1.1 Background

The policy goal of the European Prospectus Directive 2003 is, amongst others, to ensure investor protection.1 The Directive prescribes that, with some exemptions and exceptions, issuers are obliged to publish and distribute a prospectus before their securities can be listed on a regulated market (stock exchange) or be offered to the public. In the interests of actual and potential investors, the prospectus must contain such information as to enable them to make an informed assessment of the risks attached to the particular issuer and its securities. In this way, investors will be able to take investment decisions with full knowledge of the facts.2

The Prospectus Directive 2003 and the Prospectus Regulation 2004 prescribe in detail the content and format of the information that has to be provided in the prospectus. This Directive, which is in line with previous Prospectus Directives, puts great emphasis on public enforcement of the harmonised prospectus rules: a public authority has to approve the draft prospectus before the issuer is allowed to publish it. However, this Directive does not harmonise the private law prospectus liability regimes in the Member States. It merely prescribes that the Member States ensure that at least the issuer and/or its administrative, management or supervisory bodies, the offeror, the person asking for admission to trading on a regulated market or the guarantor, as the case may be, can be held accountable for the information provided in a prospectus.3 In general, the European legislator has not given the necessary attention to private enforcement of the harmonised financial information duties.4

Prospectus liability claims, as well as other corporate misinformation claims,5 are often most effectively enforced by collective enforcement. In these mass damage cases, collective enforcement serves as a procedural tool to deal with similar claims arising from the same event. Usually the amount of damages claimed by the individual investor is not too small to warrant individual enforcement. Therefore, the collective enforcement in these cases, unlike in small claim cases, does not seek to compensate the claimants for relatively high procedural costs involved with individual enforcement.

I started this research in September 2007, because I realised that due to its inherent tensions and inconsistencies, a system of harmonised information requirements regarding prospectuses enforced by a single home Member State supervisory authority and divergent private law prospectus liability regimes could not achieve its main goals: ensure (equal) protection of investors and a level playing field for all financial market participants.6 Issuing companies are likely to take into account the applicable prospectus liability regime when choosing the location of their listing. Issuers may be attracted by liability regimes where the burden is high for investors to establish liability for those involved in the publication and distribution of the prospectus.

The currently absent of alignment of public and private enforcement regimes that apply to the prospectus information requirements also prevents the establishment of a well-enforced EU-wide system of uniform prospectus rules and listing requirements as desired by the European legislator. Under the Prospectus Directive 2003 regime, the home Member State determines and enforces the prospectus' content regardless of where the issuer 's securities are to be listed or offered to the public. The home Member State is, in principle, the Member State where the issuer has its registered or statutory seat. In the absence of a harmonised private law liability regime, the Rome II regulation on the law applicable to non-contractual obligations determines the law applicable to prospectus liability claims. Because this regulation does not provide for a special private international law rule in regard to these claims, the default rule of lex loci damni applies. Therefore, the law of the place where the claimant sustained his investment losses determines the applicable prospectus liability mies. The place where the investors sustain their losses is, in accordance with the European Court of Justice's case law in regard to the Brussels I regulation of jurisdiction and recognition of judgments in civil and commercial matters, the place where the investors hold their investment account. The laffer case law is relevant for determining the applicable law as well, because the Rome II regulation prescribes that its substantive scope and its provisions have to be consistent with the Brussels I regulation.7

In our modern liberalised financial markets, it is very common that investors subscribing for the securities on offer are domiciled in many different jurisdictions. It is highly likely that investors hold their investment account in the same jurisdiction as where they are domiciled. In this situation, tensions may arise because the jurisdiction determining the prospectus contents is not the same as the jurisdiction determining the prospectus liability regime. The issuer could be confronted with successful liability claims in regard to a prospectus that complies with the home Member State's information requirements, but not with the private law prospectus information requirements. A further complicating factor is the fact that many different laws apply to the various prospectus liability claims filed by investors domiciled in different jurisdictions.8 The following sketch of the optimum situation to achieve (some form of) equal protection of investors may illustrate the problems arising from these divergences.