2.4 Prospectus Directive 2003

The aim of the Prospectus Directive 2003 is dualistic. On the one hand, it seeks to guarantee the mutual recognition of prospectuses in Europe by granting a single European passport. The complex system of (partial) recognition was deemed unable to ensure the achievement of the objective to provide a single passport for EU issuers.1 This passport was deemed necessary to promote competitiveness in Europe by lowering the cost of raising capital and facilitating the widest possible access to investment companies for all types of companies including SMEs.2 On the other hand, the Prospectus Directive 2003 aims to ensure proper investor protection. Recital 10 states that: `The aim of this directive and its implementing measures is to ensure investor protection and market efficiency, in accordance with high regulatory standards adopted in the relevant international fora.' The last part of the Directive refers to the International Financial Reporting Standards,3 the single set of accounting standards approved in accordance with the IFRS or IAS-Regulation.4

The means to achieve the aim of investor protection is laid down in article 1 of the Directive: `The purpose of this Directive is to harmonise requirements for the drawing up, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market situated or operating within a Member State.' The public enforcement mechanism of the harmonised substantive prospectus rules is achieved by requiring the approval of the home Member State's competent authority prior to publication and distribution of the prospectus.

The basic structure of the Directive is as follows. Article 3 lays down the requirement for all issuers of securities that any offer of securities5 whether it is a public offer or an offer by means of admission to listing on a regulated market, must be accompanied by a prior publication of a prospectus. The issuer or the person responsible for drawing up the prospectus have a primary duty to draw up a prospectus that provides sufficient information for investors to make informed investment decisions.6 Even though the persons responsible for drawing up the prospectus are not defined by the Directive, article 6 prescribes that Member States shall ensure that responsibility for the information given in a prospectus attaches at least to the issuer or its administrative, management or supervisory bodies, the offeror, the person asking for the admission to trading on a regulated market or the guarantor, as the case may be. The persons responsible shall be clearly identified in the prospectus by their names and positions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import.

Besides the primary responsibility of the issuer and the aforementioned responsible persons, the financial intermediaries placing or subsequently reselling the securities, thereby qualifying as an offeror of securities to the public,7 are obliged to publish a prospectus as well if none of the exceptions, which will be discussed later, apply.8 The latter obligation potentially causes the problem that for an identical offer of securities two or more prospectuses have to be published, thereby creating confusion amongst investors about which prospectus is adequate to base the investment decision on. With the adoption of the Prospectus and Transparency Amendment Directive 2010 ("PTAD 2010"), the EU legislator solved this potential problem by prescribing that financial intermediaries are entitled to rely upon the initial prospectus published by the issuer or the person responsible for drawing up the prospectus as long as it is valid9 and duly supplemented10 and the issuer or the persons responsible consents to its use by means of written agreement.11 The issuer or the persons responsible are allowed to attach conditions to its consent, provided they are laid down in a written agreement. In the event that the consent to use the prospectus has been given, the EU legislator prescribed that the issuer or person(s) responsible for drawing up the initial prospectus are liable for the information stated therein. However, if the issuer or person(s) responsible do not consent to the use of the initial prospectus, the financial intermediary is required to publish a new prospectus. In that case, the financial intermediary is liable for the information in the prospectus, including all information incorporated by reference.12 If the new prospectus refers to information contained in the initial prospectus, the issuer or person(s) responsible for the initial prospectus as well as the financial intermediary are liable for that information.

As already mentioned, one of the Prospectus Directive's objectives is to ensure investor protection.13 Investor protection is most likely needed in legal relationships between consumers and professionals/business. For that reason, the Prospectus Directive 2003 provides in article 3(2) exceptions14 to publishing a prospectus when:

The public enforcement mechanism of the harmonised information requirements is ensured by the provision that the issuer can only publish the prospectus upon approval by the competent authority of the home Member State.20 The home Member State is defined as:

The public enforcement by mandatory approval of the prospectus is limited in its purpose. The competent authority controls whether the prospectus complies with information and format requirements prescribed by the Prospectus Directive 2003 and the Prospectus Regulation 2004. Approval is the positive outcome of the home Member State's competent authority's scrutiny of the completeness of the prospectus, the consistency of the information provided and its comprehensibility.22 Public enforcement does not ensure that the information provided in the prospectus is true, accurate and not misleading; investors are still in a position to bring a successful damage claim for losses incurred as a result of the misleading prospectus.23 In fact, the authority examines the quality of the disclosure24 on the basis of technical compliance with the disclosure requirements set out in the Directive and Regulation; it does not verify on the basis of a professional standard of diligence whether the information provided sufficiently enables investors to make a well-inforrned investment decision regarding the securities on offer.25 The later due diligence is provided for by the lead manager, sponsoring banks and other private experts involved in the preparation of the prospectus.

The private enforcement mechanism has to ensure that the information provided in the prospectus is true, complete and not misleading. There is no EU legislation that harmonises the prospectus liability regime of the Member States.26 The Directive 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 the admission to trading on a regulated market or the guarantor, as the case may be, can be held accountable for the information given in a prospectus.27 The investor's right to claim damages is subject to national law.28 Member States must provide for an (adequate) prospectus liability regime such that investors are able to claim damages for the losses they incurred as a result of false or misleading information in the prospectus.29 As already mentioned, the Commission deems that the Rome II regulation on the law applicable to non-contractual obligations provides adequate protection to investors. In chapter 8, the Commission's statement in this regard will be verified.

In general, the European legislator lacks the necessary attention to private enforcement of the harmonised financial information duties. It is noteworthy to mention that the Commission, in its Public Consultation regarding the Review of MiFID, feels itself obliged to introduce a similar principle of private law liability for investment services providers when they have violated conduct of business obligations, e.g. information duties, towards their clients whereby the latter incurred losses.30 In order to ensure full effectiveness of these conduct of business rules in the investment field, the Commission wants to introduce a harmonised system of investor protection as well. This emphasis on private enforcement serves as a counterbalance to the EU legislator's favour for enforcement of these conduct of business rules by public authorities.31 By introducing such a principle of private law liability, the Commission seeks to ensure an equal protection of investors in the European Union. One may question whether it is possible to ensure such an equal protection when the conditions for establishing private law liability are not harmonised.

Once the prospectus is approved by the home competent authority, the Directive grants a European passport to issuers on the basis of articles 17 and 18. The European passport allows issuers to offer their securities to the public or obtain admission to listing in all Member States on the basis of the prospectus approved by the home Member State (article 17). The only requirement for access to the capital market in the host Member State is the notification by the home Member State of its approval (article 18).

The mutual recognition principle embedded in the European passport provides issuers the opportunity to seek approval for their prospectus with a lenient competent authority. This phenomenon is also known as forum shopping. If there is a divergence in the application of the harmonised rules and regulations with respect to the prospectus to be published when securities are offered to the public or admitted to listing by the different national competent authorities, forum shopping could seriously impair one of the goals of the Prospectus Directive 2003: ensure investor protection.

The question arises by what means a uniform application by the national competent authorities of the harmonised prospectus rules and regulations is ensured so as to prevent forum shopping with respect to public enforcement. In the next subsection, I will give an outline of the European System of Financial Supervisors that seeks to ensure compliance with the EU financial legislation by the national competent authorities and the financial market participants.