Issuers will need to grapple with several challenges including: how to assess materiality and disclose the magnitude and probability or risks occurring; how to order risk factors by materiality, which is likely to be a judgement for management to make; and how to balance comprehensibility and the reduction in generic disclosures against the need to mitigate issuer liability through full disclosure of risks.
The Final Report stays close to the draft used for consultation, but there are some significant clarifications in response to industry feedback:
- It has been made clear throughout that the assessment of materiality/specificity of risk factors rests with the issuer, but that National Competent Authorities (NCAs) should challenge if the disclosure does not illustrate that the risks meet these criteria
- The directions to NCAs not to approve prospectuses have been removed, but ESMA notes that the new wording should achieve the same result if issuers do not make the necessary changes or provide explanations when NCAs exercise their power to challenge the disclosure
- ESMA stated that it cannot address concerns raised around the different requirements needed where prospectuses are used both in and outside of Europe, but has made a statement that the types of investors (wholesale v retail) can be taken into account by the NCAs when applying the Guidelines
- Similar risk factors may be included by issuers in similar industries or issuing similar types of securities, but where the circumstances of a particular issuer mean the potential impact is different (e.g. due to market share), this should be drawn out in the individual disclosure
- The requirement for quantitative information to illustrate materiality has been re-worded, such that quantitative information need not be included where is not available or it is “not appropriate” to include in the prospectus
Read the full report on ESMA’s website here.
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