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The prospectus directive is a mandate issued by the European Union. Generally, a prospectus is a legal document that explains the details of a stock or stock fund that is being sold to the public. The prospectus directive was drafted by the EU member states to establish a uniform capital market across Europe. The prospectus directive changed the definition of a prospectus and the way it should be delivered to potential investors and clients. It streamlines the process of buying and selling shares, requiring only the relevant regulator to oversee specific transactions.
Although the prospectus directive went into effect on December 31, 2003, each state in the European Union had until July 1, 2005 to implement the necessary laws. The additional time allowed member states to develop the infrastructure to enforce the newly created regulations. The companies also took the time to produce brochures that would adhere to the new laws.
Initially, the directive was designed around the notion of European solidarity. It was conceived as a communication to the public to inform them about the particularities of a company. The facts and figures of the company’s performance were considered important enough to allow the consumer to make an informed decision about the purchase of the financial product.
The purpose of the prospectus directive was to establish a new regulatory system that would oversee the process of prospectuses for shares and loans throughout the European Union. If a regulator in one country approves a prospectus, it is valid in all other member states. The company would not have to issue a different prospectus for each state of the European Union.
For this process to work, the company issuing the brochure must establish an origin state. That is, it must have a registered office in a country of the European Union and be available to answer questions from regulators in that country. In addition to companies within the EU, companies outside the EU can also have their prospectuses approved within a member state.
There are several exceptions to the prospects policy. For example, if the person to whom the prospectus is offered is a qualified investor, or if the prospectus is offered to less than 100 people, the company does not need to involve the Member State regulator. Other exemptions involve the dollar value of the transactions.
If a company does not follow the guidelines of the prospectus directive, its shares and bonds will not be listed in the European Union. Instead, the bonds must be listed in a foreign currency. This may cause the stock to lose value and force the issuer to provide additional information to potential investors.