The regulation of cross-border public offerings of securities in the European Union: present and future.

• Author: St. John, Alexander B.

The European Union (E.U.) (1) has witnessed dramatic progress in recent years in terms of both monetary integration and the fortification of its position as a financial and economic powerhouse with the commencement of the European Monetary Union (E.M.U.), the introduction of the Euro as the European Union's single currency, and the formation of a European Central Bank. (2) While the E.U.'s success with monetary integration has been impressive, one area that remains incomplete is the integration of the E.U.'s various equity markets into a cohesive and singular capital market that would facilitate simpler capital-raising efforts by way of securities issuances. (3)

Those practicing in the European securities industry acknowledge that the directive-based regulatory framework currently in place does not produce the requisite efficiency to make pan-E.U. public offerings a reality. The European Commission attempts to rectify that with its Proposed Prospectus Directive submitted in June 2001. (4) Recognizing the deficiences that segmented financial markets create for capital-raising by companies wishing to offer securities to the public of more than one Member State and the changing financial landscape in Europe, the E.U. Commission first proposed ways to ease the raising of capital on an E.U.-wide basis in its 1999 Financial Services Action Plan. (5) The Committee of Wise Men produced Initial and Final Reports on the Regulation of European Securities Markets in November 2000 and February 2001, respectively, spelling out the shortcomings of current European regulation and the benefits of greater capital markets integration. (6) Additionally, the Forum of European Securities Commissions (FESCO) (7) produced a report in December 2000 for the European Commission's consideration (8) proposing concrete steps that would allow European issuers to make E.U.-wide public offerings "without having to produce duplicative sets of documentation or to respond to numerous additional national requirements." (9) In consideration of the need for investor protection, the FESCO proposal also provided particulars for how best to facilitate the access to approved documents to all European investors. (10) The end result of these reports and proposals is the European Commission's Proposed Prospectus Directive, a document that adopts the notion of a European `passport' for issuers, but has been the subject of serious debate and criticism, and will be discussed in greater detail later.

The purpose of this paper is two-fold: (i) to clearly and concisely address the relevant legislative directives currently applicable to a public offering of securities (whether listed or unlisted) in multiple E.U. Member States, and (ii) to examine how recent proposals, including the Proposed Prospectus Directive, attempt to reconcile their faults to better facilitate cross-border securities offerings without sacrificing investor protection in the process. The paper focuses exclusively on those issuers incorporated under the laws of an E.U. Member State and examines the public offering of equity securities, as opposed to bonds, or other security instruments. (11) PART I examines the structure of the E.U.'s directive-based regulation of the capital markets. PART II examines the applicable directives and procedures involved in facilitating cross-border offerings by distinguishing the requirements for offering exchange-listed securities from unlisted securities. PART III examines the perceived shortcomings of the E.U. directives currently in force in this area that have resulted in a scarcity of cross-border offerings in practice. PART IV examines the proposed procedures under FESCO's European Passport Report, and the current legislative status surrounding the harmonization of E.U. law pertaining to cross-border offerings, by focusing on the Proposed Prospectus Directive. This part also examines further hurdles that implementation of a harmonized system that will need to be overcome based on the realities of the current system and the outcry from the securities industry. Finally, a brief conclusion is provided.

PART I:THE E.U. SYSTEM OF REGULATING SECURITIES OFFERINGS

The E.U.'s current system of securities regulation, a product of over twenty years of directive drafting and implementation, differs significantly from that of the United States in that it lacks any sort of legal uniformity in terms of laws that apply to pan-E.U, securities offerings. (12) While one commentator has described the E.U. as "the world's primary actor in accomplishing multinational regulatory harmony in the field of securities regulation" (13) the E.U. has not been successful in fully integrating its capital markets. Generally speaking, the U.S.'s interstate sale of securities calls for the application of uniform federal laws and regulations--primarily by the Securities Act of 1933 (14) and the Securities Exchange Act of 1934 (15)--and involves the jurisdiction of a single compliance and enforcement supervisor: the Securities and Exchange Commission (SEC). (16) On the other hand, under the E.U. system, there lacks both a uniform system of laws that apply generally to pan-E.U, securities offerings and a supervisory agency, or "super-regulator," to ensure compliance with and enforcement of laws pertaining to financial markets. (17) In place of an over-arching regulatory scheme, E.U. Member States maintain jurisdiction over securities offerings occurring within their borders, which means that cross-border securities offerings are forced to "conform with diverse national rules and regulations" and creates certain regulatory inconsistencies insofar as providing information is concerned. (18)

The E.U. rules relating to the securities industry and, more specifically, to the public offering of securities consist of various directives, a form of binding legislation upon each Member State to which the directive is addressed as to the result that it is to achieve, but which leaves to the discretion of national authorities "the choice of form and methods. (19) Directives are considered the most flexible of the various forms of legislation that can be adopted by E.U. Member States since the Member States must implement directives through their own ad-hoc national legislation, thereby maintaining their own jurisdiction. (20) Therefore, the various directives related to the E.U. securities markets cannot and do not represent a superior system of legal authority for multi-state transactions. (21) Rather, in the words of two commentators, the aim of the E.U. securities offering directives is:

to form a common background of provisions in order to create uniform local laws based on the following priorities: (1) to ensure the existence of minimum standards of quality and information concerning the securities traded, the issuers and the offerors involved; (2) to ensure thorough supervision of the securities market at a local and global level, by fostering cooperation among national regulatory bodies; and (3) to make national markets accessible to issuers and intermediaries who have been admitted and are regulated in other Member States through the elimination of regulatory barriers that are not justified by material interests and de facto impede the free circulation of services and products. (22) Accordingly, the European Union's use of directives still requires legal counsel to examine and comply with the varying national laws of the Member States in which their client-issuers wish to list or offer for sale securities, and prevents issuers from obtaining a single "passport" that would allow an issuer to offer its securities in. multiple Member States, without having to comply with the local regulations of each Member State in which it offers the securities. (23) Thus, while an issuer may technically offer its securities to investors in some or all of the E.U.'s Member States, not only will that issuer have to check the specific directives that will apply to it depending on whether the issuer's securities offered are (i) listed on a stock exchange (in which case the Listing Particulars Directive (24) applies), or (ii) unlisted (in which case the Public Offering Prospectus Directive (25) applies), but will have to check each Member State's specific laws on public offerings and disclosure of information. (26)

PART II:THE DIRECTIVES CURRENTLY APPLICABLE TO EUROPEAN PAN-E.U. PUBLIC OFFERINGS

Some commentators attribute the surge in popularity among European companies deciding to "go public" by issuing equity securities stems to two sources: under-capitalization and the privatization of state entities. (27) Others attribute the popularity of securities issuances to the introduction of the Euro as the lone currency across the Member States, which effectively created a single market for cash, as well as to the technological developments now available for equity research and electronic trading. (28) Generally speaking, a public offering is undertaken in one of two ways:

[F]irst, securities can be listed on one or more stock exchanges in the same or in different countries. Second, securities can be distributed without using the market created by the stock exchange, but by offering the securities directly into the large financial market of Continental Europe. (29) Employing the latter method, as opposed to using a market created by the stock exchanges, allows direct distribution of securities into Europe's large financial market without jumping through the dual regulatory hoops required by the stock exchange rules and applicable directives when undertaking an exchange listing. Both methods are discussed below, beginning with the offering of securities on multiple stock exchanges.

1. Public Offerings of Exchange-Listed Securities

   In Europe, the national law of the stock exchange governs securities trading activities on a stock exchange. (30) As a preliminary matter, it is the law of the stock exchange that...