7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
1/51
The Prospectus Directive Chosen Aspects of theImpact of European Regulation on the Public Regulated
Markets of Poland and the United Kingdom
1
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
2/51
2
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
3/51
The Prospectus Directive Chosen Aspects of the Impact of European Regulation on
the Public Regulated Markets of Poland and the United Kingdom...................................1
1.0. Introduction
It is the aim of this essay to compare and discuss the differences in the regulatory
regime of the United Kingdom and Poland. I focus my efforts on the markets where
regulation plays the most significant part, meaning the public regulated markets of
listed shares. It is clear that the markets themselves are very different in effect of
numerous factors such as history and the legal systems characteristics. The role of
European regulation in harmonising the regulatory regimes of those two markets has
admittedly played an important role in bringing them together in terms of the regulation
of entry requirements along with numerous other issues. I start this essay by observing
the recent activities on the public regulated markets and the economic developments
that allow description of the differences in the markets themselves. The essays second
part is devoted to analysing the factors that can shape a companys decision to raise
capital via means of the capital markets, with special consideration of the public
regulated share markets. I then go on to analysing the characteristics of the financial
authorities in the United Kingdom and in Poland. In the second half of this essay I
consider the European perspective of public equity markets regulation. First, I describe
the European legislation shaping the regulation of admissions to listing in both the UK
and Poland. I then go on to discuss the procedure and effects of implementation of the
mentioned European legislation into the legal orders of those countries. I close the
3
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
4/51
essay with an assessment of the impact of the most important issues described in the
earlier parts.
Regulated Markets in UK and Poland
As of December 2008 the London Stock Exchange listed the shares of 1142 UK
companies and 321 international companies on its main market. A sum of 66,472.3
million GBP worth of equity capital was raised through its main market in 2008
alone1.With domestic market capitalisation of the LSE at 1,868,153.0 USD in
December 2008, it was the single biggest stock exchange in Europe giving way only to
such giants as the New York Stock Exchange, the Tokyo Stock Exchange and
NASDAQ in terms of capitalisation and capital flows2. In comparison to the Warsaw
Stock Exchange (GPW), the LSE stands as an older and bigger brother.
Stock Exchange Capitalisation and Number of Listed
Companies
The Warsaw Stock exchange had its capitalisation at a level of 90,815.5 million USD in
December 2008. This is relatively small in comparison to the LSEs 1,868.153 million
1 Data source: LSE statistics for 2008, available on:
http://www.londonstockexchange.com/NR/rdonlyres/B78A25AE-68C2-42D8-9903-
FB2C4B1BDF59/0/MainMarketStatistics0812.pdf2 Derived from World Federation of Exchanges Statistical data, available at: http://www.world-exchanges.org/statistics/ytd-monthly
4
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
5/51
USD. However, the Warsaw stock exchange is by far the biggest in the region of
Eastern Europe. It lists the most companies in its region and has the biggest number of
foreign companies listed on its main market3. Although as a symptom of the recent
turmoil on the financial markets, all the exchanges in the world have declined in terms
of capital flow, and most exchanges have shrunk in terms of the number of companies
they list, the Warsaw stock exchange is the only one in its region and one of the few
exchanges in Europe that attracted new companies and grew in terms of its main market
listing size by 22% in 2008 in comparison to 2007. The LSEs number of listed
companies during this same period fell by 6%. Effectively Warsaws stock exchange
managed to attract new companies in a time of crisis, even though its capitalisation
levels dropped by 53% in comparison to the previous year4. I find this particular piece
of data to be interesting. I hope that some of the issues mentioned below in this essay
will provide some explanation of this peculiarity.
A slow down in the economy, lowered the potential benefits from arriving at listed
status for companies worldwide, yet many companies chose to join the Warsaw Stock
Exchange (GPW), particularly at a time of downturn, willing to bear the costs of
compliance in order to reap the lower benefits of being listed. Whats even more
intriguing to me is that not only local companies, that treat Poland as their home
jurisdiction chose to be listed on the Warsaw Index. From the data available from the
World Federation of Exchanges, it may be observed that in 2008 three foreign
companies chose to enter the GPW listed market5. From the same data it is visible that
3 For statistical information until 2003, see J. Socha, Chairman of the Polish Securities and Exchange
Commission (now liquidated), World Bank Presentation, available at :
info.worldbank.org/etools/docs/library/154716/domestic2003/pdf/socha.ppt4 Measured in USD, in comparison to 2007, data derived from www.world-exchanges.org5 From the information published by www.world-exchanges.org , we see that the number of
international listings grew from 23 in January to 26 December. GPW is the official abbreviation for theWarsaw Stock Exchange. Whenever hereunder the abbreviation is used it is to be read as meaning theWarsaw Stock Exchange.
5
http://www.world-exchanges.org/http://www.world-exchanges.org/http://www.world-exchanges.org/7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
6/51
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
7/51
and material issues that could influence the investors common drive to choose one
equity market over another. The loss of capitalisation by nearly all the worlds
exchanges clearly suggests that the equity markets are not hot therefore do not
constitute an opportunity to be caught by companies looking for extraordinarily cheap
capital6.
If accepted that the decision to file for listing is not taken upon lightly by companies,
especially in times when raising capital can prove difficult. During periods in the
economic cycle when market capitalisation is low, it becomes harder for companies to
successfully gather capital through entering public markets and issuing equity. If the
number of listed companies would be increasing as a stock exchanges capitalisation
would increase as well i.e. in general times of prosperity, a comparison of data such as
that which I have brought forward, would need to be essentially different.
A large number of factors could influence a companys decision to enter one capital
market and not another or to offer its securities in more than one jurisdiction. Among
these factors are the legal environment and the burden of regulation that will be faced
by a company whatever option it chooses.
6 M. Barker, J. Wurgler, Market Timing and Capital Structure, 57 Journal of Finance (2002), p. 1
7
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
8/51
The Decision to Enter the Public Regulated Market
The factors considered by companies upon deciding whether they should enter the
public markets are numerous under any jurisdiction. This decision is mostly taken upon
deep consideration of strategic long term company plans and more short term based
benefit versus cost analysis. In order to arrive with such analysis a company must
consider such issues as the cost of compliance with regulation, including the costs of
supplying legal, economic and marketing counsel. Understanding the legal obligations
of a company ex ante launching a public offering is crucial to this process.
3.1. Share Capital and the Nature of Shares
The body of strategic factors to be considered in making the decision will be formed by
issues such as the directors approach to carrying risks, the companys general ability to
bear certain risks, how competitive the company is within its particular market and
finally the size of its reserve capital available for bearing the initial costs of entering the
market. G. Fuller mentions the issue of a company wishing to gather capital through
means of public share offerings as a means of limiting its exposure to debt. Shares,
according to a definition given by Farwell J. inBorlands Trustee v Steel Bros Co Ltd7
7 [1901] 1 Ch 279 at 288. Further on the same page: A share is not a sum of money, but it is aninterest measured by a sum of money and made up of various rights contained in the contract, including
8
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
9/51
() are an interest in a company measured by a sum of money(). So the sum of
money invested in a companys shares by an investor becomes automatically the
companys property. No direct property rights to the invested capital remain with the
investor, creating the right to the dividend instead. The status of the shareholder and his
right to dividend was adequately explained by Lord Macnaghten in Birch v. Cropper:
Every person who becomes a member of a company limited by shares of an equal
amount becomes entitled to a proportionate part in the capital of the company and
unless it be otherwise provided by the regulations of the company, entitled as a
necessary consequence to the same proportionate part in the property of the company,
including its uncalled capital8.
Considerations for Raising Share Capital
From the above the conclusion may be drawn that an important factor differencing
share capital from debt is that the capital invested in a company through shares does not
correspond directly with any of its property and therefore is not insured by it. This
factor may constitute a powerful strategic impulse to raise capital through shares if their
directors consider the debt capital ratio to exceed their acceptable limit9. The risk of
diluting the initial shareholder powers and influence over the company are taken into
consideration due to the fact that as shares are launched into the public market, the
original shareholders will inevitably lose some of their voting powers as new investors
gain shareholder status. Furthermore, accepting new shareholders into the company will
contribute to dilution of final paid out dividends if the capital raised will not generate
the right to the sum of money of a more or less amount. This definition varies between jurisdictions. It
is however sufficient for the purpose of this essay.8 (1899) 14 App Cas 525, HL, p. 5439 G. Fuller, The Law and Practice of International Capital Markets, 2007, p. 8 - 13
9
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
10/51
the profits expected by the company when the decision to launch a public offering was
made10.
The structure and environment of the capital market itself can influence the decision of
entering the capital markets11. During periods of market prosperity and investor
enthusiasm, the cost of capital may be lower than during periods of stagnation 12. The
element of availability of capital will shape the effective cost and benefit analysis of
entering the equity market for companies. Also, during times of general prosperity in a
companys economic environment a companys historic business results and outlooks
will seem more attractive than in a situation where a company has been suffering from
the aftermath of a stagnating or deflating economy. A. Sherman brings up an example
of a period in the market cycle when equity, or share capital is fairly easy to come by
with reference to the market for internet based companies during the late 1990s when
equity capital was easily accessible through initial public offerings (IPO) and was
treated as an exit strategy by some companies13. However this consideration is more of
a short term factor shaping the decision whether a company should seek listed status.
Immediate and inevitable costs of entering the public share markets include the costs of
compensating the underwriter, which run at an average percentage rate of 7% of the
gross proceeds of the offering. In the U.S. the usual costs of legal counsel are described
as around 200,000 USD in smaller offerings and can run up to 500,000 USD in very
large offerings according to information provided according to A. Sherman, these sums
10 G. Fuller, The Law, p. 14; Any considerations given above in relation to shares are given only in
respect to ordinary shares and not preference shares. Both the right to dividend and the voting rights of
preferential shareholders may differ. On the distinctions between the two types of shares see E. Ferran,Principles of Corporate Financial Law,2nd edition, 2008, p. 147 - 17711 A. Bielawska, Finanse Zagraniczne MSP. Wybrane Problemy, 2006, p.19.12
See, A. Sherman et alia, Raising Capital, Business Source Premiere, EBSCO Publishing 2003,p.184 -18613 A. Sherman et alia, Raising, p. 185
10
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
11/51
constitute solely the legal counsels compensation and do not cover the hidden legal
costs of complying with the standards issued by the appropriate regulating authority14.
These hidden costs include a number of issues, such as house - cleaning procedures,
due diligence, disclosure costs and overall costs of compliance with preclusive
regulation. These costs may be only described as similar in the UK, but considerably
lower for both domestic and international offerings in Poland.
Cost of Capital
One of the capital advantages of entering a regulated share market for companies is
reportedly the prestige, and additional publicity a company receives once it has
successfully launched shares onto the public market15. This would be especially true in
the case of international share offerings that are conducted concurrently on more than
one market or that get to be listed altogether on a different stock exchange from its
domestic market. International, or cross border share offerings also create the
opportunity for companies to introduce a wider shareholder base to their membership,
furthermore offering the opportunity to attract foreign and international institutional
investors, stabilising their shareholder base and perhaps attracting strategic investors
that could improve the companys reputation, or operations. However, the setback of
entering the international equity markets is the necessity to bear the costs of legal and
economic counsel. A large global underwriting house will prove to be more costly for
its services in launching shares to international markets. The same is also true for a
14 A. Sherman, Raising, p 190 193, However according to G. Lukasik, Przedsiebiorstwo na
Rynku Kapitalowym, 2007, p 147 the cost of compensating the underwriter in the UK is considerably
lower and constitutes 3.8 % and miniscule in Poland, averaging about 0.1%. These data relate howeveronly to domestic offerings that tend to be smaller. In the case of Poland this means that the
underwriting house would also be usually a domestic institution that deals with local offerings.
International offerings will effectively mean higher costs however still considerably lower than thosefor the UK or US.15 E. Ferran, Principles, p.409-416
11
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
12/51
large and internationally recognisable auditing firm, in comparison to the potentially
smaller costs that would be have to be accepted if a smaller domestic firm was chosen.
The multiplication effect an international share offering will have on the costs a
company must bear in order to successfully comply with the many legal and practical
issues in the process is known as the bundling effect. This effect works as an additional
issue that further limits the chance for launching a successful share offering in case of
unprepared companies16. Finally, companies may have to change their legal status in
order to be legible for their shares to be traded on the public market.
The Effect of Regulation
The importance of the role that regulation and the general legal environment play to the
cost and benefit ratio of entering public listed stock markets cannot be overestimated.
Even when issues such as the need for reorganisation, reform of the articles of
association and other internal legal changes are left out, the cost of compliance and the
structure of the regulatory environment will play a dominant role in deciding whether
and if, than where should a company go public. The Committee on Capital Markets
regulation, in one of its interim reports mentioned some issues that could point to the
fact that a public regulated market is losing its competitiveness due to regulation. The
mentioned Interim Report compares the issues of securities made onto the regulated and
unregulated markets on a scale of time to be able to state whether regulation influences
companies decisions to enter a specific market17. Not being able to get adequate
comparative data on the private and public markets of London and Warsaw I have
decided to compare the statistical data available on the largely unregulated bond
16
L. Enriques, T. Troger, Issuer choice in Europe Cambridge Law Journal 2008, 67(3), p. 521-559;17 Committee on Capital Markets Regulation, Interim Report 2006, available at:http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf
12
http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdfhttp://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
13/51
markets of the two countries. It is clear that while the Warsaw bond market is
decreasing by ten percent, the London bond market has increased by more than five18.
The Committee of Capital Markets Regulation sees an increase in the private markets,
accompanied with a decrease of the public markets as a sign that a jurisdictions
regulation increases the cost of raising capital through the public market to above the
acceptable level. This effect will cause the public markets in a jurisdiction to lose
competitiveness forcing companies to search for capital elsewhere. This issue has been
broadly discussed in relation to United States capital markets. For example the Sarbanes
Oxley Act has been broadly criticised for lowering the premium related to being present
on the US capital markets up until a point that the costs were greater than the benefits,
especially for foreign, cross listed companies19. The Committee for Capital Markets
Regulation describes the costs of compliance with Section 404 of the Sarbanes Oxley
Act to be at a level of 4.36 million USD per annum for an average company as in 2004.
However the costs are believed to be decreasing in time, the cost of compliance will be
working as a deterrent for entry for some companies wishing to raise capital through
public markets20.
Above, I outlined some of the issues a company must take under consideration upon
entering the public equity market. One of those outlined issues is the regulatory
environment a company will face when entering a particular market. The biggest
influence must be attributed to the entry regime within a jurisdiction, as this will
immediately influence the short term cost benefit rapport, for any company. If the
18 This is in a period between Januray and December 2008. Data retrieved from: http://www.world-
exchanges.org/statistics/ytd-monthly19
K. Litvak, Sarbanes Oxley and the Cross Listing Premium, 105 Michigan Law Review (2007), p.185720 Committee for Capital Markets Regulation, Interim, p. 4-6
13
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
14/51
costs of entering a market are too high in proportion to the potential capital that may be
raised on the market due to regulatory costs, a company may choose to enter the equity
markets within a different jurisdiction. Below, I focus on describing and comparing the
regulatory environments of Poland and the United Kingdom that can give the reader an
image of where in the system additional compliance costs may rise from.
Other Issues of Regulation
Having outlined the importance of the regulatory framework to the effective
attractiveness of the jurisdiction to issuers as a whole, I give space to institutional
considerations, the role and powers of regulators of capital markets in the two
jurisdictions. This issue has an influence not only on the initial costs of entering the
market but may influence the timing and the shape in which the public offering or
flotation into the listed market will take place.
The Regulatory Agencies of the UK and Poland
14
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
15/51
The Financial Services Authority
Plans to set up the Financial Services Authority, or the FSA, have been laid out in 1997.
The government recognised that the previous regulatory framework set up as part of the
Big Bang institutional reforms was ineffective and proved costly and lacked
transparency21. On the 20th of May 1997 the Chancellor of the Exchequer announced the
reform of the financial services regulatory structure. Numerous statutory reforms
followed this decision effectively moving the authority formerly given to the
dismantled Self Regulatory Organisations into the hands of the newly formed FSA. C.
Briault, mentions that effective supervision is dependent on what is regulated and what
tools the regulator has to his disposal, in one of his works. The Financial Services
Authority placed with the responsibility to regulate a very broad umbrella of activities
and markets22. It took over the performance of regulatory functions initially from the
Securities and Investments Board or the SIB. As the Boards legal successor it was also
formed as a company limited by guarantee23.
The statutory rules setting up the spectrum of aims and powers for the FSA had to be
drafted in a way that would facilitate this broad spectrum of responsibilities on the
regulators shoulders. The most important legal act currently in force, regulating the
aims, powers and operations of the FSA is the Financial Services and Markets Act 2000
Chapter 8. Part one of the FSMA 2000 sets out the general duties and objectives for the
FSA which it must strive to satisfy while taking any actions. According with Section 2
of part one of the FSMA 2000, the FSA must not only always act in a way which is
21 See, HM Treasury, Financial Services and Markets Bill: a Consultation Document. Part One.Overview of Financial Regulatory Reform, 1998a22 C. Briault, The Rationale for a Single Financial Regulator, Financial Services Authority
Occasional Paper No. 2, 1999, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=42808623 Financial Services Authority, The Financial Services Authority: An Outline, 1997,p. 5, availableat: http://www.fsa.gov.uk/pubs/policy/launch.pdf
15
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
16/51
compatible with its regulatory objectives, it should consider the options of acting and
perform them in the way most appropriate to meeting the regulatory objectives. This
may be interpreted that there is little room for potential recklessness in discharge of
statutory function and that statutory objectives ought to be the principal aim of any
action taken. These statutory objectives are enumerated in S. 1(2) FSMA 2000. They
include market confidence, public awareness and protection of consumers and
reduction of financial crime. Apart from these, Part 6 of the FSMA 2000 gives the
FSA the authority to regulate admissions to regulated markets, this part of the act also
generally deals with the issue of public offers of securities. More specific rules related
to admission and offering securities on the regulated markets may be found in the
Prospectus Rules, Listing Rules and Disclosure Rules of the FSA Handbook24.
According to the FSAs annual financial review, its budget for the years 2007/2008 for
ongoing regulatory activities amounted to 298.1 million GBP.
Polish Financial Services Authority
In Polands case a single financial regulator has only been created in 2006 with the
passing of the 21st July 2006 Financial Supervision Act25, in which article. 3 describe
the PFSA as the single financial regulator26. As in the case of the UK prior to the reform
the system of financial supervision was segmented into numerous agencies. Each of
24 The whole Handbook is published in parts on the FSA website here:http://fsahandbook.info/FSA/html/handbook/
Listing Rules: http://fsahandbook.info/FSA/html/handbook/LRProspectus Rules: http://fsahandbook.info/FSA/html/handbook/PR
Disclosure Rules: http://fsahandbook.info/FSA/html/handbook/DTR25Financial Supervision Act, Journal of Statutes 2006, number 157, position 1119; All the translations
of Polish Acts and Statutes are my own except for where expressly stated. For a brief introduction tothe Polish legal system, see P. Rakowski, R. Rybicki, Features An Overview of Polish Law,
LLRX.com 2000, available at:http://www.llrx.com/features/polish.htm. Although I strongly disagree
with some of the translations of institutional issues, the essay gives a fairly good idea of the Polishlegal system post 1997.26 The Polish name for this body is Komisja Nadzoru Finansowego
16
http://fsahandbook.info/FSA/html/handbook/http://fsahandbook.info/FSA/html/handbook/LRhttp://fsahandbook.info/FSA/html/handbook/PRhttp://www.llrx.com/features/polish.htmhttp://www.llrx.com/features/polish.htmhttp://fsahandbook.info/FSA/html/handbook/http://fsahandbook.info/FSA/html/handbook/LRhttp://fsahandbook.info/FSA/html/handbook/PRhttp://www.llrx.com/features/polish.htm7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
17/51
them dealt with a particular aspect of activity on the capital markets. Until the reform of
2006, the admissions of securities to the regulated markets and other regulatory issues
related to the regulated capital markets were in the hands of the Polish Securities and
Exchange Commission (PSEC), as set out in article 3 of the 29th of July 2005 Act on the
Supervision of Capital Markets27.The old Polish Securities and Exchange Commission
ultimately stopped its work and was swallowed by the PFSA on 18 September
200628.Neither the previous regulatory body nor the new PFSA have the status of a
limited company as the FSA does. Being a central organ of administration, supervised
by the Prime Minister, the PFSAs organization, legal rights and duties, the status of its
officials is regulated by Polish administrative law.
The Authoritys funding is provided, not unlike the FSAs, through the members of the
regulated markets29. However the sums it incurs are then added to the central budget
and wholly dependent on the final budget drafted for it by the Minister of Finance 30.
The net sum of capital it receives to perform its functions is also relatively small in
comparison to the FSA. The PFSA received 180 million PLN in the year 2008 from the
national budget31. The new supervisory authority, similarly to the FSA in the UK, was
given a set of objectives, the fulfillment of which is the ultimate aim of its existence.
Article 4 of the Financial Supervision Act enumerates these as: the maintenance of
adequate functioning of the capital markets, with special attention to maintaining safety
27 Journal of Law 2005, nr. 183, pos. 1537; English translation available here:http://www.kpwig.gov.pl/en/Images/nadzorze_03_03_tcm21-4129.pdf28 PFSAis an abbreviation for the Polish Financial Services Authority, whenever herein the term is used
it is meant to represent the aforementioned Authority.29 Art. 17 of the Financial Supervision Act 2006.30 Dziennik Interia, Rzd tnie budet Nadzoru Finansowego, 26 February 2009, available at:
http://biznes.interia.pl/raport/kryzys_w_usa/news/rzad-tnie-budzet-nadzoru-finansowego,125544831
H. Kochalska, Rzd Tnie Budet Nadzoru Finansowego, Dziennik Finansowy, 5th February 2009,available at:http://www.dziennik.pl/gospodarka/article313078/Rzad_tnie_budzet_nadzoru_finansowego.html
17
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
18/51
of trading, protection of investors and other market participants and ensuring that rules
of honest trading are followed32.
Comparing the Regulators
A brief comparison is sufficient to notice that these objectives vary from those set out
for the FSA in the Financial Services and Markets Act essentially in the wording. The
rules set out in s.2 (2) of the FSMA are more general in the way they are constructed
and seem to give more space for interpretation. When speaking of ensuring that the
rules of honest trading are followed in the Polish correspondent of FSMA 2000
Section 2(2) it seems that the rules from the Act have been simply restated so as to
leave less space for interpretation. It is my opinion that these objectives for regulators,
however varying in wording are expressions of a common position worked out globally
through the International Organization of Securities Commissions. The final version of
the recommended Objectives and Principles of Securities Regulation and aims has been
issued in May 200333. The organization however underlines that many subjects prior to
the resolution of 2003 have already been published in other previous resolutions.
IOSCOs recommendation of using a wholesome approach, representing the specific
characteristics of each jurisdiction is a mentioned as an important factor to the
successful implementation of the Objectives and Principles of Securities Regulation34.
The objectives of the FSMA represent the policy of the legislator to give the regulating
authority some broad goals which it must strive to achieve. In the articles following s.
32 Article 4 of the Financial Supervision Act 2006.33
IOSCO, Objectives and Principles of Securities Regulation, May 2003,Available at:http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf34 IOSCO, Objectives, p. 10
18
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
19/51
2(2), the FSMA goes on to adding greater specificity as to how the general duties of the
authority ought to be carried out35.
Power to Regulate v. Power to Supervise
To the most important differences that are visible in the legal framework setting out the
institutional framework of the capital markets regulators is that under the Polish
system, the regulatory authority is not provided with the opportunity of issuing
regulatory handbooks and was not given the function of issuing regulations in relation
to capital markets. The Polish Committee was only given the right to grant entry to
capital markets for securities and institutional participants once they satisfied certain
statutory benchmarks. These benchmarks have been set however solely in statutes and
the PFSA was not given the opportunity to influence them.
The Committee is however capable of making official statements as to how a certain
piece of legislation is understood by its officials, this adds an important factor of
stability to understanding the system as the Committees statement inure its own
officials as to how they are to understand a certain piece of legislation36. The
Committee is not however given the power of making rules that can be on their own
treated as regulation37. Not being able to issue regulation in the sense that the UK
35 S. 2(3) mentions some issues the authority must have regard to in the discharge of its duties ands.2(4) enumerates the functions the FSA has. Sections 3-6 contain descriptions of what the legislators
means in relation to each of the regulatory objectives.36 See. Art. 7 Financial Supervision Act 200637 This is due to the Polish Constitutional order. The Polish Constitution strictly enumerates the states
organs capable of issuing executive legal rules in art. 87(1). The Committee not being part of that
enumeration could only be given supervisory and administrative functions. It may does however issuespecific rules in relation to the banking sectors activities due to a special resolution granted of banking
law. See: P. Pelc Co Wolno Komisji Nadzoru Finansowego?,Portal Gazety Ubezpieczeniowej 2007,
available at: http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=307
19
http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=307http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=307http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=307http://www.gu.com.pl/index.php?option=com_content&task=view&id=22579&Itemid=3077/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
20/51
Financial Services Authority is given the same opportunity may have a number of
influences on the PFSA. First and most importantly, that the entrance regime to the
regulated stock markets will be based on hierarchically superior legal acts which are
less malleable and responsive to dynamic events. This can mean that on one side the
issuers are faced with a certain level of certainty on the other that the PFSA cannot
influence regulation in the same dynamic sense that is possible to the FSA. On the other
hand, a brief comparison of the institutional frameworks shaping the regulators
governance may ultimately have a huge influence on the markets themselves.
Transparency and Public Consultations
There is one more difference that is visible in the ways the two regulators I am trying to
compare operate. However this issue is not a strong formal part of the institutional
framework shaping the institutional framework of regulatory institutions of Poland and
the UK, in my opinion has a large influence on the dynamics of regulation in each of
the two countries. Both the Authorities have education, consultation and dissemination
of information mentioned as parts of their missions and goals38. However the FSA
seems to put more of an emphasis on the openness and transparency of its activities
towards the open public. The PFSA does not mention transparency as one of its
objectives in any of its published papers, whereas the FSA mentions the transparency
objective to its policies in numerous publications. Secondly, the PFSA does not rely on
public participation in shaping its policies. It can be argued that this is not necessary,
since the PFSA does not have the capability of issuing regulations. However having the
38 For the PFSA see website:
http://www.knf.gov.pl/en/About_the_PFSA/Tasks_and_objectives/index.html
For an outline of the FSAs open policy towards discharging its functions and goals see: The FinancialServices Authority, The Open Approach to Regulation, 1998, available at:http://www.fsa.gov.uk/pubs/policy/P08.pdf
20
http://www.knf.gov.pl/en/About_the_PFSA/Tasks_and_objectives/index.htmlhttp://www.knf.gov.pl/en/About_the_PFSA/Tasks_and_objectives/index.html7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
21/51
statutory capability of initiating the legislative process and being a consultative body on
its own (to the President of the Council of Ministers and to the Council of ministers of
its own), considerably large areas may be identified where consultation with different
experts could be beneficial to the regulatory environment of which the regulator is part
of39. Instead the PFSA focuses on its own expertise and on the information it gathers
through different administrative means. The flow of knowledge and expertise in the
case of the PFSA in only single way as the Authority is charged with educating and
raising awareness, however has no formal access to expertise that is available to it
outside of the official system of public administration. The only access points for
information to the PFSA is through formal means of disclosure from the regulated
markets and industries, which then the regulator can compile into statistical and
macroeconomic data analyse on its own and then publish in the form of reports from the
regulated markets. The only means through which experts, academics, and members of
think tanks from the financial sector may access members of the Authority is informal,
through academic conferences, seminars and other functions. These however do not
carry the trait of transparency and cannot be treated as substitute for a formal
consultation process.
In comparison with the FSAs position as not only an organisation that publishes its
own reports and its own research it is also capable of listening to opinions and ideas
from the environment its goal it is to regulate. The only source of expertise and
consultation available to the regulators is the availability of consultations from the
European Central Bank. Under article 25.1 of the Statute of the European System of
39 See: The Financial Services Authority, The Open p.4. Also the FSA was given the statutory duty
to consult and to promote public awareness. These duties were formulated under s.4 and s. 8 of Part I
of the FSMA 2000. Under the Polish Act the Authority is only placed with the responsibility topromote public awareness and to educate the public about the capital markets under article 7 (3) of theFinancial Supervision Act 2006.
21
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
22/51
Central Banks, the European Central Bank is obliged and given the right and duty to
advise national institutions on issues related to prudential supervision of financial
institutions40. This right however relates solely to issues related to the implementation
of Community legislation, therefore can be argued as limited in scope.
It could be argued that the FSAs position as an organisation independent from the
industry it is to supervise is compromised by placing the burden of the statutory duty to
consult the industry on new regulation. I would disagree with such statements as
creation of formal consultative procedures has the clear effect that the regulator is no
longer doomed to analyse the capital markets solely from one standpoint allowing its
officers access to formal channels of highly sophisticated and potentially useful
information that can prove influential on regulation. This positive flow of information
can be used as a positive influence on the dynamism of development of adequate
regulation by the Authority.
There are other factors within the structures of the UK and Polish regulatory Authorities
and how they were organised that point to differences in the regulatory environment.
The structure of the funding of the two regulators is one of those. The funding for the
FSA is provided through the markets it regulates. The fees it raises from regulated firms
and bodies constitute the Authoritys income41. The FSAs regulatory budget will
therefore need to be constructed with the expected fees in mind, keeping the regulatory
costs to a minimum by improving organisational effectiveness and that the regulations
it introduces will have a good ratio of costs to benefits. The PFSAs wholly centrally
budgeted funding structure doesnt leave any space for incentives that could influence
40
Article 25.1 of the Statute of the European System of Central Banks, Official Journal of the EuropeanCommunities No C 191/68, available at: http://www.ecb.int/ecb/legal/pdf/en_protocol_18.pdf41 Financial Services Authority, Financial , p. 10
22
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
23/51
the performance of the Authority42.However both the Authorities are politically
accountable as the FSAs officers are responsible to the Treasury Minister43
Conclusions on the Authorities
Above I have tried to describe the formal institutional framework of financial
supervision in the United Kingdom and in Poland. From the issues I have described it
becomes clear that the regulating authorities are shaped differently and have different
powers, even though their goals and objectives are more or less the same. The Financial
Services Authority is given bigger powers in relation to shaping the entry regime into
the public stock market. The PFSA has a range of powers limited mostly to giving
administrative decisions in relation to those markets. Also its abilities of gathering
information and consultations are greatly limited in comparison to those of the FSA.
Finally the budget of the PFSA is limited and designed by administrative organs and the
Authority doesnt have a clear influence over its final shape. However, according to the
Financial Supervision Act 2006 the organs budget is mostly based on funds raised
from regulated firms i.e. license payments and administrative fees. These however go
through the central budget and the final responsibility of drafting the Auhtoritys budget
lies with the Minister of Treasury. These factors, can stand for making the FSA a more
dynamic and responsive institution that is able to supervise the public stock market
more efficiently than its Polish equivalent that has been constructed along a stiffer
institutional framework, copied off blueprints for designing organs of central
42 J. Szewczak in KNF zaspaa czy jest po prostu bezradna? available at:
http://www.bankier.pl/wiadomosc/KNF-zaspala-czy-jest-po-prostu-bezradna-1911372.html ;The
author criticizes the PFSA for not following the occurrences on the market, seeming to be unable torespond to and observe new developments of financial markets. In the eyes of the author the
Authoritys structure and the availability of independent information are the main elements leading to a
general lack of dynamism.43 FSA statement on accountability:http://www.fsa.gov.uk/Pages/About/Who/Accountability/Relations/index.shtml
23
http://www.bankier.pl/wiadomosc/KNF-zaspala-czy-jest-po-prostu-bezradna-1911372.htmlhttp://www.bankier.pl/wiadomosc/KNF-zaspala-czy-jest-po-prostu-bezradna-1911372.html7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
24/51
administration. The PFSA will ultimately be more isolated from the market it is to
regulate. Influencing the material regulation will be more difficult and lengthy as the
Authority has no direct power to do so.
The Implications of the European Internal Market Legislation
The Financial Services Action Plan and the Single European Market
Both the United Kingdom and Poland are members of the European Union. However,
having joined at different times both the states were legally bound to accept the aquis
24
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
25/51
communautaire in its broadest meaning into their legal systems44. In the UKs case of
accession the initial burden of the volume of European Community regulation to be
implemented was much smaller due to the timing of the UKs accession in 1973. It was
a great feat regardless of the size of legislation that had to be implemented into the legal
order, due to numerous legal issues of the UKs Constitutional law system. The
challenge was taken upon through numerous legislative endeavours such as the 1972
European Communities Act45. Post Communist Poland faced an even larger mountain
both legal and political issues to overcome before its successful accession in 2004.
During the European Commissions summit in Cardiff in 1998, the representatives of
member states have agreed that the development and harmonisation of European capital
markets is a vital issue to the Lisbon Strategy and therefore to the existence of a highly
competitive, modern and prosperous single market of financial services within the
European Community. After the summit the Commission issued a communication in
1998 on Financial Services Building a Framework for Action46. This Communication
stated that integrating the financial services markets arising from the potential such
integration will have on increasing the number of capital allocations options for
investors. It also strongly supported the integration of equity capital markets
recognising that it would easier access to capital on a European wide scale would allow
small and medium sized companies, thus increasing economic growth and employment.
The Lamfalussy Report of 2001 played a large role in the integration of capital markets
regulation across the European Union. Having strongly pointed out the inadequacies of
the European level regulation and the EC legislative procedures, the report went on to
44See, M. Maresceau, Pre -accession, in M. Cremona (ed.), The Enlargement of The EuropeanUnion, Oxford Univesity Press 2003, p. 9 40.45 Newman, Karl. Legal problems for British Accession To the European Community, in G. Wilkes
(ed.), Britain's failure to enter the European Community, 1961-63 : The Enlargement Negotiations andCrises in European, Atlantic and Commonwealth relations, p.46 (The 1998 Communication), COM(1998)625
25
http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=000019976http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=000019976http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=000019976http://www.rhs.ac.uk/bibl/wwwopac.exe?DATABASE=dcatalo&LANGUAGE=0&OPAC_URL=&SUCCESS=true&RESOLVER=http%3A%2F%2F193.63.81.241:4550%2Fresserv&BUTTON=http%3A%2F%2Fopenurl.ac.uk%2Fbutton&ALT=locate+via+University+of+London+Research+Library+Services&rf=0000199767/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
26/51
propose reforms that could strengthen the institutional processes within the EC,
allowing for better support of integration of the European capital markets. The report
pointed out the gaps in the regulatory framework that were inhibiting the full
integration of securities markets throughout Europe47.
The Financial Services Action Plan has been introduced as a plan for implementing
these ideas into the European legislation on financial markets. The main idea behind the
FSAP was to set out measures to be undertaken by 2005 with the aim to fill out gaps
and remove the remaining barriers to the single Market across the EU as a whole 48.
The FSAP consisted of 42 issues and legislative measures that had to be undertaken for
its completion. According to the tenth report prepared by the European Commission on
the FSAP, 93% or thirty nine of the forty two FSAP measures have been successfully
implemented49. Some of the most important measures described in the FSAP have been
relevant to establishing a common entry regime to the regulated public stock markets
and to the informational duties of companies whose shares are listed on European stock
exchanges. Steps to introduce similar measures for unregulated markets were deemed
unnecessary as those were rightfully recognised as well integrated and international in
essence50.
47 N. Moloney, EC Securities Regulation, 2008, 2nd Edition, p. 21-2248 HM Treasury, The Financial Services Action Plan, Bank of England, The EU Financial Services
Action Plan: A Guide,2003, available at: http://www.fsa.gov.uk/pubs/other/fsap_guide.pdf49 European Commission, Financial Services, Turning the Corner. Preparing the challenge of the next
phase of European capital market integration 50
K. Pilecka Financial Services Action Plan stan realizacji i wplyw na ksztalt Europejskiego rynkufinansowego , Bank i Kredyt January 2005, p. 25 - 35 also in relation to the integration of bondmarkets see: HM Treasury, the FSA and Bank of England, The EU Financial , surpra note 46, p. 4
26
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
27/51
The Prospectus Directive
Directive 2003/71/EC of the European Parliament and the Council of 4 th November
2003 on the prospectus to be published when securities are offered to the public, or
admitted to trading, is one of the most important legal acts mentioned in the FSAP
under its strategic aim of creating a single wholesale market of securities. The goal of
the Directive was to create a single point of entry into the European capital markets,
enabling issuers to raise capital in Europe without suffering the burden of unnecessary
burdens. Also the Directive was to create a climate of legal certainty within the market
so that security trades would be safe from unnecessary risks51. The Directive went about
satisfying these goals through introducing a system of disclosure standards, applicable
throughout all the Member States in relation to the public offer of securities.
The Single European Passport
One of the most important aspects of the Directive was its introduction of the single
European passport. The single passport approach realises the goal of eliminating
unnecessary barriers to the gathering of capital from European capital markets, creating
a single point of entry for issuers registered in one of the Member State jurisdictions52.
The single passport institution allowed for the existence of a single European entry
regime, for the regulated public markets. As a consequence, issuers wishing to offer
their securities to the regulated markets within the European Union need only to satisfy
the regulatory needs in a single jurisdiction. Once their application for registration is
complete in one of these states they are able to issue their securities onto any of the
Member States public markets. In the case of publicly traded shares this would take the
form of cross - listing. The Directive uses the term home Member State, article 2(m)
51
See, HM Treasury, the FSA and Bank of England The EU Financial, p. 652 H. Schopmann, W. Hemetsberger, D. Schwander, C. Wengler, European Banking and FinancialServices Law, European Association of Public Banks, Second edition, 2006, p. 53 - 55
27
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
28/51
(i-iii) give a definition of what is to be understood under this term in relation to
different categories of issuers. Community issuers, who choose to issue securities
domestically, will have to conform to the entry requirements and apply for registration
with the regulator of the Member State where their registered office is located. Choice
of registration is offered to those issuers who chose to issue non - equity securities with
denomination per unit at more than 1,000. They may choose their home member state
according to where their registered office is located, where the securities are to be
admitted to trading or offered to the public. For those issuers incorporated in non
Member jurisdictions, the home Member State jurisdiction will be that within the EU,
where they choose to offer their securities for the first time. Once they have chosen the
Home State jurisdiction for their securities, they will have to apply for approval from
the Home State regulator. Once they have satisfied all the regulatory conditions as
prescribed by Home State law, they then will be able to offer, or cross list securities in
any of the EC markets.
The European Entry Regime Specific Regulations
The Directive constitutes provisions regulating the form and procedure for filing a
prospectus in regard to a public offering of securities. It gives clear and decisive
definitions to issues such as what constitutes a public offering of securities, thereby
clearing out the possibility of differing understanding of the term across Member States.
For the first time in the history of European regulation, there has been a single
definition of what constitutes an effective public offering of securities to the public. The
definition given by the Directive is as follows: a communication to persons in any
form and by any means, presenting sufficient information on the terms of the offer and
the securities to be offered, so as to enable an investor to decide to purchase or
28
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
29/51
subscribe to these securities53. The existence of this definition is particularly important
to the future of the directive as leaving this issue to the discretion of Member State
legislators could effectively mean that the Directive would be applicable in different
situations across the European Community thereby defeating its basic aim54. In addition
to the above, the Directive also regulates the rest of the admission to regulated markets
process. The Directive also contains important regulation in regards to prospectuses
themselves, the process of filing for approval, publishing and drawing up of
prospectuses.
The Directive clearly states that no public offer of securities on the regulated markets
can be performed without prior publication of a prospectus, or without being subject to
exemptions provided for in the Directive itself55. It clearly states the general provisions
and rules for drawing up a prospectus and gives guidelines as to how long it retains
validity56.
Personal Responsibility
Issues of defining minimum scope of responsibility for the contents of the prospectus
have also found address in the Directive. It is notable that the Directive does not
however place any exemptions on the criminal responsibility and the objective or
subjective side of its application. This issue may remain irrelevant for issuers acting in
bona fide and without any intent of committing fraud57. However the issue of what
constitutes the criminal offence of fraud may still remain a consideration under
53 See art. 2(1)(d) Directive 2003/71/EC54 Art. 1(1) Directive 2003/71/EC55 Article 3 and 4 Directive 2003/71/EC56
Art.5 and 9 Directive 2003/71/EC57 R. Pretorious, J. Ferreira, The implementation of the new Prospectus Directive in the UnitedKingdom, Journal of International banking Law and Regulation 56, 2005, p. 8
29
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
30/51
different jurisdictions for some issuers. There is a typical minimum maximum
mechanism applied in article 6 of The Directive as once it prescribes the minimum
scope of personal civil responsibility for information published in a prospectus, it also
limits the possible extent of responsibility for information. This is achieved in art. 6(2)
stating that however Member States shall be compelled to attribute at least the
minimum scope of responsibility prescribed by the Directive, they cannot however
extend the objective reach of responsibility from the merit of the prospectus itself onto
what has been published by the issuer in the prospectus summary. The Directive
contains prescriptions for regulators on to how proceed with applications for entering
public markets. The Directive goes so far as to set out a deadline for handling
registration filings. For draft prospectuses the limit is ten days, for initial public
offerings the time limit is extended to twenty days58. The Directive also lays out the
conditions for authorisation of omissions of required information from prospectuses59.
The abovementioned rule regulating responsibility for information published in a
prospectus, in my opinion, performs the role of limiting the possibility of regulatory
competition occurring among Member States legislations, thereby limiting the
possibility of forum shopping by issuers, especially those from outside the Single
Market. Limiting the scope for potential differences as to whom responsibility may be
attached for the information published in a prospectus between member jurisdictions
ultimately has the effect that this factor will stay out of the scope of consideration for
those among issuers who are searching for the most favourable jurisdiction in terms of
the scope of responsibility.
58
P. Boury, R. Panasar The Prospectus Directive Creating a single European passport, GlobalCounsel Paper Series, 2004, available at: www.practicallaw.com/A4070059 Art. 8 Directive 2003/71/EC
30
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
31/51
Approval Procedure
A similar mechanism seems to have been applied in article 13 of the Directive which
limits the maximum length of regulators approval procedures for IPO prospectus
filings to 20 days. The directive refrains from prescribing the depth and methodology of
review performed by regulators, however restricting the period of time that can be spent
on review. In my opinion this rule has the practical implication of effective
harmonisation of approval and review procedures among the many Member States
regulators. Refraining from setting standards in methodology, this rule achieves a great
deal in practical harmonisation for issuers, limiting the possibility of regulators
undercutting their own wings in competitive terms. Lengthy approval procedures in
one Member State could constitute a burden to issuers, ushering those issuers to apply
for registration in a Member State where approval procedures are take less time. The
time factor of approval procedures can seriously increase the costs of raising capital by
extending the time period for which the issuer will have to compensate the services
provided by legal and economic counsel. It is noteworthy that the Directive does not
mention or regulate the depth or formal issues related to the procedure itself leaving
those to particular Member States.
Incorporation by Reference
The Directive also introduces a number of new solutions that were previously unknown
to some Member State legal systems. First the Directive allows for, and compels
Member States to allow, the incorporation by reference of some information that was
previously published and authorised by competent authorities of the Home state60.
Article 12 of the Directive introduced another procedural facilitation for issuers,60 Art. 11 Directive 2003/71/EC
31
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
32/51
through allowing prospectuses to be registered in the form of multiple documents
depending on the choice of the issuer. In whatever option the issuer might choose the
prospectus will have to be composed of three parts:
A Summary
A Registration Document
A Securities Note
The Directive had to achieve the goal of harmonisation at a level that would not be
reachable if action was undertaken by individual states in any form. Its goal was also to
achieve greater market efficiency, thus increasing welfare after accounting for the
overall costs of implementation61. To do so the Directive displaced the old regime based
on mutual recognition and minimum harmonisation. Instead it introduced the above
mentioned system of central regulation of capital markets, with implementation on
national levels in all the Member States. The system introduced by the directive had to
take into account the issues of regulatory competition and its possible effects on the
SEM.
61G. Ferrarini, Capital Markets in the Age of the Euro: Cross - border Transactions, Listed Companiesand Regulation, 2002, p. 249
32
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
33/51
Regulatory Competition Issues
S. Woolcock gives a list of preconditions whose existence can effectively lead to
regulatory competition. The single passport regime, provides a single entry point to all
the capital markets of the European Community, providing issuers with a liberal regime
as to the forum which they may choose for operating. The other requirements for
regulatory competition to exist within the SEM include transparency and ease with
which different sets of regulations are comparable for issuers. The transparency of
these rules allows for different jurisdictions to be easily surveyed effectively leading to
the third condition. That being the ease with which the impact of regulatory policy can
be assessed in terms of the issuers goals. As I mentioned above, when considering the
different factors that affect an issuers decision to enter the regulated equity markets,
the cost that compliance costs of regulation can play a vital role on the companys
effective decision62.
The impact with which varying costs that regulatory compliance costs may influence a
companys decisions has been clearly illustrated in the Centros case63. In this case the
62 S. Woolcock, Competition Among Rules in the Single European Market, in International
Regulatory Competition and Coordination. Perspectives on Economic Regulation in Europe and theUnited States, ed. By W. Bratton et al., 1996, p. 289 - 32163 Centros Ltd v Erhvervs- og Selskabsstyrelsen (C-212/97), ECJ, 9 th March 1999, [2000] Ch. 446
33
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
34/51
European Court of Justice faced a case where a company chose to register its main
office only pro forma in a different jurisdiction, only to set up a branch of their
company, using the freedom of establishment rule of articles 52 and 58 of the Treaty of
Rome, to conduct business in what was de facto its home jurisdiction64. This case
clearly illustrates the potential that regulatory competition carries.
Differences in entry requirements, accompanied by the single passport rule could
especially influence companies from outside the European Community. The Prospectus
Directive allows them to choose their own Home State jurisdiction. As mentioned
above, for the purpose of the Directive, the Home State jurisdiction will be for those
entities that upon which they will choose to offer their securities for the first tie within
the SEM.
Race to the Top v. Race to the Bottom
If regulatory competition would not be minimised by the Prospectus Directive through
limiting its potential to rules where there is little transparency and comparability
available between Member State Jurisdictions, issuers from outside the SEM could gain
a potentially powerful competitive advantage. Being able to choose their Home State
jurisdiction through simply identifying the one with the least regulation within the
European Community and offering their shares to the public there for the first time they
would gain access single passport access to all the Member States markets65. Such a
situation could cause competitive inconsistencies among the Member States capital
64 For a more detailed consideration of the case see: E. Wyymersch Centros: A Landmark Decision inEuropean Company Law, Ghent University Financial Institute Working Paper 99-15, available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=19043165
The single passport is given upon issuing of a certificate by the Home State regulator, drawn up inaccordance with art. 18 of Directive 2003/71/EC, stating that approval for a prospectus has beengranted by the competent authority.
34
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
35/51
markets. If the aim of regulation is to prevent sub optimal regulatory levels of
regulation within the SEM, the rules governing the entry regime to the capital market
have to be homogenous at a high level. This can only be achieved on a European scale
through a number of rules inhibiting the possibility of a race to the bottom among
Member State regulators66.
On the other hand the Directive seems to heed to the numerous voices of the scientific
community that convey the point that regulators being left to their own merits will tend
to favour over regulation. Regulators, being creatures of their local jurisdictions will
tend to focus on the fulfilling their statutory objectives under their domestic law, rather
than commit themselves to a strategy of under regulation. According to S. Davidoff,
regulatory competition can take place in the form of a specific race to the top, where
regulators rather focus on satisfying their statutory goals instead of accepting a
regulatory strategy that would make their domestic market more competitive 67. This
phenomenon is particularly observable in the United States, where the aftermath of the
Sarbanes Oxley Act has raised listing costs for domestic and foreign companies, that
more and more often choose to refrain from listing on the US stock exchanges,
choosing to offer their securities in Europe and Asia instead68.
In either case, the existence of a predisposition towards regulatory competition among
Member States in regulating the listing regime and entry requirements would defy the
definite goal of the Prospectus Directive being the protection of investors on a pan
European scale. Both the hypotheses of predicting the directions of regulatory
66 S. Woolcock, Competition , p. 289 - 29367 S. Davidoff Regulating Listings on a Global Market, 86 North Carolina Law Review, 2007, p.89 -
15468 L. Zingales, Is the US Capital Market Losing its Competitive Edge?, ECGI Working Paper No.192/2007, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028701
35
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
36/51
competition seem to have been accounted for in some parts in the Prospectus Directive.
An example of this is the issue of the prescribed minimum and maximum scopes of
responsibility for the information published in a prospectus69.
Prospectus Directive and High Harmonisation Rules
Another very explicit example of European legislators that the European Securities
markets are prone to the effects of regulatory competition is the very fact that the
Prospectus Directive constitutes of mostly specific rules that do not leave space for
varying implementation between jurisdictions70. Furthermore, the Directive itself
provides in articles 5(5), 7, 10(4), 11(3), 14(8), 15(7), that the Directive will be
followed by more specific European legislation. The very existence of specific
regulation forming the European - wide regime of entering the public regulated markets
by companies is noteworthy. This is because of the rule of subsidiarity. The principle is
expressed in numerous places within the monolith of the first pillar of European law71.
The most basic concern of the principle is the derogation of powers on issuing specific
regulation to the Member States when the preconditions predefined do not occur72. In
the case of the Prospectus Directive with its aim as described by the FSAP being the
creation of a single European regime of raising capital through the means of the SEM
the principle of subsidiarity would be inapplicable due to the above mentioned issues
related to regulatory competition. This point is further reinforced by the specific
69 Art. 11 of Directive 2003/71/EC70 For a comparison of the implementation of the Prospectus Directive in the United Kingdom and in
Poland see the next chapter.71 Namely in, article 5 of the ECT in conjunction with art. 2 (b) and the 12th recital in the EUTpreamble.72 The preconditions are defined under art. 5 of the ECT. These preconditions are first, the area where
regulation is to be issued is not exclusively in the competence of the Community, secondly theobjectives of regulation cannot be sufficiently handled by the Member States acting on their own andthird, the aimed objective can be more efficiently handled by the Community.
36
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
37/51
regulation anticipated in the articles of the Directive mentioned above73. These articles
provide for the resolution of directly applicable specific rules regulating the format,
method of publication, form of advertisement of a prospectus as well as the specific
information that is to be present in a prospectus by the Commission of European
Communities. These specific rules took the form of Commission Regulation (EC) No.
809/200474.
Further Harmonisation Level 2 Regulation
The Regulation75 is a Level 2 regulation as specified by the Lamfalussy procedure. It
provides highly technical and specific requirements towards the informative duties that
any prospectus is required to contain in order to provide the regulator in order for
approval to be granted. Its main concept, apart from implementing the abovementioned
delegations provided for in Directive 2003/71/EC, revolves around instituting a
building blocks concept applicable to the formation of information to be provided in a
prospectus. It was amended in 2006 to provide for regulations of third country
accounting standards76 and in 2007 with regulations addressing the treatment of
complex financial history of companies77. The amending provisions added further
detail.
E. Ferran argues that the provisions found in the Directive and in the Level 2
Regulation have been designed mostly to counter the effects that the previous regime
73 articles 5(5), 7, 10(4), 11(3), 14(8), 15(7) of Directive 2003/71/EC74 Text of the regulation as it was published in the Official Journal of the European Union [2004]L149/1 is available here: http://ec.europa.eu/internal_market/securities/docs/prospectus/reg-2004-
809/reg-2004-809_en.pdf75
EC Regulation No. 809/2004, hereunder called the Regulation76 Commission Regulation (EC) No 1787/2006 European Union Official Journal [2006] L337/1777 Commission Regulation (EC) No 211/2007 European Union Official Journal [2007] L61/24
37
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
38/51
had on the capital market. Due to the material ramifications of this paper I cannot go
into describing the detail specifications that were in force prior to the installation of the
Directive and the Level 2 Regulation. In my opinion it is enough to say that the
previous system was based on mutual recognition of entry requirements among
Member States, rather than a single passport approach demonstrated by the Directive.
It is clear from analysing the discussed articles of the Prospectus Directive and from the
general spirit of the Regulation that the identifiable spirit of these remedies is the
creation of a single, strict and specific system of European rules for entering the
regulated equity markets.
The above analysis of the technical regime on entering the regulated markets in Europe
creates the impression that it is a coherent system that enforces a one size fits all set of
regulations over all the regulated securities markets in Europe78. On grounds of my
earlier discussion, I find that some of the basic principles of the Directive and the very
existence of the Level 2 specific Regulation shows evidence that it was designed with
the aim of discouraging regulatory competition between Member States79.
However the problem I formulated in the beginning of this paper remains. The fact that
the regime regulating the entry requirements for companies into the regulated equity
markets is a detailed and coherent system of rules seems to suggest that it is not the
78 The one size fits all model of regulation was criticised by the London Stock Exchange on the
grounds that the new regime would undermine the UK secondary markets and limit investors access tonon- EU equity products, in London Stock Exchange, Comments from the London Stock Exchange on
Proposed Prospectus Directive, available at:
http://www.londonstockexchange.com/NR/rdonlyres/A6B9CF00-E0BE-4899-A6E5-
71EC95A7317E/0/0108PDatt.doc79 The International Capital Markets Association, Letter to the Commission on the Review of the
Prospectus Directive from the 8th of April 2008, clearly states that one of the previous regimes flaws
was its lack of strength in implementing unilateral regulation among Member States. The ICMA callsfor further strengthening of the Prospectus Directives regime and implementing more specific rulesinto the Directive when it will be amended.
38
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
39/51
law in books that constitutes a factor to the statistical differences in numbers of
domestic and foreign companies applying to listing in the UK and Poland. The fact is
that the specific disclosure requirements applicable to companies applying to list in
either the UK and in Poland derive mostly form the Level 2 Regulation and the more
specific institutions of the Prospectus Directive. Before any final conclusions can be
reached regarding the triviality of European regulation on the capital markets I find it
compelling to analyse the method, form and effects of implementing the Prospectus
Directive into the jurisdictions of Poland and the UK.
Directives Implementation in Poland and the UK
The Directive expressly provided the deadline for implementation in all of Member
States. This date was set to be the 1st of July 2005 by article 29 of the Directive. In the
UK, it has been anticipated that the implementation of the Prospectus Directive into the
legal order will take considerable legislative efforts after the Directive was first
published80. The official final report on the effect on regulation the Directive had does
not however list many issues and generally treats the changes made to the listing
requirements as fairly small and limited in scope. There have been changes
implemented into the Financial Services and Markets Act 2000 section VI to facilitate
for the Directive. These changes include amending the powers and responsibilities of
the FSA, the automatic effect of the Directives regulation, amendments made to the
FSAs Rulebook and guidance and the adoption of the CESR recommendations by the
FSA81. Both the primary and secondary amendments to UK regulation implementing
the changes brought by the Directive have been formulated in Statutory Instrument
80 R. Pretorius, J. Ferreira, The Implementation, p. 181
S. Revell, T. Jones, M. Kalderon, The Prospectus Directive and its Implementation in the UK,Freshfields, Bruckhauser and Deringer Briefing Paper Series, available at:http://www.freshfields.com/publications/pdfs/practices/9790.pdf ;
39
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
40/51
1433, brought forward by HM Treasury82. In the case of Poland, the legislative steps
that were to be undertaken for implementation of the Prospectus Directive into the legal
order were delayed. Effectively the legislation necessary for the successful
implementation of the Directive was not drawn up in time to meet the deadline
provided by the Directive itself. This delay may have been caused by a number of
issues. The law firm Gessel, in one of its briefing reports attributed this delay to the
burden of legislative measures that had to be undertaken due to implementation of other
pieces of European legislation related to capital markets regulation and internal reforms
that were taken place adjacently to those in the Polish Parliament83. The appropriate
legislation implementing the Directive has been passed by Parliament on the 29 th July
2005. Nearly a month after the Directive was to be implemented into the legal order.
This period was extended even more due to the vacatio legis period practiced in Poland,
demarking the period the day when a bill is passed by Parliament and when the
legislation officially comes into life. This created a certain number of difficulties for the
Polish regulator. In order to create a climate of legal certainty the (no longer existent)
regulator PSEC, issued a report in which it cited the possibility created by the
Constitution of Poland for the direct application of Community law in the Polish legal
order84. The article allows for the legal fiction to be applied that when an international
agreement ratified upon prior consent granted by statute shall have precedence over
statutes if such an agreement cannot be reconciled with the provisions of such
statutes85. This solution was also made possible by the aquis communautaire. However
82 SI 2005/1433, available here: http://www.opsi.gov.uk/si/si2005/20051433.htm ; explanatory note byHM Treasury Department, available here: http://www.hm-treasury.gov.uk/d/20050525_EM_to_PD.pdf83 Kancelaria Prawna Gessel, Najnowsze Zmiany na Polskim Rynku Kapitalowym, 2005, availableat: http://www.iir.pl/konf/loga/W0328/w0328_informacja_dotyczaca_zmian_prawnych.pdf84
KPWiG, Zarys publicznego oferowania papierw wartosciowych po 1 lipca br. w sytuacji braku
nowych regulacji implementujacych dyrektywe 2003/71/EC, Report, 2005, available at:
http://aries.kpwig.gov.pl/pdf/prosp_zmiany.pdf85 Article 91(2) of the Constitution of Poland, available at:http://www.sejm.gov.pl/prawo/konst/angielski/kon1.htm
40
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
41/51
no such provision exists in any of the first pillar Treaties, there is body of case law
developed by the European Court of Justice that provides a wholesome approach to the
problem.
The rule derived from Van Gend en Loos86 says that citizens may call upon the rules
imposed by the European Communities even without direct implementation of those
into the national legal order of the Member states. In Defrenne v. SABENA87 the ECJ
pointed to the vertical effect that the principle of direct effect has on the legislation of
the Member States. A secondary effect of this ruling is that the Member States, through
their organs, must observe the regulation issued by European Communities and ensure
their application into their legal orders. The PSEC acted in anticipation of the necessity
to provide for the direct application of the rules provided in the Prospectus Directive, by
announcing a change in regulation prior to the actual implementation into the national
legal order88. The legislation constituting the actual final implementation of the
Directive into the Polish legal order took the form of the Act on Public Offer89. The
mentioned Act constituted a final and nearly direct implementation of the Prospectus
Directive into the Polish legal order. Materially neither of the systems chose to
implement varying solutions in their implementation of the Directive. In the UK also
the HM Treasury, in a report on the impact the Directive had on the regulatory
environment of the UK, agrees that the principle of high level of harmonisation intrinsic
86 ECJ 05.02.1963 C-26/62, [1970] C.M.L.R. 187 [1976] ECR 455 C 43/75, see S. Weatherill, Cases and Materials on EU Law, 8th Edition, 2008,
p. 113 114 available at: http://books.google.co.uk/books?
id=uoib8qONIsC&pg=PA113&lpg=PA113&dq=defrenne+v.
+SABENA+Case+41/74&source=bl&ots=BoFMVRXMd5&sig=36JyMONNmVkMJ9UXcHwecVxftk0&hl=en&ei=bYkWSvHEEJWUjAfzjJj2DA&sa=X&oi=book_result&ct=result&resnum=4#PPA114,
M188
KPWiG, Zarys, p. 2 - 589 The Act on Public Offering, the Conditions of Entering Securities into the Organised System ofTrading and Public Companies, 29th July 2005, Journal of Statutes Nr. 184, Pos. 1539
41
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
42/51
to the rules of the Directive precludes any variation in the form of implementation into
the legal order90.
The Impact of the Entry Regime on the Market
The discussion in the above paragraph clearly points out the fact that not only there was
very little space for differences in implementation of the Directives rules, there was
also very little variation in the actual method of implementation and its results. These
findings allow for some initial conclusions to be made. It can be said that the European
regime regulating entry into the official listings markets is highly homogenous and
based on high harmonisation rules and the implementation of those rules in Poland and
UK can be described as congruent. This statement however ultimately fails to give an
explanation of the focal problem of this paper. Since there is a single entry regime for
the market of listed equity securities, the impact of regulation ought to be the same in
both the UK and in Poland. However the data quoted in the beginning of this paper
suggests this is otherwise.
The results of the analysis made in the previous chapter, suggest that considerations of
different factors than just the formal regulation must be taken into account in order to
provide an answer for why does the Polish market seem to attract more listings than
London. The approach of analysing the law in books accepted in the biggest part of
this essay provided only a partial answer to the basic problems discussed in this paper.
L. Enriques has encountered a similar problem when analysing the impact of EC
Company Law directives on the corporate governance of European companies91. He
90 HM Treasury, Final Regulatory Impact Assessment, available at: http://www.hm-
treasury.gov.uk/d/20050519_Final_RIA.pdf91 L. Enriques, EC Company Law Directives and Regulations: How Trivial Are They?, 27 Universityof Pennysylvania Journal of International Economic Law, 2006, p. 1- 78
42
7/31/2019 The Prospectus Directive Chosen Aspects of the Impact of European Regulation on the Public Regulated Markets o
43/51