In December 2016, the Swiss Council of States as the first chamber of Swiss parliament discussed the proposed Financial Services Act. If enacted as currently drafted, the act will impose new requirements on financial services providers and introduce a new Swiss prospectus regime. Modeled largely after the EU prospectus framework, the new prospectus regime will be a veritable paradigm change to Swiss capital market regulation, introducing a number of novelties for issuers of securities in the Swiss market, such as the requirement for an ex ante approval for most financial instruments, coupled with some important long-awaited explicit exemptions from such requirement and the requirement for a prospectus for secondary public offerings. Compared to the draft proposed by the Swiss Federal Council, the Swiss Council of States made a few well-received amendments, but some important issues still remain that would warrant reconsideration.

By Christian Rehm / René Bösch (Reference: CapLaw-2017-01)

1) The Proposed Revision of the Swiss Prospectus Regime

On 4 November 2015 following a well-used public hearing, the Swiss Federal Council submitted the draft of the Financial Services Act (FinSA), together with a dispatch (Botschaft), to the Swiss Parliament. The FinSA sets forth the new prerequisites for providing financial services, as well as requirements applicable to offerings of financial instruments. As far as the rules on the offerings of financial instruments are concerned, the FinSA would introduce a number of fundamental changes to the Swiss prospectus regime. Most notably, a requirement for an ex ante approval of prospectuses, the long-awaited codification of private placement exemptions in line with international standards and a duty to publish a prospectus in the case of secondary public offerings. The Swiss Council of States did not change this basic layout of the new regulation.

The details will be set forth in an implementing ordinance that is yet to be published.

2) Duty to Publish an Approved Prospectus

a) New Approval Requirement

The existing Swiss prospectus regime requires the publication of a rather short offering prospectus in the case of primary public offerings but not for secondary offerings, and of a listing prospectus which is in line with international standards in the case of a listing on a Swiss stock exchange. It does not currently require offering prospectuses to be filed with, or approved by, any Swiss governmental or other authority or body. Only in the case of a listing of financial instruments in Switzerland, e.g., on the SIX Swiss Exchange Ltd. (SIX), is such an approval required by the relevant stock exchange as the competent self-regulatory body.

The FinSA, as approved by the Swiss Council of States, would introduce an approval requirement for offering prospectuses by a new regulatory body, the so-called approval authority or reviewing body. This body, while still a private body, must be licensed by the Swiss Financial Supervisory Authority FINMA and would be vested with administrative powers. It is expected in the Swiss market that the SIX will apply to be appointed as approval authority.

This prospectus and approval requirement will apply to all public offerings, primary and secondary, in Switzerland and, independently, to all securities that are to be admitted to trading on a trading platform in Switzerland. Securities that are at the time publicly offered or are the subject of a request for admission to trading, in each case filed prior to the entry into effect of the FinSA, will benefit from a transitional period. The Swiss Federal Council may extend this transitional period or introduce an additional transitional period specifically for the prospectus and approval requirement should the appointment of, and start of operations by, the approval authority be delayed.

b) Ex Ante Approval and Exemptions

In principle, the approval authority would have to approve the prospectus prior to a public offering or an admission of securities to trading on a trading platform in Switzerland. First-time issuers (i.e., issuers who either have not yet published a prospectus approved by the approval authority or do not have securities admitted on a Swiss trading platform) would be required to submit the prospectus for approval at least 20 calendar days prior to commencement of the envisaged offering or admission to trading, all other issuers at least 10 calendar days. These are the periods within which the approval authority would have to state that the prospectus is approved or that the prospectus has to be revised, in which case the applicable period for approval would start anew after re-submission. However, if the approval authority does not react within the required period, this does not mean that the prospectus is automatically deemed approved.

However, other than the European bond markets which are to a large extent wholesale markets targeted at institutional clients, the Swiss fixed income market is largely a retail market with standard denominations of CHF 5,000. This would mean that in a system requiring the pre-approval of prospectuses, bond issuers would always have to prepare a full-fledged prospectus prior to listing, in particular, as for many issuers, the Swiss market is not deep enough to warrant the preparation of a program documentation. This dilemma between having to obtain a pre-approval, on the one hand, and the issuers’ need to be able to very quickly access the markets, on the other hand, has in the past been solved by the SIX by allowing the provisional admission to trading before the formal listing approval is obtained, but only for fixed income and structured products. Based on industry input received in the public hearing, the draft FinSA, as now approved by the Swiss Council of States, took note of this important practice and introduces an exception to the rule of ex ante approval for certain securities to be specified in the implementing ordinance. The dispatch explicitly states that bonds shall be designated as exempted securities. However, the exemption in the draft FinSA is, in contrast to the prior consultative draft, not limited to bonds. Accordingly, other debt instruments that currently benefit from the SIX’s provisional admission to trading, e.g., structured products, convertible bonds, etc. may (and in our opinion should) also be eligible to benefit from this exemption. Where this exemption applies, issuers must nonetheless ensure that a prospectus whose contents conform to the requirements of the FinSA is available and published no later than the day on which the public offering commences or admission to trading is applied for. The review and approval of such a prospectus by the approval authority will, however, only take place ex post (i.e., after the offering has been completed or after the admission to trading) rather than ex ante. According to the current draft FinSA, a Swiss bank or broker dealer will have to confirm (more appropriate would be to verify) that the most important information about the issuer and the relevant securities is available at the time the prospectus is published. The prospectus that is so available on the offering date or date of admission to trading will be required to contain a statement that it has not yet been approved by an approval authority.

c) Automatic Approval of Certain Non-Swiss Prospectuses

Another important feature of the FinSA is that foreign prospectuses qualify for approval by the approval authority if they are drafted according to standards of the International Organization of Securities Commissions (IOSCO) and the disclosure and ongoing reporting duties are equivalent to those of the FinSA. Prospectuses that have been approved in accordance with certain foreign standards to be specified by the approval authority would be automatically deemed approved.

A foreign prospectus automatically deemed approved must be published no later than at the time of commencement of the public offering or admission to trading and be deposited with the approval authority.

d) Publication and Validity of Prospectuses

In the case of an initial public offering of equity securities, the approved prospectus must be published at least six business days prior to the end of the subscription period. This introduces a new statutory requirement for the length of the subscription period and will make discussions in the Swiss equity markets about the minimum duration of the subscription period obsolete. For the offering of non-equity securities, the approved prospectus must be published prior to the start of the public offering or before the admission of the security to trading. The publication may be made by electronic means only (e.g., on the website of the issuer or guarantor or of the approval authority), but, in such case, the prospectus must also be made available free of charge in printed form upon request.

Once approved, the prospectus is valid for 12 months for purposes of a public offering in Switzerland and/or admission to trading on a Swiss trading platform, subject to the duty to update in case of material new developments (see below).

3) Contents of the Prospectus

Prospectuses must be prepared in an official language of Switzerland or in English. As to their contents, the FinSA as approved by the Swiss Council of States only states the golden rule of prospectus drafting, i.e. that the prospectus must contain all information material for the investment decision of the investor, and lists some specific items with respect to the issuer and, if applicable, the guarantor, the securities, and the offering. The prospectus will also have to include a summary that contains the important information, presented in an easily comprehensible way. If benefiting from an exemption from the ex ante approval requirement, the prospectus must include the relevant disclaimer (see above). The details of the required content of a prospectus will be set out in the implementing ordinance, i.e. the SIX will no longer be the standard setting authority in the Swiss market. In this respect it seems important to note that the European system certainly is a well-functioning capital market regime that can serve as a reference for developing the new Swiss prospectus regime; however, the content requirements for prospectuses set by the European regulator are extremely formalistic and much too detailed. Therefore, the Federal Council should rather take the well-established SIX regulations as a starting point when drafting the new content requirements in order to preserve the competitive edge of Swiss markets.

The FinSA as approved by the Swiss Council of States explicitly permits a prospectus to incorporate certain information by reference. Such incorporation by reference is not permissible in the summary, and is only possible for documents published prior to, or concurrently with, the prospectus; so called forward incorporation is thus not possible. Apart from these limitations, the implementing ordinance should preferably allow incorporation by reference as much as possible. Incorporation by reference not only serves the interests of issuers but by precisely referencing the relevant information without unnecessary duplication also those of investors.

In case of new developments that occur prior to the end of the subscription period or, in the case of an admission to trading, prior to the start of trading on the relevant trading platform, if likely to materially affect the price of the securities, a supplement to the prospectus must be prepared and published. This supplement must also be approved by the approval authority prior to its publication within a maximum of seven calendar days. The approval authority is required to publish and maintain a list of events, the occurrence of which would generally not trigger an approval requirement but simply a duty to publish a supplement to the prospectus.

4) Exemptions from the Duty to Publish a Prospectus

The draft FinSA as approved by the Swiss Council of States introduces a set of explicit exemptions from the prospectus requirement largely in line with the current Prospectus Directive of the European Union and existing SIX regulations. Also, in the version adopted by the Swiss Council of States, the Swiss National Bank, the Bank for International Settlements (BIS) and regulated insurance companies are generally exempted from the FinSA. For insurance companies this exemption may make sense as far as their activities are separately regulated or they are offering regulated insurance products; however, own capital market activities of insurance companies should conceptually be subject to the primary capital market rules of the FinSA.

a) Type of Offering

The list of exempted transactions includes, inter alia, public offerings limited to professional clients (e.g., financial intermediaries within the meaning of the Banking Act, the Financial Institutions Act (including asset managers) and the Collective Investment Schemes act, insurance companies, companies with a professional treasury and – subject to certain yet to be specified criteria – wealthy private clients), offerings addressed to less than 150 private clients, and offerings with a minimum investment of CHF 100,000 or of securities with a denomination of at least CHF 100,000. Also, de minimis offerings of less than CHF 100,000 over a period of twelve months are exempted. These exemptions largely mirror the European Prospectus Directive which, however, is currently under review. Therefore, it seems important that the legislator not only closely follow European developments (hearing participants proposed e.g. to increase the number of private clients in a private placement from 150 to 500 and to increase de minimis thresholds) to ensure that the Swiss regime when enacted does not go beyond what is required in Europe, but also delegates sufficient authority to the Swiss Federal Council to quickly react to a changing regulatory environment by amending the implementing ordinance.

b) Type of Security

The public offering of certain types of securities may – subject to certain conditions – also be made without an approved prospectus. For example, the following transactions can all be made without an approved prospectus: the exchange of outstanding equity securities for equity securities of the same class, the delivery of equity securities following a conversion of debt instruments of the same issuer or any of its affiliates, the offering of securities to executives or employees, and the offering of money market instruments (including in particular commercial paper). For employee offerings, the draft FinSA as approved by the Swiss Council of States closely follows the wording of the European Prospectus Directive and also requires that “details of the offer” must be provided; however, this openly worded requirement is likely to create substantial legal uncertainty and should thus be revisited.

c) Exemptions for Admission to Trading

There are also exemptions from the prospectus requirement in the case of admission to trading without a concurrent public offering in Switzerland. For example, as already the case under the listing rules of the SIX, the admission to trading of securities that, calculated over a 12-month period, account for less than ten percent of the equity securities of the same class that are already admitted to trading on the same trading platform, can be made without a new prospectus. Most notably, the FinSA as approved by the Swiss Council of States continues the SIX practice (e.g., regarding the Sponsored Segment of the SIX) of exempting securities that are already traded on a foreign trading platform that is either deemed eligible by the trading platform or where the transparency for investors is otherwise safeguarded from the prospectus requirement. The FinSA also introduces a new prospectus exemption for admission to trading on trading segments that are only open to professional clients.

By contrast to the European Prospectus Directive, which contains a number of exemptions for admission to trading verbatim mirroring the offering exemptions, this technical duplication is still missing in the draft FinSA. This potential gap should preferably be closed, be it by repeating the relevant exemptions as is the European Union or adding a general reference to the offering exemptions.

d) Further Exemptions

In the implementing ordinance, the Swiss Federal Council may also provide for additional exemptions from the prospectus requirement, e.g., for small and medium-sized issuers, well-known seasoned issuers, or for the offering of pre-emptive subscription rights. Given that the Swiss Federal Council shall have the authority to enact full-fledged exemptions, the ordinance could, and in our view should, also provide for lighter documentation requirements for certain types of issuers, e.g. well-known seasoned issuers which should be allowed to incorporate previously filed materials to the maximum extent possible.

e) Information in Private Placements

The FinSA as approved by the Swiss Council of States requires that all material information must be given to all offerees in a private placement. This clause ensures equal access to information for all offerees and does not stipulate an affirmative duty to provide a certain level of information. Preferably, the clause should be slightly amended to clarify that the test whether the offeror provided sufficient information should be left to applicable contract law.

f) Carve-out of Privately Placed Debt in the Banking Act

While the FinSA as approved by the Swiss Council of States would allow non-regulated issuers to privately place debt to more than 20 offerees, such private placement would currently be considered deposit taking under the Banking Act triggering the requirement to obtain a banking license. This would effectively render private placements of debt instruments by non-regulated issuers impossible, putting the Swiss market at a stark disadvantage compared to foreign regimes, and should, therefore, be revisited. However, we strongly believe that the question of what constitutes deposit taking should not be addressed (also not indirectly) in the FinSA, but rather in the Banking Act itself.

5) Basic Information Document

The dispatch of the Federal Council required that whenever a financial instrument other than shares (or comparable equity securities) was offered to private clients, a so-called basic information document containing all information material for the client’s investment decision, presented in an easily comprehensible way and designed to make financial instruments easier to compare, had to be prepared.

However, while such basic information document may be appropriate for short-term financial investment products, and in particular structured products, the document would not really be well-suited for debt offerings. Taking into account the wide criticism this proposal has drawn in the public hearing process, the Swiss Council of States has considerably limited this requirement; the FinSA as approved by the Swiss Council of States now excludes debt instruments without derivative elements from the requirement of having to prepare a basic information document.

It is expected that the implementing ordinance will ensure that the requirements for the basic information document are aligned with those applicable to the Key Investor Documents (KIDs) under the EU PRIIP Regulation.

6) Prospectus Liability

Notwithstanding the new prospectus approval requirement, the prospectus liability regime applicable to anyone participating in the drafting of the prospectus that is currently provided for in Swiss civil law will continue to exist. Consequently, a person responsible for drafting or contributing to a prospectus may incur liability for false or misleading information contained in the prospectus or if the prospectus does not fulfill the legal disclosure requirements.

Unlike the current prospectus liability regime, in order to avoid any such liability, the FinSA as approved by the Swiss Council of States would require the drafters of the prospectus to prove that they did not act intentionally or negligently. This reversal of the burden of proof would constitute a novelty in Swiss law and in particular require that a defendant prove the non-existence of certain facts, a proof that may be extremely difficult to establish in practice. Should defendants not be able to prove that they did indeed not act intentionally or negligently, they would be held liable.

Still, an investor would have to prove that the prospectus contained false or misleading information or was incomplete, that he or she relied on the prospectus when making the investment decision (with predominant probability), the amount of the damages, and that the defect in the prospectus caused these damages. With this requirement to prove causality, the Swiss Council of States declined to introduce the fraud-on-the-market theory, which would assume reliance on the prospectus by the investor when making the investment decision.

While a prospectus will need to include forward-looking statements, liability for such statements is rightfully limited. Wrong or misleading forward-looking statements can only lead to prospectus liability if they are made against better knowledge or made without including a disclaimer that future developments are subject to uncertainty (similar to the bespeaks caution doctrine in the U.S.). Summaries can only lead to liability if they are still incorrect or misleading if read together with, or inconsistent with, the rest of the prospectus.

7) Criminal Liability

The FinSA as approved by the Swiss Council of States also introduces criminal liability in the case of an intentional violation of the Swiss prospectus rules. While a similar provision can be found in the Swiss Federal Act on Collective Investment Schemes, this concept not only seems to be at odds with traditional Swiss law concepts, but also jeopardizes the overarching goal of introducing an attractive and competitive primary capital markets regime by ultimately discouraging issuers from using the Swiss markets for fear of criminal liability. Given that capital markets are extremely agile markets, adding criminal liability would put the Swiss market at a disadvantage, in particular as the European prospectus regulation does not provide for a similar criminal liability. Accordingly, issuers might avoid the Swiss market.

8) Appraisal

Aside from the change in the burden of proof in the case of prospectus liability and the introduction of criminal liability for intentional non-compliance with Swiss prospectus rules, the FinSA as approved by the Swiss Council of States would introduce a modern and practical prospectus regime in Switzerland that in our assessment is largely compatible with the EU prospectus regime and other international standards.

In our view, by taking the Prospectus Directive and its exemptions as a model, by accepting that established Swiss practice should continue, and by giving regard to the needs of both small and medium-sized issuers as well as large well-known seasoned issuers, the proposed regime will not introduce major obstacles for Swiss and foreign issuers. Rather, it will enhance transparency for investors and create more legal certainty for issuers.

René Bösch (rene.boesch@homburger.ch)
Christian Rehm (christian.rehm@novartis.com)