In June 2018 the Swiss Federal Parliament passed the Financial Services Act and the Financial Institutions Act, and on 23 October 2018 the Swiss Federal Council presented the ordinances implementing these acts for public consultation until early February 2019. It is expected that the acts and its ordinances will become effective on 1 January 2020. Modeled largely after the EU prospectus framework, the new prospectus regime marks 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.

By Christian Rehm / René Bösch (Reference: CapLaw-2018-56)

1) The Proposed Revision of the Swiss Prospectus Regime

On 15 June 2018, after almost 2 ½ years of deliberation the Swiss Parliament enacted the Financial Services Act (FinSA) and the Financial Institutions Act (FIA). 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 introduces 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 draft Ordinance on Financial Services published on 23 October 2018 for public consultation (Draft-FinSO) specifies several details of how the principles set out in FinSA shall be implemented. While it is still in draft form, at a minimum the part in the Draft-FinSO governing the new prospectus regime is expected to not receive significant contradictory comments and, therefore, to be in near final form.

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 introduces 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 will be vested with administrative powers. It is expected in the Swiss market that the SIX and BX Swiss will apply to be appointed as approval authorities. Once licensed these approval bodies will be the sole competent bodies to approve prospectuses under the FinSA regime. Admissions of new issues to market places, however, will be continue to be governed by the admissions bodies of the relevant market places. But the new framework should assure that such admission bodies have to accept an approved prospectus under FinSA without setting up its own additional disclosure requirements, aside from technical aspects relevant to the specific market place. It is further expected that Swiss market places will amend their rules such that the approval and admission-to-trading process can run in parallel and be coordinated.

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 Draft-FinSO now proposes that the duty to prepare a prospectus under the authority of FinSA comes into effect 6 months after the first approval authority is licensed. Such licensing is expected to occur as of 1 January 2020; accordingly, the new approval requirement is expected to be fully in place as from 1 July 2020 onwards.

b) Ex Ante Approval and Exemptions

In principle, the approval authority will 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) will 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. Yet, 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. Acknowledging the relevance of this practice for the Swiss market, FinSA now introduces an exception to the rule of ex ante approval for certain securities to be specified in the implementing ordinance. The Draft-FinSO names straight bonds, convertible and exchangeable bonds, bonds with warrants attached, mandatory convertible notes, contingent convertible notes (CoCos) and write-down bonds as such exempt securities, and structured products with a duration of 30 or more days.

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. But to benefit from this exemption from the ex ante approval requirement, a Swiss bank or broker dealer will have to confirm in writing to the issuer / offeror that the most important information about the issuer and the relevant securities is available at the time the prospectus is published. Such prospectuses made 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 will 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 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 only states the golden rule of prospectus drafting, i.e. that the prospectus must contain all information material for the investment decision of an 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 are set out in annexes to the Draft-FinSO, as schemes for several classes of securities. As currently drafted the schemes are based on the well-established SIX regulations with some additional requirements as well as helpful clarifications. The schemes denote also where seasoned frequent issuers (issuers of equity securities included in a leading Swiss index or issuers having outstanding debt instruments in a principal amount of at least CHF 1 billion) benefit from alleviations.

The FinSA 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 Draft-FinSO will allow incorporation by reference as much as possible. Incorporation by reference not only serves the interests of issuers, but also those of investors by precisely referencing the relevant information without unnecessary duplication.

In case of new developments that occur prior to the end of the subscription period or, for 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 FinSA introduces a set of explicit exemptions from the prospectus requirement largely in line with the Prospectus Directive and the Prospectus Regulation of the European Union and existing SIX regulations. Also, 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 are in our view 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 investment vehicles for wealthy private clients which to have a professional treasury (likely to be family offices)), offerings addressed to less than 500 (non-professional) investors, and offerings with a minimum investment of CHF 100,000 or of securities with a denomination of at least CHF 100,000. Finally, offerings of less than CHF 8 million over a period of twelve months are exempted. While these exemptions largely mirror the new European Prospectus Regulation, including in particular the recently increased offering limit of CHF 8 million, the Swiss Parliament deviated from the EU regulation when in the final legislative efforts it increased the private clients exemption from 150 to 500 investors.

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 FinSA is more liberal than the European Prospectus Regulation in that it no longer requires that “details of the offer” be provided; while this requirement was still contained in the draft FinSA, the parliament acknowledged that this would have created substantial legal uncertainty.

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, starting on the basis of the current listing rules of the SIX but then going beyond, the admission to trading of securities that, calculated over a 12-month period, account for less than twenty (currently 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. This increase in percentage mirrors the new European Prospectus Regulation.

Most notably, the FinSA also 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 Regulation, which contains a number of exemptions for admission to trading verbatim mirroring the offering exemptions, this technical duplication is missing in the FinSA. But in the final deliberations a provision has been introduced to clarify that these exemptions shall apply mutatis mutandis for the admission to trading.

d) Further Alleviations and Abridgment Options

The Draft-FinSO will provide for additional alleviations and abridgment options from the prescribed prospectus content for well-known seasoned issuers. It seems that for technical reasons within the government the published draft did not reflect the proposals of the expert group for such alleviations and abridgment options, but the government has assured that these proposals should largely be acceptable and be reflected in the final version of the Draft-FinSO.

e) Information outside of the Duty to Publish a Prospectus

The FinSA requires that if an offer is exempt from the duty to publish a prospectus the issuer or offeror must treat all investors equally if they provide relevant information to investors in connection with such offering.

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

While the FinSA 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. To address this problem, the Draft-FinSO proposes that the Banking Ordinance be amended to specify that if the offeror prepares a basic information document no such licensing issues arise. This proposal is flawed and to be rejected because it is overly broad and would introduce the duty for all Swiss offerors of bonds to prepare such basic information document for all bonds while the regulation of the basic information document itself specifically exempts bonds from this duty.

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, parliament has considerably limited this requirement; the FINSA now excludes debt instruments without derivative elements from the requirement of having to prepare a basic information document. The Draft-FinSO proposes to exempt, inter alia, the following securities from the basic information document: convertible bonds, provided they are convertible into shares of the issuer or an affiliate within the same group, subscription rights in a rights offering, employee options, dividends in kind, floating rate bonds to the extent referring to benchmarks, inflation protection bonds, bonds with call and early redemption features, and zero coupon bonds. With this enumeration the Swiss legislator follows a much more flexible approach than the EU under the PRIPPs Regulation.

The Draft-FinSO contains the specific details for the format and contents for such basic information document. While generally the Draft-FinSO follows the requirements for Key Investor Documents (KIDs) under the EU PRIIP Regulation, it contains helpful alleviations and more flexible standards. But FinSA also stipulates that instead of preparing a basic information document under the FinSA, one may also use a KID.

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.

While the draft FinSA, as proposed by the Federal Council, required prospectus drafters to prove that they did neither act intentionally nor negligently, parliament did not adopt this reversal of the burden of proof, acknowledging that this would have constituted a novelty in Swiss law and in particular would have required defendants to prove the non-existence of certain facts, a proof that would have been extremely difficult to establish in practice. Consequently, the FinSA in our view retains the existing proven liability regime and in particular does not introduce the fraud-on-the-market theory, which would have assumed reliance on the prospectus by the investors 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 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 is 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 puts the Swiss market at a certain disadvantage, in particular as the European prospectus regulation does not provide for a similar criminal liability.

Also, the newly introduced criminal liability is unfortunately not really well-drafted. While the clause clearly states that only material omissions may trigger criminal sanctions, the wording is less clear for misstatements, and would theoretically allow that even minor misstatements could be sanctioned. Yet, in our view, the same standards must apply to misstatements and omissions, i.e. only material misstatements and only material omissions can be the subject of criminal sanctions.

8) Appraisal

Aside from the introduction of criminal liability for intentional non-compliance with Swiss prospectus rules, the FinSA introduces 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)