Under the newly enacted Financial Services Act (FinSA), a prospectus is not required if a public offer of securities is directed at less than 500 investors. This article considers the new 500-investor rule from a practical perspective and proposes guidelines for potential offerors who wish to rely on it.
By David Weber (Reference: CapLaw-2020-14)
The Financial Services Act (FinSA) together with the Financial Services Ordinance (FinSO) completely overhauled the disclosure requirements for capital market transactions in Switzerland. As a rule, any person (whether the issuer or a third party) who makes a public offer of securities (whether newly issued or existing) must first publish a prospectus (art. 35(1) FinSA), which is subject to prior review by an authorized review body (art. 51 FinSA). FinSA and FinSO impose detailed requirements regarding the design, substance and publication of the prospectus (see CapLaw-2019-51). Accordingly, whether a prospectus is required for a particular offer generally has a significant impact on the time to market and the ancillary costs associated with making the offer.
Among the numerous new exemptions from the prospectus requirement is one which is expected to be particularly relevant for the Swiss market: a prospectus is not required if the public offer is directed at less than 500 investors (art. 36(1)(b) FinSA). This article considers what this exemption means from a practical perspective, in particular how offerors can ensure compliance with the 500-investor rule and its potential impact on the process of marketing and launching the offer.
1) Does “500 investors” really mean “500 investors”?
Financial intermediaries must allocate their clients to one of three segments, i.e. private clients, professional clients and institutional clients (the latter being a subset of the professional client segment) (art. 4(1) FinSA). The distinction between private and professional clients is also relevant for the prospectus requirement. In particular, public offers directed only at investors who qualify as professional clients (i.e. professional investors) do not require a prospectus (art. 36(1)(a) FinSA). This raises the question whether the professional-investor exemption and the 500-investor rule apply cumulatively, i.e. whether a public offer may be directed at an unlimited number of professional investors and up to 499 other investors.
On the face of it, the wording of the FinSA seems clear: a public offer is exempted if it is directed only at professional investors or if it is directed at less than 500 investors. However, the wording may not reflect the true intention of the legislator.
The new prospectus requirement was modeled on the EU prospectus directive (now replaced by the EU prospectus regulation). Under EU legislation, offers addressed to fewer than 150 persons per member state other than qualified investors are exempted from the prospectus requirement. Similarly, the Federal Council’s draft of the FinSA sought to exempt public offers directed at less than 150 investors who qualify as private clients. The Federal Assembly increased the threshold to 500, but the parliamentary debate does not indicate that any other deviation from the Federal Council’s proposal was intended.
Furthermore, the two exemptions are motivated by different rationales. In the case of an offer directed at a limited number of investors, the legislator assumed (whether rightly or wrongly) that the investors have a sufficiently close relationship to the offeror to limit the risk of abusive practices. With respect to professional investors, the assumption was that these types of investors have sufficient economic means to protect themselves. Since the legislator apparently considered either one of these circumstances (closeness of relationship or economic means) as sufficient to make a statutory disclosure requirement unnecessary, the two exemptions based on the (presumed) existence of such circumstances should be available cumulatively. To be clear, the offeror does not actually need to have a close relationship to any particular investor to be able to rely on the 500-investor rule, only the number of investors is decisive.
That this issue is even open to debate is regrettable, in particular considering that existing EU legislation provided a good model for clear rules. As things stand, the author’s view is that professional investors should not count towards the 500-investor threshold. That said, until there is a reliable precedent, offerors might want to consider directing the offer at only 499 investors overall or, where this is not feasible, relying on another exemption.
2) What needs to be restricted to less than 500 investors?
In order for the public offer to not require a prospectus, the offer must be directed at less than 500 (non-professional) investors. The prospectus requirements (and certain other rules) under the FinSA are based on the idea that an offer is a type of communication which meets specific criteria. Accordingly, the author suggests that what needs to be restricted to less than 500 (non-professional) investors is any communication which meets such criteria. Consequently, an offeror is not relieved from the prospectus requirement if it makes a general offer, but ultimately only permits less than 500 investors to participate.
An offer is defined as a communication of any nature, which contains sufficient information on the terms of the offer and the financial instrument, and is customarily aimed at calling attention to and disposing of a particular financial instrument (and therefore is, or may in good faith be understood as, an invitation to acquire that particular financial instrument) (art. 3(g) FinSA and art. 3(5) FinSO). In other words, not the number of addressees or the form, but the purpose and the level of detail of the communication are decisive.
The level of detail is the more helpful criteria in differentiating between restricted and unrestricted communications by an offeror. Strictly speaking, a communication only contains sufficient information to qualify as an offer if it specifies the material terms of the offer and therefore is specific enough to be capable of acceptance by the investor (or, in the case of a solicitation of offers, to lead to an offer from the investor which is capable of acceptance by the offeror). In other words, the legislator intended to only restrict communications at the very end of the solicitation process, in the immediate run-up to the acceptance of an offer when evaluations and negotiations are essentially over. Consequently, interactions with investors at the very beginning of the process with the purpose of gauging general market sentiment (such as pilot fishing, pre-sounding, or testing-the-waters) generally do not have to be restricted. As an example, in the author’s view no prospectus is required if an offeror conducts a general evaluation of market interest in a novel investment product on a broad investor basis (i.e. more than 500 persons), but ultimately offers the securities to less than 500 investors.
In practice, it may be difficult to determine from exactly which point communications must be restricted, in particular since the material terms (namely volume and price) of an offer are often defined in an iterative process of interactions between the offeror and investors (or selected lead investors and/or investment banks) against the background of potentially changing market conditions. Until there is a reliable precedent or clear official guidance, offerors might want to consider restricting communications earlier rather than later in the solicitation process.
Communications from an offeror to investors which are unrelated to a specific immediate transaction (i.e. which are not solicitation materials) generally do not have to be restricted, even if they occur during the marketing and solicitation process of an offer. For instance, general advertising with respect to the offeror is normally not specific enough to qualify as an offer. Similarly, general investor and analyst meetings in the ordinary course of business or non-deal road shows are not intended as an invitation to acquire specific securities and generally do not have to be restricted either. Nevertheless, offerors should ensure that these interactions with investors are limited to ordinary-course matters (e.g. financial results, strategic outlook, etc.) and that offer-related matters are reserved for other, restricted forums.
3) Equal provision of material information
In the case of a public offer which complies with the 500-investor rule (or is otherwise not subject to the prospectus requirement), the offeror must treat investors equally when providing them with material information on the public offer (art. 39 FinSA).
The practical implications of this new equal treatment requirement are largely untested. The provision requires the offeror to make any material information on the offer provided to some investors also accessible to all other investors at whom the offer is directed. In the author’s view, this not only applies to formal solicitation materials (e.g. an information memorandum), but also to due diligence information made available in the context of the offer. As a rule, material information on the offer should be made available to all potential investors at the same time. Where this is not possible (e.g. if a particular investor is approached at a later stage of the solicitation process), the information should be made available without delay and in any event sufficiently prior to the end of the deadline for accepting the offer.
With respect to general oral communication with investors (e.g. road shows or investor presentations), it should be sufficient if the offeror affords investors equivalent access to participate. Bilateral oral communications with individual investors are typically limited to summarizing or elaborating on existing solicitation materials and should therefore not convey further material information on the offer. Nevertheless, an offeror should consider making its responses to investor queries available to all investors (e.g. in a Q&A or similar document) in due course.
4) Proposed guidelines for offerors
While the 500-investor rule is a novelty under Swiss law, the concept of an offer directed at a limited number of investors (private placement) is not. Accordingly, best practices developed for private placements under the old regime continue to be relevant under the FinSA. The author proposes that offerors who wish to rely on the 500-investor rule observe the following general guidelines:
– To ensure that restricted communications are not made to more than 499 (non-professional) investors, offerors should keep a continuously updated record of any investor to whom a restricted communication is made (including when a financial intermediary is acting on behalf of one or several investors). Such records should include whether the investors are classified as private or professional clients.
– To ensure that any material information on the offer provided to any investor is also made accessible to all other investors at whom the offer is directed, offerors should keep a continuously updated record of all restricted communications made (available) to each investor.
– Any written documentation relating to the offer which might be considered a restricted communication should include appropriate selling restrictions and specify that the communication is personal to the recipient only and not to be distributed to any other person.
– Offerors must not make restricted communications (including written documentation relating to the offer) publicly accessible. As a rule, any website through which restricted communications are made available to the investors at whom the offer is directed (e.g. a data room) should only be accessible with personal login details and include the same legend (selling restrictions etc.) as written documentation relating to the offer.
– Materials relating to the offer must not be labeled as “prospectus pursuant to FinSA” or with any similar labelling.
5) Conclusion
Complying with the 500-investor rule to avoid having to draw up and submit for review a formal prospectus comes with its own challenges and requires some operational efforts. Relying on other general exemptions, e.g. by directing the offer only at professional investors (art. 36(1)(a) FinSA), requiring a minimum investment per investor of CHF 100,000 (art. 36(1)(c) and (d) FinSA) or, especially in a crowd-investing context, limiting the volume of the offer to CHF 8 million (art. 36(1)(e) FinSA), may sometimes be the path of least resistance for an offeror. It remains to be hoped for the Swiss market that the 500-investor rule will nevertheless also facilitate the availability of high-profile offers to retail investors.
David Weber (dweber@vischer.com)