Annexes 1 and 2 of FinSO require the indication of at least a maximum price in the prospectus. There are many situations where that is not adequate. This contribution shows that there is no need to apply the annexes of FinSO word by word, but that there is interpretative leeway. In that setting, article 41 FinSA that provides the review body the power to grant exemptions has mainly the function of granting certainty over and above the interpretation of the checklists.
By Matthias Courvoisier (Reference: CapLaw-2021-03)
Article 50 (1) of the Financial Services Ordinance (FinSO) provides that a prospectus for securities must contain the minimum information stipulated in Annexes 1–5 of FinSO. Annex 1 for equity securities and Annex 2 for debt securities provide that if the final issue price cannot be stated in the prospectus, the prospectus needs to indicate the maximum issue price.
Now, there are many situations where prospectuses do not even contain the maximum issue price. That is for example often the case in bond offerings where the preliminary prospectus available at the time of marketing the offering contains very little or no pricing information. The same is true in case of at-market rights offerings where the offer price is only determined in the (often) so called international offering that only occurs or still continues after the end of the rights offering period. The reason for not even providing a maximum interest rate in bond offerings or maximum issue prices in such equity offerings is that such maximum prices have no function in the particular situation. The market produces a market price. Setting a maximum price would condition this market which would at best interfere with the price setting at a proper market price. Of course, one could set the price artificially high, but such price setting apparently makes no sense. It is neither a proper guidance nor a protection for investors. In the IPO situation, where a price range is set, the situation is considerably different. In an IPO there is usually no previous pricing information, be it in the form of a rating or in the form of trading prices, available. The upper and the lower band result from the pricing information received by the banks in the pilot fishing exercises and from the discussions with analysts as well as own pricing considerations. Here, the market is provided valuable information it would otherwise not have. The setting of a maximum price is also no protection for investors. Even if they cannot set a maximum price by themselves, they are protected by the fact that a market price will result from a proper offering of the securities.
This shows that there is an apparent gap between practice and what the mentioned Annexes of FinSO provide.
This gap results from the inherent problem of checklists if they become part of the law. Checklists are precise, but also inflexible. The Annexes of FinSO aim at specifying article 40 (1) of the Financial Services Act (FinSA) that provides that the prospectus needs to contain the information that is material for the decision of the investor and lists very general categories of information. The checklists of the Annexes are however by nature not made such that they would fill the gap between very general terms and specific items on the list. No one has thought about all the various situations where the checklist items have no function or those situations where it is even detrimental to provide the respective information. That problem can be tackled in two ways: either by interpretation or by applying article 41 FinSA that allows the review body to provide for exemptions. It is also possible to combine the two approaches.
The way through interpretation recognizes the nature of the checklists as described above and allows the correction of the checklist by interpretation in the specific situation. This is based on article 40 (1) FinSA which provides that the prospectus needs to contain information material for the decision of the investors and article 46 (c) FinSA that requires that when specifying the minimum content of the prospectus, the Federal Council needs to take into account the specific properties of the issuers and the securities. In other words, where the specific requirements have not been taken into account one must have the possibility to deviate from the specific item of the Annex. It is not required to argue that in this specific situation the Federal Council overstepped its competence to determine the minimum content of a prospectus. It is sufficient to recognize that precise checklists have their inherent limitations and need to be treated with flexibility, thereby always keeping the general provision of article 40 (1) FinSA in mind. That is also the way jurisdictions that appear to be much more prescriptive than Switzerland deal with their provisions that are too detailed. At hand, the specific type of offer does not require the indication of a maximum price and that such indication would even be counterproductive in the cases discussed. Therefore, the list has to be interpreted such that it does not require that maximum pricing information at the beginning of the offer is provided where this is not sensible.
The second route is through article 41 FinSA that allows the review body to grant exemptions mainly in case the disclosure would be detrimental to the issuer or the information would be of minor importance as in the case at hand the indication of a maximum price. In either case, no exemption may be granted for information that is material for the decision of the investors according to article 40 (1) FinSA. Against this background, article 41 FinSA appears as a provision designed for correcting situations where the application of the checklists contained in the Annexes of FinSO leads to undesired results. Interpreted in this way, article 41 FinSA could be understood as the formal way of handling the interpretative approach described above. That is however not correct since there are situations where a prospectus is published in connection with a public offer without the prior review by the review body. That is namely the case in bond issuances where the bank or securities trader confirmation according to article 51 (2) FinSA is sufficient and the review by the review body only occurs subsequently. Of course, one could in each case obtain a declaratory decision by the review body, but that appears not an appropriate procedure designed to allow the efficiency gains aimed at by article 51 (2) FinSA.
From our point of view, the two approaches exist together and are not strictly separated. The interpretative approach grants the required flexibility and helps the banks and securities traders to issue their confirmations according to article 51 (2) FinSA. It is also helpful for the review body since it does not have to grant special exemptions in each case, but can profit from some leeway for interpretation. On the other hand, article 41 FinSA gives the issuer certainty that it is not in breach of the regulations when it explicitly asks for and is granted an exemption. Needless to say that in case article 41 FinSA would be regarded as the formal way to handle the interpretative approach, the banks and securities trader confirmation pursuant to article 51 (2) FinSA could be granted even without a declaratory exemption based on article 41 FinSA provided the bank may reasonably expect that such exemption be granted.
Matthias Courvoisier (matthias.courvoisier@bakermckenzie.com)