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Approval of Prospectus, the "Country of Origin" Principle

  • Netherlands
  • Banking and finance

01-07-2007

A question often heard in the market is whether the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, “AFM”) has to approve a prospectus from a securities issuer based in the Netherlands that wishes to offer its securities not in the Netherlands, but only in another EU Members State. Isn’t it possible for the Dutch issuer to simply obtain approval for its prospectus from the financial supervisory authority in the other EU Member State?

The answer is no. We shall explain briefly in this newsletter why the AFM, as the Dutch supervisory authority, is responsible, by exclusion of all foreign supervisory authorities, for approving the prospectus.

European passport regime

Europe has had a “European passport regime” for investment institutions and securities issuers for some time. The European passport offers such issuers and institutions the option, in certain circumstances, of offering their products and exercising activities within the European Union without having to apply for separate authorisation or separate approval of a prospectus in each Member State.

The issuer is required to be under adequate supervision in its home country, in other words its country of origin (the Member State in which the issuer has its registered office), which means that it is authorised (or is exempted from the obligation to obtain a license) and/or, if necessary, has made an approved prospectus generally available.

This (European) principle is known as the “country of origin” principle or “home state control” principle.

In the Netherlands, the AFM is the only supervisory authority responsible for supervising investment institutions and securities issuers, and hence also for approving prospectuses of securities issuers based in the Netherlands. Even if the securities are not to be offered in the Netherlands, the AFM must approve the prospectus.

The license obligation of Dutch investment institutions falls outside the scope of this newsletter. From here onwards, we shall concentrate only on approval of the prospectus.

Prospectus Directive

The exclusive competence of the AFM as regards approving all prospectuses published by securities issuers based in the Netherlands has its origins in the European Union’s Prospectus Directive (“Prospectus Directive”). Recital 14 of the Prospectus Directive contains the following ground:

"The grant to the issuer of a single passport, valid throughout the Community, and the application of the country of origin principle require the identification of the home Member State as the one best placed to regulate the issuer for the purposes of this Directive.

It follows from this that in principle, the supervisory authority of the country of origin is pre-eminently responsible for approving the prospectus.

Competence of the AFM for approval in Dutch legislation

On January 1, 2007, the Financial Supervision Act (“Wft”) entered into force in the Netherlands. The introduction of this new Act replaced: the Dutch Securities Transactions (Supervision) Act 1995 (“Wte 1995”), the Decree Securities Transactions (Supervision) Act 1995 (“Bte 1995”), as well as legislation and rules in which the AFM’s competence to approve a prospectus were previously regulated.

Article 5:2 of the Wft stipulates that it is prohibited to offer securities in the Netherlands without having made a prospectus approved by the AFM publicly available. This wrongly gives the impression that in the case of securities that are not offered in the Netherlands, the AFM does not have to approve the prospectus.

It is clear from Article 5:6 of the Wft in which cases the AFM is specifically competent to approve a prospectus.

The AFM is competent to approve a prospectus when the issuer has its registered office in the Netherlands and when it is intended to offer to the public or an admission to trade in a regulated market relating to, inter alia:

  • securities of the nature of shares (in the Netherlands or another Member State);
  • securities not of the nature of shares (in the Netherlands only).

The AFM also possesses this competence in case of an offer to the public or admission to trade in a regulated market relating to securities:

  • in the Netherlands by an issuer based in a country that is not an EU Member State;
  • in the Netherlands or another Member State by an issuer based in a country that is not an EU Member State, if it has previously opted for approval by the AFM; or
  • in the Netherlands or another Member State by an issuer that has its registered office in a country that is not an EU Member State, if it has previously opted for approval by a supervisory authority of another EU Member State and the issuer now opts for approval by the AFM.

At the points where it was not clear in Wte 1995 how the country of origin principle from the Prospectus Directive was implemented in the Dutch legislation, no room for misunderstanding remains in the Wft.

Delegation of authority for approval to and/or by foreign supervisory authorities

The AFM is competent to approve a prospectus from an issuer that is legally based in another EU Member State when the supervisory authority of that EU Member State delegates its authority for approval of the prospectus to the AFM.

The AFM is also authorized to delegate the approval of prospectuses to foreign supervisory authorities. If the foreign supervisory authority agrees to this, the AFM will inform the issuer of this. The AFM is then no longer competent to grant approval.

However, it has become clear to us from informal discussions with the AFM that in principle, the AFM will not make use of its own option of delegation.

Conclusion

In contrast to the old Dutch legislation, the Wft makes it clear once and for all in which cases the AFM is competent, as the exclusive supervisory authority, to approve a prospectus. Even in the event that securities are offered (only) outside the Netherlands, the AFM must approve the prospectus if the issuer has its registered office in the Netherlands.

This means that for these issuers, it is also very important to check in the case of issuances outside the Netherlands the extent to which compliance with Dutch legislation on supervision is required.

How can we help?

Eversheds Faasen can advise you on the applicability of the Wft to a share issue you are planning.

Moreover, Eversheds Faasen is very experienced in drafting and evaluating (simplified) prospectuses, providing advice on, inter alia, compliance matters, structured finance issues, parallel debt structures, security rights, securitization, legal opinions, comfort letters and listing matters.

We are also specialized in conducting (civil) proceedings in general, prospectus liability proceedings in particular and appeal proceedings.

In case you have any questions and/or remarks, or in case you would like to know what we can do for your company, please do not hesitate to contact us.

For more information contact

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