1 KEY POINTS OF THE PROSPECTUS DIRECTIVE

Contents
1.1 Introduction
1.2 When is a Prospectus required?
1.3 Form of Prospectus
1.3.1 Registration Document
1.3.2 Securities Note
1.3.3 Summary Note
1.4 Validity of the Prospectus, supplements and updates
1.6 Conclusion
Contacts

1.1 Introduction

In July 2003, the European Parliament and the EU's Council of Ministers both voted in favour of a draft directive on prospectuses for securities trading ("the directive"), designed to introduce a new "single passport" for issuers, valid throughout the European Union. The idea is to speed up cross border business, reduce costs and bureaucracy and increase investor protection. As things currently stand, if a company wishes to offer its securities to the public, it must obtain regulatory clearance in each EU member state for its prospectus. However, under the directive, a prospectus approved in one member state will be valid across all fifteen member states without any further conditions or procedures (other than as to the translation of the summary; as detailed below). The directive will apply to the Official List and the Alternative Investment Market of the London Stock Exchange. As for the OFEX Market, where a company applies for admission to OFEX and makes a public offer in excess of £2.5 million, a prospectus will be required under the directive (see below). In other cases, OFEX believes that a prospectus will not be required as OFEX falls outside the scope of the directive.

It is proposed that, in each member state, a single administrative competent authority will be designated to approve any prospectus and to assume responsibility for supervising compliance with the directive. However, under the current draft, competent authorities are permitted to delegate tasks to other bodies. For the Alternative Investment Market ("AIM"), if it remains a regulated market, this will preserve the status quo for the time being, as AIM can delegate responsibility to a nominated advisor for ensuring that an applicant company is suitable for the market. Any such delegation of tasks relating to the obligations under the directive will be reviewed five years after the directive comes into force.

1.2 When is a Prospectus required?
The new rules will apply to public issues of securities (equities, bonds, derivatives etc) ("a public offer") as well as companies seeking admission to trading on a regulated market situated or operating within a member state ("an admission"). Under the directive, no securities may be offered to the public or admitted to trading on a regulated market in the EU, unless a prospectus has been made available. However, there are exemptions to this rule. For example, there is no obligation to publish a prospectus if the public offer is addressed:

(i) solely to qualified investors ; or
(ii) to a restricted circle of fewer than 150 natural or legal persons per member state, other than qualified investors.

If an offer can therefore be categorised as "private", it will fall outside the scope of the directive. In addition, the directive will not apply to securities included in an offer where the total consideration of the offer is less than €2.5 million (which limit is calculated over a period of 12 months). The obligation to publish a prospectus will not apply to the admission of securities representing, over a period of twelve months, less than 10 per cent of the number of securities of the same class already admitted to trading on the same regulated market.

If the offer falls within one of the exemptions (for example, it falls below the threshold of €2.5 million), then national rules will apply (e.g. in the United Kingdom, the Public Offers of Securities Regulations 1995, although they will need to be amended). If the company is seeking to make a public offer on AIM, then the prospectus would have to comply with the directive and the Public Offers of Securities Regulations (or its equivalent by virtue of the AIM rules.) The directive, as it is currently drafted, does not prevent a member state or a competent authority imposing other additional (and therefore higher) standards in the context of admission to trading of securities on a regulated market within that member state. Notably, this could apply to corporate governance. However, there is a proviso to this rule as such requirements may not directly or indirectly restrict the drawing up, the content and dissemination of a prospectus approved by a competent authority, or limit the capacity of an issuer to make a public offer and/or seek an admission.

1.3 Form of Prospectus
The directive requires that the prospectus should contain all information which is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to such securities. The directive also allows information (such as annual reports) to be incorporated by reference. Where the public offer or admission will take place only in the home member state, the prospectus should be drawn up in a language accepted by the home competent authority. However, where the public offer or admission will be in more than one member state, the prospectus should be drawn up either in a language accepted by the competent authorities of those member states or in a language "customary in the sphere of international finance" at the choice of the issuer (in most cases, likely to be English). In addition, the competent authorities of the home and host member states may require that the summary be translated into its official language.

The prospectus may be drawn up as a single document or a separate document consisting of the three documents below. These documents are required irrespective of the size of the issuer.

1.3.1 Registration Document
The registration document should cover at least the following:-

1. the identity of the directors, senior management, advisers and auditors of the company;
2. information about the company's financial condition, capitalisation and risk factors;
3. information about the company's business operations, the products it makes or the services it provides, and the factors which affect the business;
4. the factors that have affected the company's financial condition and results of operations for the historical periods covered by the financial statements;
5. an assessment of factors and trends, which are expected to have a material effect on the company's financial condition and results of operations in future periods;
6. information concerning the company's directors and managers (e.g. remuneration, board practices, employees, share ownership);
7. information regarding major shareholders, related party transactions, and interests of experts and advisors;
8. the financial statements to be included in the document and such other matters as the periods to be covered, the age of the financial statements and any significant changes; and
9. information on share capital, memorandum and articles of association, material contracts, experts reports, documents on display and subsidiary information.

1.3.2 Securities Note
The securities note should contain some of the information referred to under the registration document (e.g. the identity of directors, senior management, advisors and auditors, selected financial data and risk factors). However, it will also include:-

1. Offer statistics, method and expected timetable;
2. Reasons for the offer and use of proceeds;
3. Plan for distribution, markets, selling securities holders, dilution and expenses of the issue; and
4. Additional information on exchange controls, taxation, dividends and paying agents.

1.3.3 Summary Note
The summary note should provide the essential characteristics and risks associated with the company, any guarantor and its securities and a summary of the most important information included in the prospectus. The summary note should be in a brief form (no more than 2,500 words).

In relation to the risk factors, there must be a prominent disclosure of factors which are specific to the issuer or its industry, and material to the securities being offered and/or admitted to trading in order to assess the market risk associated with these securities.

Under the directive, member states must ensure that, at the very least, the company as the issuer, its management, the offeror or the person seeking admission is responsible for the information given in the prospectus. The persons responsible should be clearly identified in the prospectus and they should also declare that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and the prospectus makes no omission likely to affect its import. Member states should also ensure that chief accountants, auditors, analysts and consultants who are engaged by the company and who have delivered essential contributions to the prospectus are notified to the competent authority and can be called to responsibility by investors.

1.4 Validity of the Prospectus, supplements and updates

Under the directive, a prospectus is valid for up to 12 months after its publication for public offers or admission. However, the prospectus should be updated where a significant new factor, material mistake or inaccuracy relating to the information in the prospectus which is capable of affecting the assessment of the company's securities has arisen. In addition, where securities are admitted to trading on a regulated market, the company must provide an annual update to the registration document.

1.5 Approval and publication of Prospectus
The prospectus must be approved by the home competent authority before publication and there are strict deadlines for approval. The competent authority shall notify the company, the offeror or the person asking for admission, as the case may be, of its decision regarding the approval of the prospectus within 10 working days of the submission of the draft. This time limit shall be extended to 20 working days if the public offer involves securities issued by an issuer which does not have any securities admitted to trading on a regulated market and which has not previously offered securities to the public. The deadline for the approval period can be extended in cases where the information is "materially incomplete".

Once approved, the company must file the prospectus with the competent authority. It should then be made public as soon as practicable:-

1. by insertion in one or more newspapers circulated in the member states in which the public offer is made or where admission is sought; or
2. in a printed form, free of charge, at the offices of the relevant market, at the registered office of the company, or at the offices of the company's financial intermediaries; or
3. on the company's website or that of its financial intermediaries; or
4, (if available) on the website of the competent authority of the home member state.

If so requested, the competent authority of the home member state shall provide the other member states with a certificate of approval attesting that the prospectus has been drawn up in accordance with the directive.

1.6 Conclusion
The directive's implementation is likely to take place in May 2005.

In relation to working capital, similar provisions to the Listing Rules will apply except that the 12 months requirement is replaced in the current draft with "sufficient for present requirements." It is expected that the next level of implementation will specify what is meant by this statement.

Under the directive, the home competent authority may authorise the omission of certain information from the prospectus only if it considers that disclosure of such information would be:

1. contrary to the public interest, or

2. seriously detrimental to the company, provided that the omission would not mislead the public with regard to facts and circumstances essential for an informed assessment of the issuer and rights attached to the securities to which the prospectus relates, or

3. of minor importance only for a specific offer or admission and is not such as will influence the assessment of the financial position and prospects of the issuer.

The directive invites comparison with the Listing Rules and the AIM rules. There is no doubt that under the directive, when securities are offered to the public or are admitted to trading, the form of the prospectus (with its three document lay-out) will be significantly different. However, when compared with the current UK regulatory regime, the content requirements, as envisaged, will be very similar.

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Katy Knight, Clive Hopewell or Alexander Keepin (London), Francis Rundall or Richard Norton (Cheltenham) or Geoff Sparks (Guildford) and on 0207 203 5000.

Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.