Private Investment Funds and the New UK Prospectus Regulations

February 2006

Prohibition on transfer without an approved prospectus

The implications for private companies following the implementation of the Prospectus Directive in the UK has raised numerous questions over the extent to which the new UK Prospectus Regulations apply to the marketing of interests in private investment funds.

The basic prohibition on the transfer of securities, introduced by the Prospectus Regulations in implementation of the Directive, is:

"It is unlawful for transferable securities to which this section applies to be offered to the public in the United Kingdom unless an approved prospectus has been made available to the public before the offer is made."

When is a Prospectus Required?

For a prospectus to be required: -

• The securities must come under the provisions of the Regulations; and
• The securities must be transferable within the meaning of the Regulations; and
• An offer must be made to the public that comes within the Regulations.
• Do the securities come under the provisions of the Regulations?

• Shares, and other equivalent securities;
• Bonds and other types of securitised debt; and
• Any other securities normally dealt in, giving the right to acquire them by subscription or exchange or giving rise to a cash settlement.

Shares in a fund that is a company, and also units in a unit trust and interests in a limited partnership are all clearly covered. Interests in Collective Investment Schemes that are open ended are, however, expressly excluded from the definition.

Are the securities transferable within the meaning of the Regulations?
For the securities to be "transferable" within the context of the Regulations they need to be negotiable on the capital market. By this, the securities do not actually need to be negotiated, but simply "capable of being negotiated", and as such have to be free from all transfer restrictions. Is an Offer to the Public being made within the meaning of the Regulations? The definition of what is included in an offer to the public for the purposes of the Regulations is very broad, being stated as: -

If there is a communication to any person that presents sufficient information on:

• The transferable securities to be offered; and
• The terms on which they are offered,

Exemptions from requirement to issue a prospectus

Some offers are, however, exempt from the requirement to issue a prospectus. These include: -

• those directed at qualified investors;
• those made to fewer than 100 persons;
• offers where the minimum consideration is 50,000 euros;
• offers where the securities are denominated in amounts of at least 50,000 euros; and
• those where the total consideration for the securities being offered cannot exceed 100,000 euros.

Firms should therefore be aware that, even if the offer is prima facie one that is caught by the Regulations, there is considerable scope for ensuring that at least one of the above criteria excluding the offer from the requirements is fulfilled without necessarily adversely affecting the marketability of the securities in question. Requirement to issue an Approved Prospectus and the Prospectus Requirements

If, despite the above, an Approved Prospectus is required there are strict requirements regarding the preparation and approval of it prior to issue.

The Prospectus Rules lay down detailed requirements on the information to be included in the draft prospectus. This must then be submitted to the FSA, with the appropriate fee, for approval before issue to any prospective investor. The FSA is required to give approval within 20 working days where the issuer does not already have securities admitted to trading on a regulated market and has not previously offered securities to the public, and within 10 working days otherwise.

Conclusions

Firms planning to offer securities to the public, which may constitute an offer that is potentially caught by these new Regulations, should firstly consider the options open to them to structure the product or the nature of the offer to avoid the need to issue a prospectus.

Alternatively firms should ensure that they are aware of the Prospectus Requirements, and in particular, the information requirements and the timing implications imposed by them.

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