Towards the Evolution of Laws Regulating International Aspects of IPOs
The past few years have seen considerable changes in the regulation of initial public offerings. However, legal uncertainty is generated by the lack of a specific rule to determine which legal system has jurisdiction in civil liability cases arising from a misleading prospectus.
In today’s globalized market, it is not uncommon for large corporations to look abroad for sources of financing. The laws regulating certain securities transactions, including initial public offerings (IPOs), must evolve to keep up with changes in markets and technology. The European Economic Area (EEA) has seen the beginnings of such an evolution in recent years, at least regarding certain aspects.
The fundamental IPO document
Every IPO begins with a prospectus. This fundamental document describes the characteristics of the securities on offer and establishes the rules of the IPO itself. More importantly, this document includes economic and financial information about the company that is seeking to raise capital. The appropriate regulatory authority must approve the prospectus, which in the case of Spain is the National Securities Market Commission.
A prospectus is required if the offering is public. Information about the issuer of the securities is one such form of protection, as it allows investors to make an informed decision about whether to participate in the IPO or not.
Under European regulations, jurisdiction is assigned to the country where the damage is incurred. Two main questions arise: What, precisely, is the damage? And where is it located? The situation becomes complex when the IPO affects several markets.
In the EEA, disclosure requirements have been simplified by eliminating the need to prepare a different prospectus for each market involved in an IPO.
In today’s globalized environment, multinational IPOs within the EEA are commonplace. The unification of regulatory regimes has played a key role in allowing the mutual recognition of IPO authorizations through the so-called “prospectus passport” system.
The question is: what happens if a company includes misleading information about its financial situation in an IPO prospectus? If the true information is revealed, the market value of the securities plummets, causing investors to lose money. In a strictly domestic IPO—for which there is only one prospectus—the solution is straightforward: investors file lawsuits in that country, in accordance with local civil liability laws.
However, in transnational IPOs, the evolution of the law has lagged behind the harmonization of the regulatory framework.
Under European regulations, jurisdiction is assigned to the country where the damage incurred, but two main questions arise: What, precisely, is the damage? And where is it located?
The damage is suffered by the market, and the market is located in the country where the misleading information was published. Consequently, the applicable laws, for civil liability purposes, are the national laws of the affected market.
In the case of multinational IPOs, multiple legal systems are applicable: one per affected market. This is a foreseeable outcome for both the issuer and the investors.
The aforementioned solution, though reasonable, is not without controversy. Many authors have argued that the relevant damage is the financial damage suffered by individual investors. Moreover, the Court of Justice of the European Union, in its Kolassa ruling, reached conclusions that can be extrapolated to the question of jurisdiction. Kolassa refers, albeit confusingly, to individual damage. This line of reasoning leads to a frankly unsatisfactory conclusion: that the financial damage occurs in the investor’s place of residence, provided that the investor’s bank has an establishment in the same state. Thus, any country in the world could theoretically have jurisdiction, and the issuer of the securities cannot predict which one it will be.
In today’s globalized environment, multinational IPOs within the EEA are commonplace. The unification of regulatory regimes has played a key role in allowing the mutual recognition of IPO authorizations through the so-called “prospectus passport” system. Nevertheless, to put an end to the current situation of legal uncertainty, it is also necessary to clarify which country’s laws will apply in the event of a civil liability case involving damages arising from a misleading prospectus.
Sara Sánchez Fernández, Assistant Professor at IE Law School
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