This post first appeared as Blog post at FIN LAW.
As an alternative to a bank loan, companies can raise money from investors via the capital market. This can be done through a variety of financial instruments. The most common and best-known in this context are shares as an equity instrument and bonds for raising debt or hybrid capital. The financial instruments can be presented classically in securities certificates or in electronic form.
Regardless of the form of the capital raising instrument, it should be noted that an information document must be published in the event of a public offer to a large number of small investors. For large-volume issues, this is usually a securities prospectus. The requirement as to what information must be included in the prospectus follows from the Prospectus Regulation and other accompanying regulations. For issues of up to 8 million euros in Germany, there is alternatively the option of using a securities information sheet (WIB) that is up to four pages long.
The content requirements of the WIB follow from the Securities Prospectus Act (WpPG). One important piece of information for investors is what the issuer’s financial situation is. Accordingly, historical financial information is regularly required to be included in the documentation. Especially for young or small companies as issuers, it is important to check in advance whether they can meet the requirements.
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Securities prospectuses have the highest requirements
The requirements for historical financial information are the highest for a securities prospectus under the Prospectus Regulation. For dividend stocks such as shares offered to retail investors, audited historical financial information for the last three years must be included, as well as an auditor’s report for each financial year. If consolidated financial statements are prepared, at least these must be included. If the issuer is required to report in accordance with international accounting standards, this financial information must be included.
If the issuer is not obliged to do this, the financial information can also be prepared in accordance with national accounting standards such as the HGB. In this case, these must contain at least the balance sheet, the profit and loss statement, an overview of all changes in equity, the cash flow statement, the accounting methods and explanatory notes.
In these cases, smaller companies in particular must check whether their accounting meets these requirements or whether they may also need to prepare financial information that meets the aforementioned requirements. The same applies, with a few relaxations, to historical financial information for retail non-equity securities such as bonds. The period to be presented here is two instead of three years.
Facilitation for SMEs and small-volume emissions
According to the Prospectus Regulation, small and medium-sized enterprises (SMEs) have the opportunity to create a so-called EU growth prospectus. In terms of content, this has lower requirements than a regular securities prospectus. This also applies to financial information. For dividend stocks, only the last two financial years have to be covered instead of three. If accounting is carried out in accordance with national accounting standards, there is no need to present a cash flow statement or an overview of changes in equity.
For non-equity securities, only the last financial year needs to be covered and no cash flow statement needs to be included if the issuer uses national accounting principles. A WIB can be used for emissions of up to 8 million euros in Germany. For a WIB, the issuer’s debt ratio, calculated based on the most recently prepared annual financial statements, must be included.
A reference to the most recent annual financial statements must also be included and it must be stated where they can be obtained. These simplifications can make the preparation of the prospectus or WIB much easier, especially for smaller and young companies, as they can mean that no new financial reports have to be prepared.
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