Investor protection is crucial when a company publicly issues new shares in the course of a capital increase, or if securities are traded on the secondary market. Investors are only protected if they are in full knowledge of all material and correctly reproduced parameters (issuer, intention to issue, etc.) when taking their purchase decision. In addition, the purchaser must be provided with all information on the risks associated with the financial commitment and the long-term prospects of the respective financial product. The (issue) prospectus serves as a suitable instrument to meet the information needs within the Swiss financial market.
While the obligation to publish a prospectus is not a novelty and was already regulated in Art. 652a of the Swiss Code of Obligations previously in force, since the beginning of the year it has been subject to a more detailed, uniform regulation in the newly enacted Financial Services Act FinSA (Art. 35 ff.) and in its implementing ordinance FINSO. At the same time, the previously existing discrepancy between Swiss and applicable EU law (in particular MiFID II, EU Prospectus Directive) was largely taken into account by further extending investor protection and including provisions aiming at creating equivalence between the different legal systems.
The obligation to publish a prospectus applies to companies that publicly offer securities, such as shares or participation certificates, or that apply for admission of securities to trading on a Swiss stock exchange (for exemptions, please see below). The obligation to publish a prospectus also extends to the issue of digitised shares, e.g. ""tokenized shares"".
If the offer is addressed to an unlimited group of persons, the ""publicity requirement"" is considered to be fulfilled. Offers directed at existing customers only are likely to be qualified as ""public offers"" in the sense of the prospectus provision as well. Information that solely concerns communication relating to securities trading or the issuer, as well as offers directed exclusively at professional clients (Art. 4 para. a lit. b FinSA), are not covered by the duty to publish a prospectus.
In addition, the term ""offer"" may also include detailed, advertising-like promotions, brochures or electronic offers. From a territorial perspective, the prospectus regulations apply to all public offers made in Switzerland. That hence also includes the issuance of securities to Swiss investors or the application for admission to trade on the Swiss stock exchange by a foreign issuer (""cross-border inbound activities""). Foreign issuers may, however, equally rely on the exemptions listed in the FinSA. Cross-border inbound activities are only then not considered as having been performed in Switzerland (and the FinSA is not applicable accordingly) if these are performed by foreign financial service providers in the context of client relationships that have been entered into on the express initiative of the client (Art. 2 lit. a FINSO), or if financial services have been requested from foreign financial service providers on the express initiative of the client (lit. b, so-called ""reverse solicitation""). In addition, the foreign provider can have its foreign prospectus equivalent to the FinSA requirements approved by a so-called prospectus reviewing body in Switzerland (Art. 54 FinSA). In accordance with Art. 54 para. 3 FinSA, the reviewing body maintains a list of countries whose prospectus approval is recognised in Switzerland. If there is no obligation to publish a prospectus due to an exceptional circumstance (see below), the foreign offeror or issuer must nevertheless treat investors equally in terms of Art. 39 FinSA when providing them with material information. Swiss issuers that conduct public offers abroad do not qualify for the prospectus requirements according to FinSA.
Prospectus requirement for ""Security Token""
For securities issued in digital or tokenized form, a prospectus must also be published in accordance with Art. 35 ff. FinSA, if they are offered to the public. In accordance with the Guidelines for Inquiries regarding Initial Coin Offerings (ICOs), which FINMA published as early as 2018, asset tokens or ""security tokens"" represent, among other things, shares in companies or dividend entitlements. One main application of a security token is the tokenized share. Asset tokens that are of the same quality as securities therefore have the same consequences under financial market law as conventional securities, namely the obligation to publish a prospectus. A distinction must be made between the primary issuance of the token and its trading on the secondary market. In principle, the extent to which DLT-based assets qualify as securities and, as a consequence, are subject to the obligation to publish a prospectus must be assessed on a case-by-case basis.
It should be pointed out at this point that so-called security token offerings (""STOs""), which have become increasingly attractive and publicised after the ICO boom, are generally subject to the obligation to publish a prospectus, unless an exception is made (see below). If digital shares are offered for subscription via a platform and an unlimited number of persons can view or visit this platform, this is likely to be a public offering of securities in any case.
Content of the Prospectus and Exemptions from the Obligation to publish a Prospectus
From a content perspective, the prospectus must be written in such a way that it complies with the requirements set out in Art. 40 FinSA in connection with Art. 50 ff. FINSO – focusing on the risks associated with the financial product to be issued as well as the issuer itself and its business situation. It must be written in a correct, coherent and comprehensive manner. The annexes to the FINSO set out minimum requirements for prospectus content depending on the type of security. Corresponding template schemes for the minimum content of the prospectus can be found in Annexes 1-5 to the FINSO. Furthermore, the issuer is also required to practice transparency with regard to valuation methods. This sometimes serves the purpose of highlighting factual information and avoiding investment decisions based on risk-descriptive, advertisement-like recommendations. Ultimately, the prospectus must be accompanied by a mandatory summary, designated as such and containing the essential information, which should enable comparison with similar financial products.
The general obligation to publish a prospectus is largely limited by numerous exemptions. Those are differentiated according to the type of offer and the type of securities. While the first constellation is based on the limited need for protection of experienced investors (e.g. an offer directed exclusively at professional clients), in the latter case the exception is made on the assumption that the need for information on the securities is already sufficiently covered (e.g. in the case of securities issued outside of a capital increase in exchange for equity securities of the same class already issued). Furthermore, the FinSA equally provides for exemptions for the admission to trading. In the absence of a duty to publish a prospectus, Art. 39 FinSA stipulates that offerers or issuers shall treat investors alike when sending them essential information on a public offer.
Novelty: Supervisory Prospectus Review - (in principle) ex ante
The prospectus must be published prior to the issuance of securities, and the prospectus must be approved ex ante by a FINMA-certified reviewing body. At the beginning of May 2020, FINMA approved the first two reviewing bodies pursuant to Art. 52 FinSA, namely BX Swiss AG and SIX Exchange Regulation AG. The six-month transition period (Art. 109 FINSO) is therefore running, which means that from 1 December 2020 prospectuses will be subject to a mandatory prior review and approval of one of the FINMA-approved reviewing bodies. Exceptions also exist with regard to the ex ante duty to review, taking into account bond transactions, in order to ensure timely access to the market (Art. 60 FINSO in connection with Annex 7). In these cases, however, the prospectus must be submitted in good time.
Legal Consequence: Liability Provisions
Ultimately, an investor who acquires securities based on incorrect, misleading information or information that does not comply with the legal requirements may claim the loss he has suffered from the author of this information in accordance with Art. 69 FinSA. In addition, the author of the false information risks being prosecuted. If he acts intentionally, he is liable to a fine of up to 500,000 Swiss francs. Late submissions of prospectuses also risk criminal prosecution to the same extent.
Summary
With the FinSA entering into force, the new prospectus law has provided Switzerland with an information regime equivalent to that in other European countries with regard to the issue of securities or applications for admission to a trading venue, thus laying the foundation for a level playing field among investors. At the same time, taking into account existing self-regulation (e.g. the listing rules of the SIX Swiss Exchange), it must be specified that the ""novelty effect"" may be less than it might appear at first glance. While from now the legal and regulatory basis clearly sets the minimum content of a prospectus, which equally apply to DLT-based securities, the ex ante examination by FINMA-approved reviewing bodies in particular represents a novelty. With the approval of the first two reviewing bodies, the Swiss financial market is now well equipped to implement the financial market regulation that has been developed over many years, including the prospectus requirements. It remains to be seen whether the necessary pragmatism will be applied in order to consolidate Switzerland's position as a competitive financial centre in the long term.
