# **The European Union**

## **Brief description of the primary market regulatory framework**

The primary market framework for corporate bonds in the EU is characterized by two main offering regimes: public offers and exempt public offers, or HBOR. A form of HBOR was first introduced in 1980 by the EU Council Directive (80/390/EEC), followed up with the 1989 Council Directive (89/298/EEC) and finally replaced by the most comprehensive framework laid out in the Prospectus Directive of 2003, which went into effect in 2005. The last was subsequently amended in 2010 with changes going into effect in July 2012. No pure private placement regime exists at the EU-legislative level; particular member states may have such regimes at the national level. Although the exempt offer regime does not differentiate between debt and equity, the most natural users of this issuance channel are issuers of corporate debt.

The particularly interesting feature of the EU HBOR is the condition that stipulates that offers with a minimum denomination of €100,000 or greater are exempt from filing a prospectus. Although four other possible conditions exist for prospectus exemption, this is the most commonly used and preferred condition because it is the easiest to control, the requirement being basically “hard-wired” into the offer. The high denomination serves to prevent the securities from being purchased and traded by retail investors.<sup>36</sup> Although the EU HBOR does not place large demands on issuers from a regulatory perspective, the market practice is to still expect issuers going through this channel to provide significant disclosures, often accompanied by a formal listing, which can trigger other requirements. As a result, in practice, this regime is used by relatively large issuers that can comply with the market’s demands. A new initiative led by the International Capital Market Association (ICMA) is underway to develop a new pan-European private placement segment, aimed primarily at unlisted issuance by medium-sized companies. From a regulatory perspective, this regime would also fall under the EU exempt public offer regime but would be distinct in terms of its application by the market.

|**Key Featu**<br>|**res of the Hybrid Offer Regime**<br>|
|---|---|
|**Official name of the hybrid offer**<br>**regime or regulation and year of**<br>**adoption**|Prospectus Directive (2003/71/EC)|
|**Nature of the regime**|Exemptpublic offer|
|**Relative importance of the regime**<br>**(percentage of total issuance, 2010)**|65%<sup>37</sup>|

> 36 However, it does not provide an absolute guarantee that leakage to the retail sector will not occur.

37 Comprehensive issuance data by offer type (public vs. exempt) within the EU region are not currently available. As an attempt to determine a best estimate, a representative proxy was used based on Eurobond offers with a minimum unit denomination of €50,000 that were listed in 2010 on the Luxembourg Stock Exchange (LuxSE), one of the largest Eurobond listing venues in Europe. Thus, the data try to capture offers taking advantage of prospectus exemptions based on the minimum denomination condition, i.e., offers with a denomination of €50,000 or greater, the existing threshold in 2010. The data include only euro-denominated offers. The main caveats of the analysis are that the data do not take into account offers in other currencies, exempt offers based on conditions other than the minimum denomination, and offers made on a national basis outside the Eurobond markets. _Source:_ LuxSE, ICMA consultations, and World Bank calculations.

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