ESMA publishes Consultation Paper on Draft Guidelines on "product supplements"

Two of the provisions of the EU Listing Act – a regulation amending, inter alia, the Prospectus Regulation (EU) 2017/1129 – that entered into force on December 4, 2024 were:

Article 23(4a) of the Prospectus Regulation, which prohibits a supplement to a base prospectus from introducing a new type of security for which the necessary information has not been included in that base prospectus; and
Article 23(8) of the Prospectus Regulation, which mandates ESMA to develop guidelines to specify the circumstances in which a supplement is to be considered to introduce such a new type of security not already described in a base prospectus by June 5, 2026.

One of the primary stated goals for the introduction of these regulatory provisions was harmonising divergent practices developed by national competent authorities in this area.

In response to the mandate set out in Article 23(8) of the Prospectus Regulation, ESMA has proposed two Draft Guidelines its Consultation Paper released on February 18, 2025.

Draft Guideline 1 focuses on the purpose of a supplement, and states:

A supplement should include information which is material to assessing the securities that are already mentioned in the base prospectus. The addition of information about new types of security features into a base prospectus using a supplement does not provide information which is material to assessing the securities that are already mentioned in the base prospectus.

In its explanatory notes regarding Draft Guideline 1, ESMA identifies the following as new types of features that are not already generally provided for in the base prospectus, which, accordingly, should not be introduced by way of a supplement:

a new type of underlying;
a new guarantee;
a new step-up/step-down interest payment provision; and
a new fixed-to floating interest payment provision.

ESMA stresses that these structural features of securities are so material that they must be included in the base prospectus from the outset. On the other hand, supplements are only permitted in the case of "significant" new circumstances. ESMA’s arguments therefore seem to be a bit circular. Are all other product-related changes by way of a supplement immaterial and therefore not able to be included in a supplement? ESMA should give further thoughts on the point of differentiation about what a new type of security actually is.

In contrast, ESMA views increases in the aggregate nominal amount of an offering programme as a type of material event or factor which an issuer should disclose by way of a supplement. The underlying reason for this is that such a change could impact an issuer’s long-term ability to make repayments concerning the securities mentioned in its base prospectus.

Draft Guideline 2 seeks to provide more detailed guidance on how issuers can avoid submitting a prohibited “product supplement”, and states:

Issuers should consider the various types of securities they reasonably expect to issue during the validity period of the base prospectus and should appropriately provide for them when they submit their base prospectus for approval. This should be done by including disclosure such as the risk factors associated with the relevant type of securities as well as the overarching terms and conditions that are applicable and by identifying the type of securities which the issuer will issue in the overview of the programme.

In its explanatory notes regarding Draft Guideline 2, ESMA specifically identifies the following illustrative categories of structured securities that ordinarily cannot be introduced by way of a supplement, and should rather at least be generally provided for in the approved base prospectus by including disclosure such as relevant risk and overarching terms and conditions:

green bonds;
sustainability-linked notes;
securities with crypto assets as an underlying;
guaranteed notes;
equity-linked notes;
index-linked notes;
commodity-linked notes;
currency-linked notes; and
fixed-to-floating rate notes.

This aspect of ESMA’s guidance is notably not consistent with recent practice by certain national competent authorities, which have approved supplements, in particular in respect of introducing green bonds and sustainability-linked notes or European Green Bonds since the end of last year. We think it is not helpful to reduce options for issuers if a new development during the term of the base prospectus, such as the entry into force of the Green Bond Regulation or changes in CRR for capital instruments, results in a new product perspective. In our view, a supplement should be allowed in these new circumstances.

Most of the examples given in Draft Guideline 2, for example equity-linked notes, are clear and not surprising; however, they appear not to be well aligned to the “features” discussion under Draft Guideline 1. In other words, ESMA should differentiate between a “type of product” and a(n) (additional) “product feature”. The latter should be allowed to be implemented by way of a supplement, if the risks of the instruments do not change. For example, why is the addition of a fixed interest to an already existing floating interest structure so material from an investor protection perspective? In our view, if the new feature just adds a pay-out structure without creating new risks that have to be described, a supplement should be allowed.

In contrast, ESMA provides the following examples of changes that would not amount to a prohibited “product supplement”:

addition of a new currency as an underlying in a base prospectus that generally provides for the issuance of currency-linked notes; and
limited adjustments to existing redemption formulae or formulae for calculating interest; and
limited changes to risk factors regarding the securities.

A new currency is a Category C information item and it should already be possible for it to be included in the Final Terms only. It is further unclear how the market can interpret the “limited adjustments to existing redemption formulae or formulae for calculating interest” in view of the examples given under Draft Guideline 1, for example the mentioned new fixed-to floating interest payment provision, if, for example, the base prospectus already provides for fixed interest and floating interest payment structure, but not for a combination. In addition, what exactly is a “limited” change to existing redemption formulae? Is it possible to add a leverage factor which could increase risks more substantially compared to a fixed-to-floating interest? Can a new formula be added or just an existing one revised? Is a supplement at all the practical and applicable tool for the addition of “limited” changes to the base prospectus? The reason for a supplement must be a material new circumstance.

We think that a different approach should be used by ESMA based on the differentiation of “type of products”, such as equity-linked notes, and the “addition of a new feature”. Otherwise ESMA increases the risk of even longer base prospectuses (as also mentioned by ESMA in the Consultation Paper). The overall aim of the Listing Act is to reduce complexity in base prospectuses and to reduce their size. A more liberal approach in the inclusion of pay-out additions to a base prospectus in “supplements” (new features) and in the Final Terms (limited changes to pay-outs) seems to be helpful for both issuers and investors to ensure that base prospectuses are not only a regulatory filing instrument, but a real information document. We also do not see the need for national competent authorities review and approve product features.

The deadline for submitting comments on Draft Guidelines is May 19, 2025. ESMA will evaluate the feedback it receives in Q2 and Q3 2025, and will publish the Final Guidelines in Q4 2025.