Wherever you stood on the BREXIT debate, one opportunity that the UK government has seized is to remove or reform the inherited EU financial services legislation and replace it with a regime which positions the UK more competitively with other global financial centres. Despite the objective of having harmonised legislation across the EU, adopting legislation negotiated by 28 member states was never going to deliver something tailored to the needs of every country. The UK now has the chance to do that for itself, starting with a much-needed reform of the rules relating to prospectuses. What the government is proposing is nothing short of a clean sweep.
Whilst the old Prospectus Regulation was well-intentioned, aiming to protect retail investors, it has had the unintended consequence of making it too onerous for smaller companies to extend share offerings to those investors, and to their own existing shareholders, contributing to reduced liquidity. Smaller companies therefore tend to raise funds only from a limited number of sophisticated, institutional investors. Any offer to existing, or new, retail shareholders must be limited to the equivalent of €8m. Anything in excess of that requires a prospectus to be published, which is expensive and time-consuming.
In addition, larger secondary fundraisings by companies listed on regulated markets like the London Stock Exchange’s Main Market require a prospectus, irrespective of whether or not the investors participating in that fundraising are sophisticated. This adds significantly to the cost and timescale of such fundraisings.
The UK government has taken seriously its remit to facilitate wider participation in the ownership of public companies and to remove the impediments to companies offering shares to wider groups of investors, and is undertaking a detailed, phased repeal and replacement of EU financial regulation. First out of the blocks is some extensive new prospectus legislation, emphasising its importance to the competitiveness of the UK financial markets, and therefore the UK’s economy. Read alongside the FCA’s proposals to reform the Listing Rules these changes will make London’s stock exchanges much more attractive to domestic and overseas growth companies, as a significant number of the impediments to listing and raising money in the UK should now be removed, and a broader spread of investors will be able to participate.
Background
Following Lord Hill’s Listing Review, which concluded in early 2021, the UK government has been consulting on changes to the legislative framework for listed companies and in particular the prospectus regime. The proposed approach is to revert to the historical ‘FSMA’ regime, where parliament sets a legislative framework – in this case, the new Financial Services and Markets Act 2023 and a number of associated Statutory Instruments – and then delegates the setting of the detailed rules to the regulators, being the Financial Conduct Authority (FCA) and the Prudential Regulation Authority. This provides a more flexible system, which can be adapted quickly to take account of market innovation and new threats and opportunities, without the need for further legislation from parliament.
In setting the rules relating to prospectuses, the FCA has been tasked not only with ensuring that markets function well and with integrity and that consumers are protected, but also to facilitate the international competitiveness of the UK economy. These reforms are aimed squarely at attracting international companies to list, raise money and do business in the UK, following some high profile ‘losses’ such as the listing of ARM on Nasdaq.
In early July 2023, HM Treasury published its policy note on The Public Offers and Admissions to Trading Regulations 2023 and a near final draft of those Regulations, which are subject to final consultation during August. The new Regulations will repeal the old EU-derived Prospectus Regulation and replace it with an entirely new regime covering admissions to trading and public offers of securities.
However, whilst the new Regulations are potentially far-reaching, it should be noted that a lot of the detail is delegated to the FCA, and so the FCA will need to consult on and implement new rules to bring the reforms into effect. The Regulations provide the framework, but the FCA will provide the detailed rules. So, whilst the Regulations are expected to be in force later this year, and we can see the broad effect of the proposals, a lot of the substance is unknown at this stage, and the individual rules will only come into force as and when the FCA publishes them. The FCA expects to consult on these during 2024. Meanwhile, some guidance has been published by the FCA in the form of ‘engagement papers’, giving us a good indication of its thinking in certain areas.
The proposals are extensive and complex. The proposed framework, and our expectations of the FCA’s position on some of the key rules, are outlined below.
Prospectus Requirements – IPOs
Whilst the Regulations delegate the form and content requirements for prospectuses to the FCA, we expect that there will be little material change to the existing requirements for IPOs, save that the FCA is considering options to simplify the content and layout of an IPO prospectus, intends to revisit its requirements around reporting on ESG and is expected to harmonise its prospectus requirements with its proposed changes to the Listing Rules.
What is more interesting is that the FCA may determine whether or not a UK prospectus is required for secondary listings in the UK of companies already listed overseas. Recognising the benefits that dual listings can bring to the UK as a financial centre, the government has stated that it is interested in creating a framework which could permit the use of an overseas prospectus for a UK dual listing. In its consultation, the government considered that the FCA could use its discretion not to require a UK prospectus where a prospectus is published in another country, and that this should be sufficient to enable the FCA to accept an overseas prospectus in certain circumstances should it deem it appropriate. For example, this could potentially permit an ASX-listed company to use its Australian prospectus to seek a dual listing on the LSE’s Main Market. The government is also considering permitting overseas companies listed on certain designated stock exchanges to make public offers into the UK without publishing a prospectus. The FCA does not appear to have put forward a view on these points, so the extent to which they are implemented remains to be seen. However, we think that there is a very good argument to simplify the UK listing process for dual listings, enabling companies listed on a limited number of quality, recognised overseas exchanges to list in the UK at a reasonable cost. In addition, as we commented in our last publication on the proposed changes to the Listing Rules, we are of the view that the FCA should introduce a lighter touch regime for overseas companies which are already listed on designated markets, which wish to apply for a “secondary listing” on the LSE’s Main Market.
Prospectus Requirements – Secondary Fundraisings
The prospectus requirements under the current Prospectus Regulation regime are complex. Broadly, there are two ‘triggers’ requiring publication of a prospectus, each subject to separate, but overlapping, exemptions. The ‘triggers’ are (1) application for listing of securities on a regulated market, like the LSE’s Main Market (but not AIM or AQSE) – this covers both IPOs and further issues of shares following IPO; and (2) offers of securities to the public (irrespective of whether, or upon which exchange, the offering company was listed).
The principal exemption to the ‘regulated market’ trigger is that a prospectus is not required where a listed company is admitting less than 20% of its issued share capital over a 12-month period. So, a company that is already listed on the Main Market does not have to publish a further prospectus if it wants to issue further shares unless it breaches that 20% limit. The problem is that the 20% threshold is very low, and in spite of the ability to publish a shorter form prospectus after a company has been listed for 18 months this is a serious inconvenience for growth companies.
The most useful exemption to the ‘public offer’ trigger is that a prospectus is not required where the consideration for the offer can’t exceed €8m (or equivalent). This effectively puts a cap on the extent to which a company can raise capital from the public, including from its existing shareholders – for example, by way of an open offer or rights issue.
Publishing a prospectus, which must be reviewed and approved by the FCA, is a costly and time-consuming process. Whilst this makes sense on an IPO, the existing rules are a serious impediment to further capital raising following IPO, which puts the UK markets at a competitive disadvantage to equivalent markets in other jurisdictions, for example in North America.
Under the new Regulations the two triggers will remain, but the exemptions will be far broader. Importantly, there will be a new exemption from the ‘public offer’ trigger where the securities offered are already trading on a UK regulated market, like the LSE’s Main Market, or on a multilateral trading facility, like AIM or AQSE. This is extremely important, as it will make it quicker, cheaper and easier for companies to include their own shareholders, and retail investors, in any share offer without having to publish a prospectus. This will reduce costs and foster engagement with a broader range of investors.
The question for Main Market companies is what the exemptions to the ‘regulated market’ trigger will be. The FCA has sketched out some possible options in one of its ‘engagement papers’. Our best guess here is that the 20% limit will be raised, with a prospectus only required at a much higher threshold – perhaps even as high as 75% of existing share capital – and that some form of shorter document (perhaps even just an announcement) will be required for offerings under that threshold. Whatever the requirements, it is clear that the 20% threshold will be raised and accordingly that the burden on Main Market listed companies raising further funds will be significantly reduced.
Offers by unlisted companies
For unlisted companies, the requirement for a prospectus to be published in relation to a public offer will be removed where the offer is under £5m or, if it exceeds £5m, where the offer is made via an FCA-regulated ‘public offer platform’. On the face of it, this is a major boost for crowd-funding platforms. However, the devil will be in the detail of how public offer platforms are to be regulated, the extent of the due diligence and other work that they will be required to do, and the level of disclosure that will need to be made in relation to offers so as to ensure investors are protected.
Unlisted companies will also be able to continue to rely on the existing exemptions for offers to fewer than 150 investors, or to certain qualified investors.
Forward-Looking Statements in Prospectuses
Forward-looking statements in prospectuses, such as statements of intention or expectation, are currently subject to the same liability standards as statements of fact. Naturally, it is impossible to have the same degree of certainty about these statements. This leads to considerable caveating of forward-looking statements, and can discourage companies from making them (or, at least, there is a strong incentive for the banks and other advisers on the transaction to temper the statements). Investors therefore miss out on important information and management views about the expected prospects of a company.
The UK Listings Review recommended that HM Treasury should facilitate the provision of forward-looking information by issuers in prospectuses, Accordingly, the new Regulations will provide a lower liability threshold for forward-looking statements – only if the person responsible for the statement has been dishonest or reckless will they be liable; simple negligence will not suffice. However, statements that are subject to this lower standard will have to be clearly identified as so-called ‘protected forward-looking statements’. It remains to be seen how practice will develop on this – whether these statements will be contained in the main body of a prospectus, with an appropriate disclaimer, or listed in a separate section – either of which could break the flow of the narrative.
Separately, there is a proposal to strengthen the position of banks and other advisers by providing them with a clear defence against claims made in connection with the adequacy of prospectus disclosure. The hope here is that strengthening the position of banks and other advisers should, indirectly, lead to streamlined disclosure practices, without overly elaborate caveats and risk factors.
‘MTF Admission Prospectuses’
Currently, other than where they make an offer to the public, companies listed on ‘multilateral trading facilities’ (or MTFs), such as AIM or AQSE, are not required to publish a prospectus. For example, admission to AIM requires an AIM admission document – which is similar to a prospectus, but is not reviewed by the FCA and has different standards of liability – and further issues of shares, unless offered to the public, require no further documentation.
The new Regulations envisage that the FCA could require operators of MTFs that allow retail investor participation, like AIM and AQSE, to require companies to publish an ‘admission prospectus’ in connection with admission to that MTF – for example, replacing an AIM admission document with an AIM ‘admission prospectus’ – with the content determined by the operator of the MTF. The ramification is that these admission prospectuses would be subject to the same statutory liability and compensation schemes as prospectuses, and will have the same rights of withdrawal for investors, but they will also have the benefit of the ‘protected forward-looking statement’ regime described above.
The FCA says that it will take a proportionate approach, aiming to promote broader investor participation and to improve the quality of information that investors receive. Crucially, an MTF admission prospectus would enable retail investors to participate in the IPO of a company on an MTF, like AIM or AQSE, without the issuer having to publish a full prospectus vetted by the FCA. Effectively, the content requirements for the document are set by the MTF operator, but its prospectus ‘badge’ brings it within some of the regulatory provisions of the prospectus regime relating to liability and compensation. Whilst this will unlikely be of value to smaller growth companies, who would typically rely on institutional investment, larger companies could benefit from involving retail investors in their IPO.
We consider it likely that the FCA will require MTF operators like AIM and AQSE to require publication of an admission prospectus for all IPOs and reverse takeovers. But importantly, the FCA say that they do not expect there to be material changes to the steps involved in compiling and validating these listing documents, and that the content requirements and process for approving the documents will remain with the MTF operator. The admission prospectus will not be subject to FCA review or approval. Also, there is no intention to require publication of a further admission prospectus for secondary fundraisings. We therefore expect the listing documents for AIM and AQSE to remain substantially the same, albeit with some additional regulatory rubric relating to the new regime, such as an explanation of the withdrawal rights, and with an increased presence of forward-looking statements.
The precise legal status of a proposed admission prospectus will need to be carefully assessed by our Nomad clients, to determine what additional risks and responsibilities may be implied and how this may impact the IPO process for AIM companies.
Conclusion
Whilst the extent of the new changes is still subject to confirmation by the FCA, we expect that the new proposals, particularly when read in conjunction with the FCA’s proposed changes to the Listing Rules, should streamline the listing and secondary fundraising processes in the UK, encouraging broader retail investor participation and making London’s markets more attractive to overseas companies, including those with an existing listing on an overseas exchange. The UK government’s desire to foster retail participation in listed companies, and to make London’s capital markets more competitive, is evident in the new Regulations, and we expect that the resulting FCA rules will do nothing to diminish this. The London capital markets are clearly open for business.
For further information, please contact:
Michael Dawes, Partner, Bird & Bird
michael.dawes@twobirds.com
