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UK Government consultation on review of the UK prospectus regime

  • United Kingdom
  • Corporate

07-07-2021

The UK Government has published a consultation on review of the UK prospectus regime which responds specifically to Recommendations 7, 8 and 9 of the UK Listings Review (see our briefing here).

Objectives and approach

Following the end of the Brexit transition period with the UK being free to depart from EU rules, the review has four key objectives:

  • to facilitate wider participation in the ownership of public companies and remove barriers to non-institutional investor participation in share offerings;
  • to improve the efficiency of public capital raising by simplifying regulation and removing the duplications that currently exist in the UK prospectus regime;
  • to improve the quality of information that investors receive in prospectuses; and
  • to improve the agility of regulation in this area.

The consultation covers the following main areas: (1) new rules on admissions to trading on a regulated market, (2) prospectus content and ancillary rules for the Financial Conduct Authority (FCA), (3) forward looking information in prospectuses, (4) companies trading on junior markets, such as AIM and the Exchange’s Aquis Growth Market, (5) scope of the UK public offer rules, (6) public offerings by private companies, and (7) public offerings into the UK by overseas companies.

Whilst there is quite a lot of detail behind some of the proposals, we highlight some of the key proposals set out in the consultation below.

New approach to public offers of securities and rules on admissions to trading on a regulated market

As regards overall approach, the Government adopts Lord Hill’s recommendation in the Listing Review (Recommendation 7) that the admission of securities and the public offer rules be dealt with separately in the future. The Government is proposing (i) new exemptions for companies with (or applying to have) securities admitted to trading on stock markets of various types covering offers of securities admitted to trading on regulated markets or junior markets, such as AIM or the Aquis Growth Market; and (ii) exemptions for companies admitted to trading on overseas equivalents of regulated markets. The basis for the new exemptions is that the securities are already freely trading or, in the case of an IPO, will be freely trading once the IPO completes and that such trading occurs in a highly regulated environment.

Separately, the Government is also proposing changes to what would constitute ‘the public’ in a public offering of securities which aim to ensure that fundraising offers to close stakeholders of a company are not treated as public offers of securities. This aims to remove a disincentive against offering shares to a company’s own shareholders and is consistent with the Government’s objective of facilitating wider participation in securities offerings.

Proposed new FCA powers in this area include:

  • Giving the FCA, as the UK securities regulator with responsibility for ensuring that markets operate well, new rule-making powers to enable it to regulate admissions to trading on regulated markets.
  • Giving the FCA broad discretion to recognise prospectuses prepared in accordance with overseas regulation in connection with a secondary listing in the UK.
  • It is intended to retain in law (as opposed to FCA Rules) an overall standard of preparation for a prospectus, a key determinant of legal liability for investment losses, and for supplementing a prospectus when circumstances change. However, in order to make the regime agile and flexible, the main design principle underpinning the new prospectus regime should be that provisions are retained in statute only where strictly necessary. Absent a good reason for retaining a provision in statute, if an equivalent provision is required, the Government would like to see it located in the FCA rulebook.

Prospectus content and ancillary provisions

The consultation proposals here include:

  • Retaining the existing ‘necessary information’ test for the information that must be included in a prospectus (as set out in Article 6 of Retained Regulation (EU) 2017/1129 as it forms part of UK law (UK Prospectus Regulation)).
  • Retaining clarifying wording that the ‘necessary information’ may vary depending on whether the issuer’s securities are being admitted to a regulated market for the first time or whether the prospectus is being issued in connection with a further issue.
  • Giving the FCA responsibility to make detailed rules on the content of prospectuses (which could include reduced disclosure requirements for further issues on a more wide-ranging basis than that currently set out in Article 14 of the UK Prospectus Regulation relating to the simplified disclosure regime for secondary issuances). Under the proposed reforms, for example, it would be for the FCA to specify the component parts of a prospectus should it wish to, as well as the detail of individual items of content.
  • Including in the revised regime an ability on the part of the FCA to require that a prospectus is approved by the authority prior to publication but, at the same time, giving the FCA discretion to set out the applicable rules on the review and approval of prospectuses (and which authority should be responsible for reviewing them) in order to ensure flexibility in the regime (e.g. so that it could decide to review certain types of prospectus but not others, akin to its current ability in the Listing Rules to review and approve certain types of shareholder circular but not others).

Forward looking information

The consultation also considers the desirability of including more forward-looking information (projections of future profitability) in prospectuses, another recommendation made by Lord Hill in the Listing Review on the basis that it is that sort of information which is in many cases most useful to investors when weighing up investment decisions. In summary, whilst this is a technical area, the consultation proposes replacing the ‘negligence’ liability standard that currently applies in relation to statements in a prospectus which are forward looking (under section 90 and Schedule 10 of the Financial Services and Markets Act 2000 (FSMA)) with the ‘recklessness’ or ‘dishonesty’ standard (under Schedule 10A of FSMA and section 463 of the Companies Act 2006) that applies in relation to forward-looking information published in annual reports and announcements by companies to the market made via regulatory information services. This reduced liability regime would apply only in relation to statements in a prospectus which project or predict a future state of affairs (and which are identified as being forward-looking with appropriate warnings) and not to statements of fact. Neither would it apply to the working capital statement in a prospectus. These types of statement would still be subject to the ‘negligence’ standard referred to above.

Companies traded on junior markets

This would include multi-lateral trading facilities (MTFs), such as AIM and the Aquis Growth Market. The consultation sets out two options in relation to prospectus requirements.

The first proposal is for a simple exemption from the restriction on public offerings of securities (set out in section 85(1) of FSMA) for companies whose shares are traded on these MTFs. The proposal would be structured along the same lines as the proposal for companies whose shares are admitted to trading on regulated markets. It would only apply where the issuer has itself requested admission of the securities to trading on the MTF. It would not apply where the trading on the MTF provides a secondary liquidity venue.

Alternatively, an exemption from section 85(1) of FSMA, plus a new ‘MTF admission prospectus’. Under this option (in addition to exempting companies admitted to trading on MTFs from the public offering rules as set out in the first option) admission documents published in relation to an admission to an MTF would be recognised as a form of prospectus in the reformed regime (an ‘MTF admission prospectus’). The intention would be to bring such documents within the scope of section 90 of FSMA, including the proposed change to the standard of liability in respect of forward-looking statements referred to above. Under this option, the exchange operating the MTF would be able to specify through its own rulebook the content of the ‘MTF admission prospectus’, together with procedures for ensuring it meets the requirements of the MTF. This could include requiring the document to be reviewed by a nominated advisor, as AIM requires currently.

The scope of the UK’s public offering rules

The proposals include a revised definition of “the public”, which would provide a new exemption from the public offer rules for an offer made to existing holders of securities. The effect of this would be to remove all rights issues from the restrictions imposed by the public offering rules. It would also exempt all share-for-share offers.

The Government proposes retaining the 150-person threshold and the qualified investor exemptions currently contained in the UK Prospectus Regulation. The consultation also seeks views on the exemption that relates to public offers made to employees, former employees, directors and ex-directors.

Public offers by private companies and overseas companies

The consultation sets out alternative options to allow private companies to raise capital from the public as an alternative to publication of a prospectus. This includes requiring offers by private companies to be made through an authorised firm.

There are also alternative options set out regarding public offers made into the UK by overseas companies, including a new regime of regulatory deference which would allow companies with securities listed on a non-UK stock market which is considered to provide equivalent investor protections to those in the UK to extend an offer of those securities to the public in the UK (other than in relation to an IPO), on the basis of offering documents prepared in accordance with the rules of that market’s jurisdiction. There would be no FCA review of the documents and such a mechanism would consider investor protection on a wider and more holistic basis than is currently the case. If this option were to be pursued, the Government would also propose that such public offers be notified to the FCA and would also consider providing the FCA with a reserve power to order an offer into the UK to be closed to the UK public where it was satisfied its completion would be detrimental to the interests of investors in the UK. In relation to overseas unlisted companies, the Government does not propose to facilitate public offers in the UK by such companies.

Next steps

The consultation closes on 17 September 2021.

The Government proposes that overhauling the current prospectus regime will be achieved through a two-stage process:

  • a Government consultation followed, assuming the Government decides to proceed, by legislation; and
  • an FCA review and consultation on the rules that will replace the UK Prospectus Regulation, where it is empowered to make rules.

The consultation notes that the FCA has indicated its support for reforming the UK prospectus regime with a view to better aligning documentation requirements with the type of transaction being undertaken and, subject to the outcome of this consultation, is ready to develop and consult on further rules.

Comment

The Government and the FCA are moving ahead quickly to implement a number of the proposals set out in Lord Hill’s UK Listing Review. We have already seen consultations from the FCA in relation to special purpose acquisition companies (SPACs), and most recently on a series of reforms to improve the effectiveness of UK primary markets. Separately, HM Treasury has also published a consultation on the UK’s regime for wholesale capital markets, which includes exploring a new class of trading venue with regulatory requirements tailored for smaller SMEs, with a reduced regulatory framework.

The proposals the subject of this consultation are wide-ranging and would involve delegating significant rule-making powers and discretion to the FCA as to how it regulates UK capital markets, public offers of securities and prospectus contents going forward in an effort to make the regulatory regime more flexible and agile in adapting to the opportunities presented by the advance of technology and the more ‘global’ outlook of the UK post-Brexit.

Whilst there are a number of changes in the UK capital markets landscape on the horizon which are likely to be welcomed by both companies and investors, given the need for the Government to pass legislation in relation to the prospectus proposals set out in this consultation, the timeframe for implementation of changes to the prospectus regime is uncertain.

Useful Links

Consultation: UK Prospectus Regime Review