Some of the recommendations were addressed to the Financial Conduct Authority (the “FCA”) and the FCA has already acted on three of them with its Listing Rules changes in relation to SPACs (August 2021) and the free float requirement and special weighted voting shares with a premium listing (December 2021). Others were addressed to the Government and concerned changes to the structure and content of the U.K.’s prospectus regime. It is on those prospectus regime changes that HM Treasury has now published its conclusions, setting out the policy approach it intends to follow in reforming prospectus requirements in the U.K. (the “Prospectus Reforms”).
The Prospectus Reforms are couched in overview, rather than specific detail and will have to await the availability of parliamentary time for the necessary legislative changes to be introduced. In most respects the Prospectus Reforms follow the proposals that the Government set out in its July 2021 consultation.
Admissions to Trading on Regulated Markets
Under the U.K. Prospectus Regulation, a prospectus is generally required before securities may be admitted to trading on a U.K. regulated market (such as the Main Market of the London Stock Exchange (“LSE”)); and also before they may be offered to the public (see below). The FCA currently has responsibility for approving the prospectus but the requirements for producing a prospectus are contained in legislation (the Financial Services and Markets Act 2000 (as amended) (“FSMA”)). Under the Prospectus Reforms, the criminal offence of requesting admission of securities to trading on a U.K. regulated market without an approved prospectus will be removed and instead the requirements for a prospectus in these cases will be handed over to the FCA to be set out in its FCA Handbook, including determining:
- if and when a prospectus will be required—if it is, no admission will be approved without one,
- what it should contain,
- whether a prospectus should be required for a secondary listing in the U.K. of
- securities listed elsewhere, and
- whether a prospectus must have been approved by it before publication.
A New Regime for Public Offers
In place of the current requirement, unless an exemption applies, for prospectus to be prepared where transferable securities are offered to the public, public offers will be generally prohibited, subject, however, to some important exceptions.
Permitted Public Offers
These exceptions will include the existing public offer exemptions—e.g. offers to “qualified investors,” to fewer than 150 natural persons, and certain director/employee offers and takeover offers—plus certain additional offers such as:
- those involved in the admission of securities to trading on U.K. regulated markets and certain other “junior markets” (such as multilateral trading facilities (“MTFs”))
- pro-rata offers of further securities by a company to its existing equity holders
- certain offers by private (i.e. unlisted) companies (see below)
- offers into the U.K. by companies with overseas listings (see below)
Existing threshold figures for “public offer” exemptions under the U.K. Prospectus Regulation will be restated from euros into pounds sterling on a one for one basis, save that the exemption for offers of wholesale non-equity securities of at least €100,000 will be reduced to £50,000.
Public Offer Documentation of Disclosure
In place of the prospectus (or a prospectus type “admission” document) that will be required for admission to trading on a regulated or junior market, public offer documents will be required to satisfy the existing “equality of information” requirement that applies in relation to prospectus advertisements and requires any material information in relation to the offer to be disclosed to all investors.
Non-Transferable Debt Securities (“NTDS”)
HM Treasury separately consulted on the future regulation of NTDS (or “mini bonds”)—unlisted securities offered to retail investors—and has concluded that its preferred option for NTDS regulation is for them to be included in the new public offers regime.
Prospectus Content
As already mentioned, it will be for the FCA to determine the detailed content of any prospectus required for the admission of securities to trading on a regulated market.
The “Necessary Information” Test
In addition, as at present under FSMA a prospectus will have to satisfy a “necessary information” test, failing which investors will be able to seek compensation through legal action. However, the Government proposes modifying the current requirements by:
- removing the existing distinction between prospectus content for debt securities with denominations of at least (or less than) €100,000,
- clarifying that the relevant necessary information may vary depending on whether the admission concerns an IPO or secondary issuance, and
- modifying the “necessary information” requirements for debt (as opposed to equity) securities so that they focus on the creditworthiness of the issuer (or guarantor) as opposed to its prospects.
Forward-Looking Statements
Another significant change proposed relates to the inclusion of “forward-looking statements” in a prospectus. The liability attaching to these statements—which will have to be clearly labeled as “forward-looking”—will be reframed so that, unlike other information contained in the prospectus, liability to compensate investors will only arise if the person making the statement:
- knew the statement to be untrue or misleading,
- was reckless as to whether it was untrue or misleading, or
- in the case of omissions, knew the omission to be a dishonest concealment of a material fact.
Private Company Offerings
The Prospectus Reforms propose a new regime for offers made by private companies—i.e. unlisted companies rather than strictly private companies under the Companies Act 2006 which are prohibited from making any offers of securities to the public.
The Government consulted on two alternatives to the current regime which, subject to the exemptions referred to above, requires a prospectus to be prepared and approved for offers above €8 million. Either the offer could be made only through a FCA-authorized firm or, as a variant on that, the offer would have to be made through an authorized firm, but via a regulated platform for public offers of securities which the authorized firm would have to have been permitted to operate (as a new type of regulated activity). The Government has decided to proceed with this second variant alternative, leaving it to the FCA to determine on the detailed regulatory requirements that will apply to the operation of such electronic equity crowdfunding platforms.
The €8 million cap on offers not requiring a prospectus will be removed and a new cap introduced below which the restrictions on “private companies” making public offers will not apply (other than for the “equality of information” requirement with respect to disclosure mentioned above).
Overseas private companies will also be permitted to make public offers in the U.K., subject to the above regulation.
Other Oversea Company Public Offerings
Oversea companies that wish to extend to the U.K. an offer of a securities which are listed on certain designated overseas exchanges will be permitted to do so on the basis of offering documents that have been prepared in accordance with the relevant overseas requirements. The FCA’s role will be focused on an assessment of the overall effectiveness of the overseas exchange’s regulation rather than on the particular content of the overseas offering document. It will also have powers to intervene in offerings to protect U.K. investors in exceptional cases.
Offering Documents for Junior Markets
As mentioned above, admission of securities to trading on MTFs (e.g., the LSE’s AIM), rather than on a regulated market, will be specifically exempted from the new prohibition against public offers. Currently, most offers of securities to be traded on MTFs will in any event be structured so as to fall within the existing exemptions for a prospectus (e.g., made only to “qualified investors”).
The “admission documents” that MTFs require to be prepared for securities to be admitted to trading on their markets will, under the Prospectus Reforms, be treated as a type of prospectus so as to enable them to benefit from the reforms discussed above in relation to the more limited liability that will attach to forward-looking statements included in a prospectus. MTF operators will retain responsibility for setting their own admission criteria and rules with respect to the markets they operate.
Final Thoughts
These significant reforms will leave the U.K. prospectus and public offerings regime looking markedly different from the current EU regime which the U.K. has retained following Brexit. They will be welcomed for the flexibility that they offer companies wanting to raise capital in the U.K. with regards to the structuring of their capital raises, including in terms of whether a prospectus will be required and, if it is, the requirements for preparing it and, where necessary, getting it approved, and the liability that will attach to different content included in it.
However, implementation of these reforms will have to await parliamentary time for introduction of the necessary legislation and a detailed consultation by the FCA on the new prospectus rules book that it will be commissioned to develop for the new regime.
“... we will ensure that the regulation of prospectuses is more agile and dynamic. Leaving the EU means we can better tailor regulation to U.K. markets. Doing so will mean that, in future, the regulation of prospectuses will be better able to respond to innovation and change.
The government recognizes the need to fundamentally reform this area...”
John Glen
Economic Secretary to the Treasury (Ministerial Forward to the July 2021 Consultation)
U.K. Prospectus Regime Review: A consultation.
