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Lord Hill’s 2021 report into the state of the UK’s listing and public offering regime covered a number of related areas from the need for a general improvement of efficiencies in the listing process to the specifics of relaxing trading suspension rules to encourage SPACs.
A central feature of the report was the importance of bringing up to date a Prospectus regime that has been creaky for some time and, more recently, has been languishing in the same post-Brexit holding pattern as numerous other pieces of EU-derived legislation.
The Treasury has now published a succinct four-page summary which sets out the government’s proposed policy approach in this area.
Admission to trading || Public offers
A key recommendation of the Hill Report was to separate the requirements for admitting securities to trading on a regulated market from those for offering securities to the public, and this recommendation has been duly adopted.
These two corporate actions have lived somewhat uncomfortably alongside one another for many years, united by the requirement that a Prospectus (containing certain prescribed information) must be produced in either case.
So, what is changing?
For admissions to trading, the Prospectus concept will be retained but the FCA will have greater flexibility to determine whether a prospectus is needed at all and the extent of information it needs to contain.
The idea here is to allow a lighter-touch approach for secondary issuances – something already partly catered for under the proportionate disclosure requirements but likely to be taken further in an updated rulebook with the FCA retaining more case-by-case discretion.
The far bigger changes are to the public offer regime of which “prospectuses will not be a feature“.
The starting point will be a general prohibition on public offerings of securities. This will be subject to certain familiar exemptions, specifically for securities to be listed on a regulated market, offered to existing holders or offered to less than 150 persons or solely to ‘qualified’ (i.e. institutional) investors. The listing exemption will also cover certain ‘junior’ MTFs although we expect to see additional provisions in those cases when the detailed rules are published.
More intriguingly, offers of unlisted securities to the public will only be permissible through a regulated platform, operated by an FCA-regulated firm specifically authorised for the purpose.
A new regulated activity “covering the operation of an electronic platform for the public offering of securities, such as an equity crowdfunding platform” will be created.
Accordingly, firms operating in the crowdfunding space are likely to need two new regulated activities added to their permission suite in due course – this new platform permission and the proposed gateway permission for approving financial promotions (without which the marketing of genuine public offers will be impossible).
The definition of a public offer will be extended to include those of non-transferable securities which currently fall outside the prospectus regime. This is a neat move by the government to bring mini-bonds and other high-risk investments within the regulatory ambit where previous attempts to police these had been scuppered by the (legitimate) non-regulated status of the offerors.
The FCA will be left to determine “the detailed requirements that such platforms will be subject to, including the levels of due diligence and disclosure with which issuers will need to comply“.
Will there be a de minimis threshold?
The HMT paper states that “the government is still considering the threshold below which offers of securities from private companies are exempt from the prohibition on public offers“.
It is not clear how this statement tallies with a statement elsewhere in the paper that the exemptions in Article 1(2) of the Prospectus Regulation are being retained. These exemptions already include a €1 million threshold with small capital raisings beneath this level falling completely outside the Regulation. The paper also notes that thresholds in Euros will to be restated at 1:1 into sterling so this would imply that offers below £1 million will not be caught which would certainly ease the burden on micro-crowdfunders and community offers.
Might the threshold therefore be higher than £1 million hence the need for “further consideration”? We shall see.
The existing test for what needs to be disclosed in a prospectus – essentially the information necessary to make an informed assessment of the financial position of the issuer and the rights attaching to the securities – will be retained as the basic standard subject to some tweaks.
These tweaks will remove denomination of the securities as a threshold impacting required levels of disclosure but emphasise the difference between first time issuers and those making further issuances, for whom disclosure can be lighter. Disclosures required for debt securities issuers will also continue to differ from those for equity issuers, with the focus on their creditworthiness rather than future prospects.
Finally, following another Hill Report recommendation, the liability threshold attaching to forward-looking statements will be raised for certain prescribed types of disclosure.
The existing restrictions in this area were identified by the Hill Report as “perverse” given forward looking information is “a key, if not the key, category of information that investors ask for when a company is carrying out private funding rounds” and its provision should not be “curtailed precisely when a company is taking what is usually the most significant corporate step in its history as well as often its largest fundraise and/or liquidity event“.
The paper does not give an approximate time when we can expect these new changes to be implemented, only that the government will legislate to do so when parliamentary time allows (and once the FCA is ready to implement the new rules under its expanded responsibilities).
With statutory changes also in the offing to update the financial promotion regime, the hope is that implementation now comes sooner rather than later to realise the capital raising optimisation envisioned by the Chancellor back in late 2020.
14 March 2022