The changes indicate a more dynamic and flexible UK prospectus regime with the FCA to play a central role through enhanced rule-making powers.
On 1 March 2022, the UK government (through HM Treasury (HMT)) announced the outcome of its consultation to reform the UK prospectus regime. The consultation was published in response to recommendations from Lord Hill’s UK Listing Review to enhance the competitiveness of the UK capital markets. Broadly, the announced changes indicate a more dynamic and flexible UK prospectus regime with the FCA to play a central role through enhanced rule-making powers.
The HMT’s announcement essentially indicates a direction of travel. The impact of these changes will not be fully understood until the publication of the legislative changes and the FCA’s consultation papers. HMT states that the government will legislate to replace the existing prospectus regime when parliamentary time allows.
The principal changes are set out below.
Regulation of public offers of securities and admission of securities to trading
- Admission to trading
The FCA will be granted enhanced rule-making powers to specify in its rulebook if and when a prospectus is required in the context of admission of securities to trading on UK regulated markets, as well as the detailed content requirements of a prospectus.
- Public offers
The prospectus will no longer be a feature of the UK public offerings regime. Instead, there will be a general prohibition on public offerings of securities subject to an expanded list of exemptions covering:
- Offers of securities that are, or will be, admitted to UK regulated markets
- Offers of securities to those who already hold equity securities in the offering company, subject to certain conditions, including that the offer is made pro-rata to a person’s existing holding
- Offers of securities that are or will be admitted to trading on certain multilateral trading facilities (such as AIM)
- Offers by private companies made through a platform operated by a firm specifically authorised for the purpose
- Offers extended into the UK on the basis of offering documents prepared according to the rules of the relevant overseas jurisdiction and market. This arrangement would be subject to a new regulatory deference regime for securities listed on certain designated overseas stock markets
The “necessary information” test
Although the FCA will be responsible for setting the detailed prospectus content requirements, the new regime will largely retain the existing statutory overarching standard of preparation for a prospectus. The government intends to clarify within legislation that necessary information may vary according to whether an offer of securities relates to a first-time admission to a market or is a secondary issuance.
Facilitating forward-looking information
Forward-looking information in prospectuses will be subject to a higher “recklessness” threshold for liability. There will be a requirement to label the information as forward-looking, with the FCA responsible for specifying the categories of forward-looking information to which the new liability threshold will apply.
- Impact on listed companies: As expected, fundraisings by UK listed companies will still be subject to the prospectus requirements, and the full picture (particularly understanding the requirements applying to secondary issues by UK listed companies) will only be clear when the FCA publishes its proposed rule changes. Allocating these aspects of rulemaking to the FCA will increase the agility of the UK capital markets regime, as the FCA rulebook can be amended more quickly than legislative reform.
- Impact on private companies: The expanded list of public offer exemptions will provide private companies with more options for structuring fundraisings. These new exemptions add to the exemptions currently set out in Article 1(4) of the Prospectus Regulation, including the “qualified investors” and “150 persons” exemptions and the takeover-type exemption relevant to roll-over offers. In particular, private companies will have the ability to fundraise through a regulated platform without being subject to the current requirement for an FCA-approved prospectus on offers over €8 million. The FCA will need to consult on the detailed requirements for such platforms in due course, but the UK crowdfunding industry is likely to receive these changes positively.
- Public offerings from overseas: The proposed regulatory deference mechanism would potentially provide the FCA with the power to deem overseas prospectuses as equivalent which will be useful for overseas listed companies making offers into the UK.
- Prospectus disclosure standard: The proposed overall structure for regulating prospectus disclosures will give the FCA the power to adjust the detailed content requirements for different types of offerings. The alteration of the statutory standard for secondary issuances is interesting and seems to give the FCA more scope to modify the disclosure requirements in that context.
- Reduced liability standard for forward looking information: The introduction of a less strict standard of liability for forward looking information in a prospectus is welcome and, subject to seeing the final rules and FCA proposals, investors likely will benefit from the inclusion of more guidance within IPO prospectuses and presentations. It remains to be seen how this fits with the existing profit forecast regime.