Reform of the UK Prospectus Regime

In July HM Treasury published a consultation document on the possible reform of the law relating to the issue of prospectuses by companies using the UK public markets. The consultation period ended in September and we now await the outcome of the consultation.

Anyone who has worked on the drafting, verification and approval of a prospectus will know that it is a time consuming and expensive process. Accordingly any attempt to simplify the process is to be welcomed.

This article focuses on three aspects of the consultation namely the themes of

• Quality and Duplication
• Widening participation in public offers
• Agility

Quality and Duplication

One of the objectives of the consultation is to develop regulations that improve the quality (not quantity!) of information that investors receive from a prospectus. The starting point for the consultation is the existing requirement of Article 6 of the Prospectus Regulation (PR) that the prospectus must include all necessary information which is material to an investor to make an informed assessment of:

• the assets and liabilities, profits and losses, financial position and prospects of the issuer and any guarantor;
• the rights attaching to the securities; and
• the reasons for the issuance and its impact on the issuer.

It is hard to argue against this standard, particularly for an IPO rather than a secondary issue of shares, and the Government proposes to retain it. Any systematic approach to meeting this standard will require a description of these topics. However, once the content requirements of the PR have been fulfilled, including:

• regulatory disclaimers and health warnings;
• risk factors (usually several pages);
• an operating and financial review in addition to the business description;
• summaries of key documents relating to the company such as its articles of association, material contracts, share option schemes, directors service agreements, and disclosure of related party arrangements;

there is a danger that the requirement for “necessary” information gets lost and duplication is inevitable. The need for a summary of what is explained in detail in the document demonstrates how complex prospectuses have become.

The consultation also addresses:

• whether a prospectus is required for a secondary issue of shares (rather than an IPO);
• whether all prospectuses (say for a secondary issue of shares) need to be reviewed by the Financial Conduct Authority (FCA) before being approved; and
• one particular class of information which is usually not included in a prospectus, namely forward-looking information.

For a secondary issue of shares the PR already includes a clarification that the information required in a prospectus may vary depending on the nature and circumstances of the issuer and the type of securities being issued. In 2017 the PR was amended to include the “simplified disclosure “regime set out in Article 14 of the PR, but the Government has asked for comments as to whether this works. They are minded to include a separate test for the information required in a prospectus for a secondary issue.

As for the review of a prospectus prior to approval, the Government suggest that this question should be a matter for the FCA’s discretion, in the same way that the FCA has a discretion to review circulars issued by premium listed companies under the Listing Rules.

In relation to forward looking statements, the consultation document notes that it is often precisely information about future prospects, especially future profitability that an investor wants some guidance. It also notes that the reason for avoiding forward looking statements is that the lability attached to a prospectus is a “negligence standard”, deriving from S 90 and Schedule 10 of Financial Services and Markets Act 2000 (as amended) (FSMA), rather than a “dishonesty standard”, deriving from S 463 Companies Act 2006 and Schedule 10(A) FSMA. The difference between the two is that the negligence standard attaches liability to the persons responsible for the prospectus if they failed to take reasonable care to ensure that the statements contained in the prospectus were not untrue or misleading. The dishonesty standard attaches liability to the issuer if the persons discharging managerial responsibility knew that the information was untrue or misleading or were reckless as to whether the information was untrue or misleading.

To address these issues, the Government is proposing that:

• the FCA be given greater discretion to decide on the contents of a prospectus, including in relation to secondary issues,
• the FCA should have discretion not to review all prospectuses before they are approved, and
• the liability standard for forward looking information be changed to the “dishonesty standard”.

Widening participation in public offers

The requirement for an FCA approved prospectus is set out in S 85 FSMA, which, subject to exemptions, requires a prospectus on:

• the offer to the public of transferable securities, or
• the admission to trading of transferable securities on a regulated market.

A regulated market is, in the UK, the Main Market, ie the Premium or Standard segment of the Main Market. Accordingly the requirement for an FCA approved prospectus does not apply to the admission of securities to trading on a multilateral trading facility (MTF) such as AIM or the AQUIS growth market. However, a public offer of securities by an AIM or AQUIS listed company will require a prospectus .The Government is proposing that the obligation to prepare a prospectus for a public offer should be retained generally, but is proposing to extend the exemptions to this requirement as follows:

• The need for a prospectus should not apply at all, to a public offer of shares by a company whose shares are admitted to trading on an MTF. Having said this, the Government is considering to retain the need for a prospectus on an IPO to an MTF. In this case, the admission document would be a type of prospectus, namely an “MTF admission prospectus”. The contents of such a prospectus would still be determined by the MTF (subject to consultation with the FCA), and would have the advantage that, being a prospectus, investors would have the protection of S 90 FSMA.
• The Government considers that, in relation to a company whose shares are admitted to trading on a regulated market, the need for a prospectus on a public offer as well as on the admission of new shares to the market over and above the current 20% threshold is “duplicative and unnecessary” and should also be dropped.
• As concerns existing exemptions from the requirement to file a prospectus, such as for offers of less than €8m or only to “qualified investors”, the Government is proposing new exemptions to ensure that groups of investors previously excluded from share offers can now be included. The focus here is on retail investors and existing shareholders, and the offers in question will include placings or a share for share issue on an acquisition.

The existing exemptions have had the effect of depriving these groups of investors from the chance to invest in new share issues, which is contrary to one of the Government’s goals to widen participation in public companies. Excluding retail investors and existing shareholders from such share issues is also seen as unfair, because such share issues are often priced at a discount to the market price, meaning that the only opportunity that retail investors and existing shareholders have to acquire these new shares will be in the secondary market in which no discount applies.

Exemptions for public offers by private companies and foreign companies into the UK market will also be proposed.

Agility

The current rules on prospectuses are embedded in statute (including retained EU law). Changing them is a lengthy process. Whilst some key aspects of the prospectus regime will remain embedded in statute (such as provisions which relate to the legal liability attached to a prospectus, like S 85 FSMA above), the Government wishes to delegate more power to the FCA so that it can react to “innovation and change” and implement appropriate rule changes more quickly than is currently the case. Accordingly, within the framework of expanded exemptions set out above, the consultation proposes that the FCA should have a broad discretion to specify in its rules when a prospectus is required, what exemptions apply and what the contents of the prospectus should be. This expanded discretion could, for example, be used in connection with secondary offers of securities to a regulated market over the existing 20% threshold.

Summary

In summary the proposed changes make material changes to the rules relating to prospectuses, namely

• On the admission to trading of securities to a regulated market, the need for a prospectus is retained on an IPO, but as concerns secondary offers, at the discretion of the FCA, a prospectus may not be required in circumstances yet to be determined.
• On the admission to trading of securities to an MTF, which is also a public offer (i.e. both IPO and secondary), the need for a prospectus ceases, subject to the possibility of an MTF admission prospectus for MTF IPOs.
• On secondary offers, expanding existing exemptions on offers to the public so that retail investors and existing shareholders are no longer excluded from such offers.
• Encouraging more forward-looking statements by reducing the standard of liability to the “negligence standard”.

This article is part of our biannual Public Company Update – sign up to receive this newsletter by clicking the subscribe button on the right. For more information on the above please contact your usual Charles Russell Speechlys contact.