UK Prospectus Review: Government Confirms Policy for Reforms to Boost London's Capital Markets

Following its consultation last year, HM Treasury has set out its policy approach to amending the U.K. Prospectus regime. The current U.K. Prospectus Regulation will be replaced by legislation when parliamentary time allows. The changes will, among other things, separate the regulation of public offers of securities from the regulation of admissions of securities to trading, as Lord Hill recommended. In addition, the Financial Conduct Authority will be granted greater responsibility for the detail of the new regime through rules. The complete set of reforms will only apply once those rules are implemented. The main changes are set out below.

Admissions to trading on Regulated Markets

In line with the proposals, the prohibition on requesting admission to trading on a regulated market without first having published an approved prospectus will be removed, along with the criminal liability currently in place for those who breach the prohibition.

The FCA will be given new rule-making responsibilities on admissions to trading on regulated markets, including determining when a prospectus is required and the content thereof. The statutory liability attaching to a prospectus will remain in legislation, in particular, the provisions on the overall standard of a prospectus or when a supplement is needed.

Forward-looking information in prospectuses

Lord Hill described the legal liability that companies and their directors face as the main deterrent to companies from including forward-looking information in their prospectuses. HM Treasury confirms that the existing statutory remedy for false, misleading or omitted information will be retained. However, the threshold for liability will be raised for certain categories of forward-looking information (the FCA will have responsibility for setting the categories). Liability will only apply where the person responsible for preparing a prospectus knew the statement to be untrue or misleading, was reckless as to whether it was untrue or misleading or knew that an omission was a dishonest concealment of a material fact.

Necessary information test

A single necessary information test will be retained for prospectuses, with three differences:

• Denomination will no longer be a factor; the existing measures differentiate between offerings over and under EUR100,000, incentivizing the issue of high denomination securities.
• Clarification will be made that necessary information may vary between an offer of securities for a first-time admission and a secondary issuance.
• There will be an amended necessary information test for debt securities to focus on the issuer's or guarantor's creditworthiness, rather than prospects.

Securities that are or will be admitted to trading on MTFs, including SME Growth Markets

Currently securities on MTFs are not subject to admission to trading rules. However, issuers are subject to the full public offering rules. Admission documents are governed by the MTF's rules, with different requirements in place. HM Treasury states that securities admitted to trading on MTFs will be exempt from the general prohibition on public offerings of securities.

The current system would be preserved where the market operator sets the rules for admission documents. However, the government also intends to develop a mechanism by which admission documents published in accordance with the rules of the relevant MTFs are treated as a type of prospectus.

The revised framework and scope of the U.K. public offer rules

Prospectuses will not be an element of the new public offerings regime. Instead, the new public offerings regime will be designed to ensure that investors receive specific and proportionate information about products that will enable them to make informed investment decisions.

HM Treasury confirms that there will still be a general prohibition on public offerings of securities, subject to exemptions. The exemptions will be the same as those in the existing Prospectus Regulation; however, the list of exemptions will be expanded to cover:

• Offerings of securities that are, or will be, admitted to U.K. Regulated Markets.
• Offerings 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.
• Other categories of offer, such as for securities admitted to trading on MTFs, public offers from overseas companies and of private companies.

In addition to "transferable securities" (as under the existing Prospectus Regulation regime), non-transferable securities, including non-transferrable debt securities (including instruments sometimes known as mini-bonds), will be added to the new public offer regime. Therefore, issuers of non-transferable securities will be required to do so through an FCA-regulated platform. The question of whether (and if so, how) to regulate NTDS was considered in a separate consultation by HM Treasury, which put forward three options: (i) making the issuance of NTDS a regulated activity; (ii) extending the scope of the prospectus regime to cover NTDS; or (iii) relying on HM Treasury and FCA measures. The proposals for NTDS were prompted by the collapse of London Capital & Finance PLC, an FCA- regulated issuer of bonds that stated on their face that they were non-transferable, and that were issued primarily to retail investors. An investigation was subsequently launched and chaired by Dame Elizabeth Gloster's investigation into regulatory failings in the supervision of LC&F and the resulting report was highly critical of the FCA's supervision of LC&F and recommended that the issuance of NTDS be brought under regulation. The non-transfer clauses in LC&F's documentation were found in a Court hearing to be contractually unenforceable, rendering the NTDS category something of a misnomer or potentially even a null set (at least if the issuer is regulated), but these changes are necessary to close a loophole in the financial regulatory regime as it applies to such instruments.

In its response to the feedback to that consultation, HM Treasury has confirmed that NTDS will be brought within the new public offers regime as well as the financial regulatory regime.

Public offerings of the securities of private companies, including those that raise capital through crowd funding

HM Treasury intends to remove the current requirement for a prospectus for offers over the €8 million threshold. Instead, there will be a requirement for the offer to be made through an authorized firm subject to a new bespoke permission by amending the Regulated Activities Order to add a new activity of "operating a platform for the public offering of securities."

The FCA will be responsible for creating specific rules and supervisory practices to ensure that appropriate standards of disclosure and due diligence and verification apply to the companies offering securities on a "public offer platform" that would ensure investor protection. In addition, this will be available to overseas private companies offering securities to the U.K. public, subject to U.K. regulation.

Public offerings into the U.K. of overseas companies

Currently, if an overseas company wants to make or extend an offer (listed or unlisted securities) into the U.K., it must publish an FCA-approved prospectus. This option is rarely used in practice. The other option is the prospectus equivalence regime. However, it also requires U.K. review and approval of the prospectus and has not been used.

HM Treasury confirms that it will introduce a new deference mechanism to allow companies with securities listed on a non-U.K. stock market to extend an offer of those securities to the public in the U.K., 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, but the FCA would be notified. Instead, reliance would be on an assessment of the overall effectiveness of regulation over the relevant overseas market. The FCA will have power to intervene to protect U.K. investors in exceptional circumstances.

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