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  • UK Prospectus Review: Proposed Reforms to Boost London's Capital Markets

    The U.K. government has begun a consultation on proposals to reform the U.K. prospectus regime. This much anticipated consultation sets out proposals based on the important recommendations made in the U.K. Listing Review, which was chaired by Lord Hill. Responses to the consultation should be submitted by September 24, 2021.

    The final changes to the prospectus regime will be made through legislation and the rules of the Financial Conduct Authority, following consultation. The existing U.K. Prospectus Regulation will be replaced, in whole or part, by FCA rules.

    The key proposals in the consultation cover:

    Admissions to trading on Regulated Markets

    It is proposed that 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. HM Treasury's view is that a market operator could merely refuse admission to trading if there is no prospectus, which would be more proportionate than the existing regime. The ban on offering transferable securities to the public without publishing an FCA-approved prospectus will be retained because it is similar to the financial promotion restriction.

    The FCA could also 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.

    Furthermore, the FCA could be granted new powers to make rules on:
    • who is responsible for a prospectus, for example, the issuer or directors, which could be used to differentiate between different transaction types;
    • requirements for issuers to publish prospectuses free of charge and other rules related to the publication of the document;
    • the advertisements regime and related requirements on materials promoting the prospectus; and
    • investors' rights to withdraw their acceptance of an offer where a supplementary prospectus is published.

    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 is seeking views on how the liability might be reduced in order to encourage more forward-looking information being included in prospectuses.

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

    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. The government has identified that some of the Prospectus Regulation requirements don't incentivize the offer of securities to a wide investor base. For example, a company on a U.K. MTF that wishes to raise more than €8 million does not have to publish a prospectus if it offers the shares to fewer than 150 natural or legal persons, excluding Qualified Investors. If it offers them more widely, a prospectus is required. To encourage offers to a larger investor base, HM Treasury put forward two proposals:
    • An exemption from the restriction on public offerings of securities for issuer requests for admission of the securities to trading on the MTF. It would not apply secondary trading.
    • The second option would aim to reduce the level of liability for those responsible for admission documents encouraging the inclusion of forward-looking information in MTF admission documents by bringing MTF admission documents within the scope of the statutory liability for forward-looking statements. The current system would be preserved where the market operator sets the rules for admission documents.

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

    A new exemption from the public offer rules for existing holders of securities is proposed. This would remove all rights issues, by all types of companies, from the restrictions imposed by the public offering rules. HM Treasury would be granted powers to vary, delete or create new exemptions to public offer rules by secondary legislation.

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

    HM Treasury is seeking views on three options:

    Option 1 - maintain the status quo, requiring a prospectus for offers over the €8 million threshold (to be restated into sterling). The FCA would be responsible for establishing specific prospectus rules for the offering of securities in private companies.

    Option 2 - instead of an issuer preparing a prospectus, an offer of securities over a threshold amount could be required to be registered with and to offer its securities via an authorized firm. This would bring into play the FCA conduct of business rules (for regulated advisors, underwriters, placement agents or distributors with a role in the offering), ensuring appropriate disclosure and investor protections, such as the appropriateness test.

    Option 3 - 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." This option would allow the FCA to create specific rules and supervisory practices to ensure 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.

    Public offerings into the U.K. of overseas companies

    If an overseas company wants to make or extend an offer (listed or unlisted securities) into the U.K., it must publish a U.K. 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 proposes three options:
    1. Maintain the status quo, which would allow for losses from misstatement to be recovered in U.K. courts.
    2. Replace the equivalence regime with 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. A key requirement would be investor protection, not merely a tick box exercise to show that the information required under the Prospectus Regulation is included. The FCA would be able to stop an offering if it determined that it would be detrimental to investors' interest. In addition, the regime would be designed such that U.K. investors would have free access to the same information available to the "home" investors.
    3. A "no right to make U.K. offers" mechanism.

    These proposals would be for cross-border public offerings; there would be no such regime for private offerings. According to HM Treasury, the Qualified Investor exemption suffices in giving institutions access to those markets.

    View the U.K. Prospectus Review.

    You may like to see our client note on the U.K. Listing Review.

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