Illustrative prospectus regulations published
The Government has published an “illustrative statutory instrument”, which demonstrates how it is likely to deliver changes to the UK’s prospectus regime when the UK Prospectus Regulation (the UKPR) (derived from the EU Prospectus Regulation) is repealed.
As the Government explains in its accompanying policy statement, reforming the UK’s prospectus regime forms part of “Tranche 1” of the Government’s programme for “building a smarter financial services framework for the UK”. In its policy statement, the Government states that it intends to make significant progress on Tranche 1 by the end of 2023.
The Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations would be made under the Financial Services and Markets Act 2000 (FSMA) once the Financial Services and Markets Bill, which is currently making its way through Parliament, has been enacted.
The Government plans to use the new powers from that Bill to replace the UKPR with a regulatory framework using the new “Designated Activities Regime” (a new part of FSMA).
The draft instrument is not final and so may change before becoming law. However, the key themes are likely to remain in some shape or form.
Perhaps the key change contemplated by the instrument is that the FCA would have power to decide whether a prospectus is required where an issuer is applying to admit securities to trading on a regulated market (such as London Stock Exchange Main Market or the AQSE Main Market) or a primary MTF (such as AIM or the AQSE Growth Market).
What the FCA does with that power will be key to understanding whether there will be any substantive difference between the current regime and the proposed new regime.
Market participants will be particularly keen to see the detail of derogations or relaxations in relation to areas such as smaller and repeated secondary fundraises, fundraises by SMEs and emergency equity raises. Proposals on offerings to retail investors will also be critical, given the intended abolition of the existing €8 million exemption (see below), which retail offers have relied on to a significant degree in the past few years.
We have set out some of the interesting points from the illustrative instrument below. (The Government has also included its own summary in the policy statement.)
Public offers of securities
In line with the Government’s proposals in its previous review outcome (published in March 2022) (see our previous Corporate Law Update for more information), all offers of relevant securities to the public would be unlawful unless they fall within one of the exceptions in the instrument.
Again, it is worth noting that this differs from the current regime, under which (broadly speaking) offers of relevant securities are unlawful unless they fall within an exemption or a prospectus is published.
The instrument retains the broad definition of an “offer of securities to the public” (currently set out in section 102B of FSMA).
In particular, an offer would occur if there were a communication (in any form and by any means) to any person which presents sufficient information on the securities to be offered, and on the terms on which they are to be offered, to enable an investor to decide to buy or subscribe for them.
However, the scope of the concept of an offer to the public would be expanded beyond the current position. Whereas section 102B of FSMA refers to “transferable securities” (broadly, securities of a kind that can be traded on the public markets), the instrument refers to “relevant securities”.
This is a broader concept and encompasses equity and debt securities that are not tradable on the capital markets (which do not fall within the current concept of “transferable securities”). (Government-issued securities and certain other securities would be excluded.)
A schedule to the instrument lists circumstances in which the prohibition on an offer to the public would not apply (and, consequently, a company would be entitled to make the offer). These comprise a mixture of existing exemptions from publishing a prospectus, as well as new circumstances tailored around the proposed new regime. See box “When would an offer to the public be allowed?” below.
Notably, in line with the Government’s previous proposals, the existing exemption for offers below €8 million would be removed. That exemption has been used frequently in recent years to permit retail offers alongside institutional placings, as well as for other small fundraises (such as crowdfunding and coin and token offerings).
Instead, the intention is that fundraisings that would otherwise utilise this exemption will instead fall within one or more of the new exceptions in the illustrative instrument. These include a new exception for fundraisings through a regulated platform and for offers below a threshold to be specified.
A schedule to the instrument sets out circumstances in which the prohibition of offers to the public would not apply. There are 14 proposed exceptions in total. Some of these are reiterations of current exemptions from the requirement to publish a prospectus; others are new exceptions modelled around the new regime.
It would be possible to combine the exceptions in the same way as currently possible (where feasible) under the UK’s current prospectus regime.
- Maximum total consideration. Where the maximum total consideration for the offer (when combined with offers of securities of the same class during the previous 12 months) cannot exceed a specified amount.
The illustrative instrument does not contain a figure. Given the Government’s statement that it intended to remove the €8 million threshold, we might expect this figure to be lower than that. The current threshold in the UKPR is €1 million. (We can expect any figure in the final instrument to be framed in sterling). The Government’s policy statement suggested that it was considering a separate maximum consideration threshold for private companies, but this does not seem to be reflected in the illustrative instrument.
- Qualified investors. An offer that is addressed solely to qualified investors. This mirrors the existing exemption under the UK’s current prospectus regime.
- Fewer than 150 persons. An offer that is addressed to fewer than 150 persons in the UK. Qualified investors do not count towards this figure, so the two exceptions could be used together. Again, this mirrors the existing exemption under the current regime.
- Minimum denomination. Where the denomination per security is at least £50,000. This mirrors an existing exemption under the current regime, although at a lower level than the existing threshold denomination of €100,000 per security. (The Government says this is designed to “minimise disruption to UK institutional investor access to international wholesale bond markets”.)
- Minimum subscription. Where each investor acquires securities for a total consideration of at least £100,000. This mirrors the existing exemption under the current regime, replacing the current euro threshold for a sterling threshold of the same figure (and not the lower figure proposed for the minimum denomination exception above).
- Admission to a market. Where the securities in question are to be admitted, or are already admitted, to trading on a regulated market (such as the London Stock Exchange Main Market) or a primary MTF (such as AIM). In these circumstances, the FCA would be able to set separate rules on when a prospectus is required, as well as any exceptions (see below).
- Regulated platforms. A new exception would permit offers of securities through a “regulated platform”. The instrument does not elaborate on this and merely defines a regulated platform by reference to a new article to be inserted into the Regulated Activities Order. This is likely to provide the basis for the Government’s proposal in its review outcome to permit crowdfunding through specifically designated platforms.
- Substitute securities and scrip dividends. Where shares are issued in substitution for existing shares, or where shares are issued by way of a dividend in respect of shares of the same class. These exceptions would mirror existing exemptions under the UK’s current prospectus regime.
- Pre-emptive offers to existing shareholders. A new exception would allow offers to be made to existing shareholders under the statutory pre-emption rights provisions of the Companies Act 2006. This exception would apply only if the relevant securities are not being admitted to a regulated market or a primary MTF.
- Takeovers. This exception would allow a company to offer its own securities as consideration when carrying out a takeover of another company. This broadly mirrors the existing “takeovers exemption” under the current regime. Unlike at present, this exception would apply only if the securities are not being admitted to a regulated market or a primary MTF. However, in these circumstances, the new exception for admission to a market would apply. The instrument also contains a separate exception for offers of loan notes on a takeover.
- Offers to existing employees and directors. This broadly mirrors the existing exemption under the current regime for offers under incentive plans.
- Resolution mechanisms. This would allow offers under the UK’s banking and central counterparty special resolution regimes.
Admitting securities to a regulated market
Unlike under the existing regime, there would be no automatic requirement for an issuer to publish a prospectus if it wishes to admit transferable securities to a regulated market.
However, the FCA would have power to make rules requiring a person to publish a prospectus before applying to admit securities to a regulated market (such as the London Stock Exchange Main Market). This includes where there is an offer of securities to the public alongside the application for admission.
In practice, this is designed to give the FCA more flexibility to decide when a prospectus is (and isn’t) required when admitting securities to the larger securities exchanges in the UK, rather than to dispense completely with the requirement for a prospectus.
This would no doubt be useful in allowing the FCA to grant derogations or relaxations for smaller and repeated secondary fundraisings, for fundraises by small and medium-size enterprises, and potentially for emergency equity raises. Enabling the FCA to decide when a prospectus is required in these circumstances (including granting derogations or relaxations) was a key recommendation of the recent Secondary Capital Raising Review (see our previous Corporate Law Update).
Admitting securities to a “primary MTF”
The FCA would also have power to make rules on admitting securities to a primary MTF.
The instrument defines a primary MTF as a multilateral trading facility which accepts newly issued transferable securities for trading and which imposes rules on issuers in relation to eligibility, conditions for admission to trading, and requirements to maintain admission to trading.
This would capture markets such as AIM and the AQSE Growth Market.
Rather than regulating admissions directly, the rules contemplate the FCA requiring the operator of a primary MTF to include certain provisions in its securities exchange rules. This could include requiring an issuer, in specified circumstances, to publish a prospectus as a condition to admitting securities to trading on the primary MTF.
A key consequence of this and the proposed prospectus exceptions (see box “When would an offer of the public be allowed?” above) is that, where the FCA decides not to require the operator of a primary MTF to make admission conditional on a prospectus, no prospectus would be required to admit securities to the MTF, even if the admission would otherwise amount to an offer to the public.
In practice, this may not alter much. Admissions to MTFs, such as AIM, often take the form of targeted placings and, as such, would not trigger a prospectus anyway (because they will normally be made to fewer than 150 persons and to qualified investors).
And, in theory, the FCA could well require MTF operators to mandate a prospectus where it is most likely to be needed, such as where the offer is to be made available to retail investors.
The Government has noted that it is particularly likely to refine the parts of the illustrative instrument relating to admission to a primary MTF. This is not surprising, given that these elements of the instrument do not simply replicate existing provisions of FSMA, but rather would create new powers to regulate admission to the UK’s junior markets.
Maximising participation in offers
When making rules, the instrument would oblige the FCA to consider the “desirability of facilitating offers of transferable securities in the United Kingdom being made to a wide range of investors”.
In essence, this means the FCA would need to try and frame any rules to maximise the ability for both institutional and retail investors to participate in offers, another of the Government’s long-standing objectives.
The instrument would give the FCA power to decide who is responsible for a prospectus.
In practice, we would not expect the FCA to change the current position, namely that the responsible persons are the issuer, each of its current and prospective directors, and each person who accepts responsibility for the prospectus.
The instrument would also retain the broad content requirements for a prospectus (currently set out in article 6 of the UKPR).
The FCA would be able to authorise omissions from a prospectus, and to require supplementary information in a prospectus if necessary for investor protection. It would also preserve investors’ rights to withdraw from an offer (which are currently set out in the UKPR)
Liability for a prospectus
Persons who are responsible for a prospectus would remain liable to pay compensation to investors for loss suffered due to any untrue or misleading statement in the prospectus or the omission of any information that is required in the prospectus.
In a change to the current regime, the instrument would allow the FCA to exempt persons from liability for certain “forward-looking statements”, which the instrument terms “protected forward-looking statements”. This would include projections, estimates and statements of opinion or intent.
A person could nonetheless be liable for a protected forward-looking statement if they knew it was, or were reckless as to whether it was, false or misleading.
The instrument would continue to preserve (as FSMA currently does) any other rights investors have in relation to a misleading prospectus, such as a claim in negligent misstatement. It would also retain the FCA’s existing powers to sanction breaches of the regime.
How does this affect me and what next?
The contents of the instrument (which is, of course, still “illustrative” and in draft form) are not surprising – they reflect the Government’s proposals in its earlier review paper.
However, the instrument is most useful in providing an indication of the approach the Government intends to take to distributing powers and responsibilities under the prospectus regime going forward.
As expected, more authority will be vested in the FCA when it comes to regulating admission to trading and when a prospectus is required.
The proposed ability for the FCA to impose requirements on primary MTF operators should ensure that investors remain protected under the new regime when investing in less established businesses on the more junior markets. It will be interesting to see how the FCA uses this new power.