Government publishes draft legislation for public offers of securities

New regulations set out the UK’s future regime for regulating public offers of securities, which will replace its existing securities prospectus regime.

The Government has published a near-final version of the statutory instrument that will set out the UK’s regime for regulating public offers of securities when the UK Prospectus Regulation (the UKPR) (derived from the EU Prospectus Regulation) is repealed.

(The Government previously published an illustrative instrument in December 2022 as a means of demonstrating how the regime was likely to operate in the future. You can read more about that statutory instrument in our previous separate in-depth piece. The new instrument replaces the previous illustrative instrument.)

As the Government explains in its accompanying policy note, the instrument is part of its programme to deliver a “Smarter Regulatory Framework” for financial services in the UK.

The Public Offers and Admissions to Trading Regulations 2023 would be made under the Financial Services and Markets Act 2000 (FSMA), following amendments to that Act made by the new Financial Services and Markets Act 2023.

Whilst much of the regime is substantively unchanged, 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 multilateral trading facility (or MTF) (such as AIM or the AQSE Growth Market).

What the FCA does (or plans to do) with that power will be key to understanding whether there will be any substantive difference between the current regime and the proposed new regime.

We have set out the key points from the draft instrument below.

Public offers of securities

Under the new instrument, an offer of relevant securities to the public would be unlawful unless it falls within one of the exceptions in the instrument.

This differs from the current regime, under which (broadly speaking) an offer of transferable securities is lawful provided that a prospectus is published or the offer falls within an exemption.

The instrument retains the broad definition of an “offer of securities to the public” (currently set out in section 102B of FSMA). This includes where there is a communication (in any form and by any means) to any person that presents sufficient information on the securities, and the terms on which they are offered, to enable an investor to decide to buy or subscribe for them.

Apart from certain debt securities (such as “minibonds”), the prohibition will continue to apply only to transferable securities, which (broadly speaking) means securities of a kind that can be traded on the public markets.

This is a significant change from the Government’s illustrative statutory instrument, which would have applied also to non-transferable securities, such as shares in private companies with significant transfer restrictions. By adopting a narrower definition of “transferable securities”, the revised statutory instrument broadly maintains the status quo.

A schedule to the instrument lists exceptions to the prohibition (and, therefore, circumstances in which an offer of securities can be made). These comprise a mixture of exemptions from publishing a prospectus under the existing regime, as well as new circumstances tailored around the proposed new regime. See box “When would an offer to the public be allowed?” below.

A schedule to the instrument sets out circumstances in which the prohibition of offers to the public would not apply. There are 13 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 £5m.

This exemption effectively replaces the current exemption from publishing a prospectus for offers that cannot exceed €8 million. The Government has previously stated that it intended to remove the €8m threshold. Although the new £5m threshold would be lower than the existing threshold, it will still exempt a large number of offers from the new prohibition.
Qualified investors. An offer that is made solely to qualified investors. This mirrors the existing exemption under the UK’s current prospectus regime.
Fewer than 150 persons. An offer that is made 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.
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’s 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).
Substitute securities. Where shares are issued in substitution for existing shares. This would mirror the existing corresponding exemption under the UK’s current prospectus regime.
Scrip dividends. Where shares are issued by way of a dividend in respect of shares of the same class. This too would mirror the existing corresponding exemption under the UK’s current prospectus regime.
Offers to existing shareholders. A new exception would allow offers to be made to existing shareholders and persons connected with them (broadly, family members and family trusts). The exception would also allow shareholders to renounce their rights in favour of other shareholders or to other “exempted persons” (including qualified investors and existing officers and employees).

This is a significant expansion of the exemption originally proposed in the illustrative instrument, which would have applied only to pre-emptive offers to existing shareholders. There no longer appears to be any element of pre-emption required to engage the exception. (This exemption would not apply if the securities are being admitted to a regulated market or a primary MTF. However, in those circumstances, the new exception for admission to a market would apply.)
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 not apply if the securities are being admitted to a regulated market or a primary MTF. However, in those circumstances, the new exception for admission to a market would apply.)
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.
Regulated platforms. A new exception would permit offers of securities through what the instrument terms a “regulated platform” and which Government, in its policy note, refers to as “public offer platforms”. This is principally designed for larger offers of non-transferable debt securities, such as “minibonds”.

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 (such as the London Stock Exchange’s Main Market).

However, the FCA would have the power to make rules requiring a person to publish a prospectus before applying to admit securities to a regulated market. This includes where there is an offer of securities to the public alongside the application for admission (as there often is on an IPO).

In practice, this is designed to give the FCA more flexibility to decide when a prospectus will be required when admitting securities to the UK’s larger securities exchanges. It is not designed to dispense completely with the requirement for a prospectus.

The FCA has already acted pre-emptively by issuing a series of engagement papers in which it has set out how it proposes to use its new powers to require an issuer to publish, or exempt an issuer from publishing, a prospectus. For more information, see our separate in-depth piece.

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 that imposes rules 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 would give the FCA power to require the operator of a primary MTF that is not restricted to sophisticated investors 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 exceptions (see box “When would an offer to the public be allowed?” above) is that, if 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.

Maximising participation in offers

When making rules, the FCA would be required 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, one of the Government’s long-standing objectives.

The prospectus

The instrument would give the FCA power to decide who is responsible for a prospectus.

However, we do 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).

Under a new provision, if a non-UK issuer is required to present historical financial information, it would need to do so under one of several specified financial reporting standards. These include (among others) UK IFRS or EU IFRS, the generally accepted accounting principles (GAAP) of Japan, the United States, the People’s Republic of China, Canada or South Korea, or some other national regime that the Treasury designates as equivalent to UK GAAP.

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, forecasts and targets, as well as statements of guidance, 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 happens next?

The draft instrument is similar in form to the Government’s previous “illustrative” instrument. However, the Government has made significant changes in response to feedback from the investor community.

The proposal to remove the existing €8m maximum offer size exemption was met with mixed responses. The new exemption for offers that do not exceed £5m effectively preserves this exemption, albeit at a lower threshold no doubt reflecting feedback from the investment and advisory community.

The removal of non-transferable equity securities and many non-transferable debt securities from the scope of the instrument is also significant. Currently, securities (particularly certain equity securities in private companies) are often structured with transfer restrictions so that an offer of them does not trigger the need to publish a prospectus, which can be disproportionately expensive and time-consuming. The changes to the proposed instrument would preserve this position for equity securities.

The most significant change is that, going forwards, power to decide when a prospectus will and will not be required will lie squarely with the FCA.

This will dispense with the need for legislation to alter the regime in the future (which can be a cumbersome and time-consuming process) and instead allow the regulator to respond rapidly to changing market dynamics, creating and paring back exemptions and content requirements to suit the prevailing climate.

Otherwise, there is little substantive change to the current regime, which is reassuring for investors and advisors, who will understand the future landscape well.

The real question now is how the FCA will use its new powers, in particular whether it will genuinely operate to create more efficient capital markets.