New legislation to reform UK’s regime for public offers of securities
Final regulations have been published setting out the UK’s reformed regime for regulating public offers of securities when the UK Prospectus Regulation (the UKPR) (derived from the EU Prospectus Regulation) is repealed.
As the Government previously explained in a policy note, the Regulations are part of a programme to deliver a “Smarter Regulatory Framework” for financial services in the UK.
The Public Offers and Admissions to Trading Regulations 2024 are 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.
Much of the regime will remain substantively unchanged. The key change is that the FCA will have more power to decide whether a prospectus is required when an issuer applies 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 with that power will be key to understanding quite how different the new regime will be from the current regime.
We have set out the key points from Regulations below.
Public offers of securities
Under the new regime, an offer of relevant securities to the public will be unlawful unless it falls within one of the exceptions in the Regulations.
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 Regulations retain 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 applies only to transferable securities, which (broadly speaking) means securities of a kind that can be traded on the public markets.
A schedule to the Regulations 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 will an offer to the public be allowed?” below.
A schedule to the Regulations sets out circumstances in which the prohibition of offers to the public will 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 will be possible to combine the exceptions in the same way as 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 €8m. (The Government has previously stated that it intended to remove the €8 million threshold, sparking concerns that smaller offers would come within the regime.) Although the new £5m threshold is 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 (and so exempting a greater number of offers).
- 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 can 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 mirrors the existing corresponding exemption under the current prospectus regime.
- Scrip dividends. Where shares are issued by way of a dividend in respect of shares of the same class. This too mirrors the existing corresponding exemption under the current prospectus regime.
- Offers to existing shareholders. A new exception will allow offers to existing shareholders and persons connected with them (broadly, family members and family trusts). It will also allow shareholders to renounce their rights in favour of other shareholders or other “exempted persons” (including qualified investors and existing officers and employees).
- Takeovers. This exception will 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 will not apply if the securities are being admitted to a regulated market or primary MTF. In that case, the new exceptions for admission to a market will apply and the FCA or securities exchange (as applicable) will be able to decide in what circumstances a prospectus will be required or what conditions need to be met to dispense with a prospectus.
- Offers to existing employees and directors. This broadly mirrors the existing exemption under the current regime for offers under incentive plans.
- Resolution mechanisms. This will allow offers under the UK’s banking and central counterparty special resolution regimes.
- Regulated platforms. This new exception will permit offers of securities through what the Regulations call 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 will 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 has 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 usually 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 (link at the bottom of this article) 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. The FCA expects to issue a formal consultation in Summer 2024.
Admitting securities to a “primary MTF”
The FCA has the power to make rules for admitting securities to a primary MTF.
The Regulations define 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 FCA has the 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 will 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 require a prospectus anyway (because they will normally be made to fewer than 150 persons and to qualified investors).
In theory, the FCA could instead 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 must 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 must 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 Regulations give the FCA the 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 Regulations retain the broad content requirements for a prospectus (currently set out in article 6 of the UKPR). The FCA will be able to authorise omissions from a prospectus and, conversely, require supplementary information in a prospectus if necessary for investor protection.
The Regulations 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 will need to do so using one of several specified financial reporting standards. These include (among others) UK IFRS, EU IFRS, the generally accepted accounting principles (GAAP) of Japan, the United States, the People’s Republic of China, Canada or South Korea, or any other national regime the Treasury designates as equivalent to UK GAAP.
Liability for a prospectus
Persons who are responsible for a prospectus will 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 FCA will be able to exempt persons from liability for certain “forward-looking statements”, known as “protected forward-looking statements”. These 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 FCA has already set out some early proposals for how it will regulate protected forward-looking statements in its engagement papers (see below).
The Regulations preserve any other rights investors have in relation to a misleading prospectus, such as a claim in negligent misstatement. They also retain the FCA’s existing powers to issue sanctions for breaches of the regime.
How does this affect me and what happens next?
Although framed differently, in practice the new regime for public offers of securities will operate on very similar terms to the current prospectus regime.
The Government’s original proposal to remove the existing €8 million maximum offer size exemption was met with mixed responses. The new exemption for offers that do not exceed £5 million effectively preserves this exemption, albeit at a lower threshold no doubt reflecting feedback from the investment and advisory community.
The most significant change is that, going forwards, power to decide when a prospectus will or will not be required lies 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.
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.