London calling - reform of UK capital markets

Following earlier consultations on the effectiveness of the primary markets, which included various possible listing models, the FCA's May 2022 discussion paper put forward a single listing segment for the Official List to be known simply as a "UK listing". This would mark the end of our current two-tier listing regime, which comprises premium and standard listings. Companies with securities traded on AIM would not be affected by these changes. Key features of the new regime are set out below.

• Mandatory continuing obligations – Companies applying for a UK listing would be subject to a set of minimum mandatory continuing obligations – these would consist of requirements that focus on transparency and protecting shareholders where their interests may be different to those of management or a significant shareholder. This is designed to make a London listing competitive, in terms of barriers to entry, with the likes of Euronext, Nasdaq and NYSE.
  
  
• Supplementary continuing obligations – Companies would have the choice to "opt in" to a set of supplementary continuing obligations which would provide shareholders with an enhanced role in holding the company to account on an ongoing basis, including the controlling shareholder regime and the rules on independence and "significant" transactions: these would be based on the current continuing obligations for premium listed companies. Please see our client note which includes the FCA's table showing the suggested division of obligations. The FCA's preferred approach is an "all or none" approach: issuers either opt into all the supplementary obligations or not opt in at all. The optional layer of obligations raises the question of whether (and why) companies would choose to opt into obligations which are in excess of those required by competing regimes. The decision is likely to be based on the specific characteristics of the company's business and the perceived needs of its shareholders. Crucial factors are likely to include index eligibility and the views of the investor bodies.
  
  
• Single set of eligibility criteria – In a move to eliminate the "quality" differential between issuers, there would be a single streamlined set of eligibility criteria which would include the current requirements for a minimum market capitalisation of £30m and a "free float" requirement of at least 10% of the company's issued share capital. However, the long-standing requirements for a three-year track record, historical financial statements and a "clean" or unqualified working capital statement would not now be included. Instead the FCA would move to a disclosure-based regime which would allow investors to decide whether or not to invest based on the disclosures in a company's prospectus.
  
  
• Listing Principles – There would be one set of Listing Principles, with the current Premium Listing Principles (including the principle of equal treatment of all holders of the same class of share and the "one share equals one vote" principle) applying to all companies who list.
  
  
• Dual class share structure – The FCA is consulting on whether companies with a dual class share structure which are currently eligible for premium listing should be permitted to list in the single segment. Under this proposal, standard listing would no longer exist as a more flexible option for such companies which are ineligible.
  
  
• Class 1 transactions – These would form part of the voluntary "supplementary" obligations. The FCA is consulting on whether the current 25% threshold is appropriate.
  
  
• Sponsor regime – All listed companies would be required to appoint and retain a sponsor, but the level of involvement of the sponsor would depend on whether the company opts into the supplementary obligations. The FCA is consulting on certain aspects of the sponsor regime, in particular record-keeping requirements and conflicts of interest.
  
  
• Transition for existing listed companies – Premium-listed companies would have a transitional period in which they can decide whether to keep their existing requirements or downgrade to the minimum continuing obligations. In the new era, existing standard-listed companies may be able to keep their listing.
  
  
• Overseas companies and SPACs – Somewhat confusingly, the suggestion is to keep these entities following the current standard listing regime (even though this is being phased out for other entities) as they are unlikely to satisfy the eligibility criteria for the new single segment.

Although at first glance the proposed single segment has advantages of clarity and simplicity, the nuances described above, which retain elements of the current regime, may lead to confusion and result in the segment not being quite as "single" as intended. The proposed regime appears much more inclusive yet raises questions as to status and eligibility for the FTSE indices. Firstly, for some issuers who value the current "badge" of quality of a premium-listing, the lack of differential may be a drawback. Secondly, only premium-listed shares are currently eligible for inclusion in the FTSE UK Index Series and it remains to be seen how FTSE Russell would amend its requirements in light of the proposed new regime.

The mechanics and details of the new regime are yet to be confirmed. Please see our client note for more information on the discussion paper and our initial client note on the background and original proposals.

In March 2022, the Government published the outcome of the UK Prospectus Regime Review (please see our client note for further details), and this was followed at the end of last year by an Illustrative Statutory Instrument: the Financial Services and Market Act 2000 (Public Offers and Admission to Trading) Regulations 2023 (the "Illustrative SI"). The Illustrative SI shows how the Government will make its proposed changes to the existing regimes using powers set out in the Financial Services and Markets Bill and is accompanied by a Policy Note which provides further details of the proposed reforms.

As with the listing regime, the new prospectus framework represents a significant change to the current regime. As the name suggests, the Illustrative SI, which follows the proposals put forward last year, is not final and is therefore subject to change before becoming law. It should therefore be seen as more of a "glimpse" of the new regime, although we expect that the main themes will remain substantially the same. The key features of the new regime are set out below.

• Admission to trading – In contrast to the current regime, there would be no automatic requirement to publish a prospectus when securities are admitted to trading on a UK regulated market. A key concept of the new UK regime is that the FCA would have the power to decide whether a prospectus is needed in the case of admission to trading both on a regulated market, such as the LSE's main market, and on a primary multi-lateral trading facility, such as AIM. This power extends to situations where there is an offer to the public (see below) alongside the admission to trading. How the FCA exercises this power will be the key factor in determining how the new regime will work. For example, we await details of possible derogations in relation to areas such as smaller and frequent secondary fundraisings on these markets and emergency fundraisings. It will also be interesting to see how the FCA's powers will work in the context of regulating admissions to AIM. Rather than regulating this directly, the rules contemplate the FCA requiring the London Stock Exchange (in the case of AIM) to include certain provisions in its securities exchange rules (which could, for example, include publishing a prospectus as a condition to admitting securities to trading on AIM). It should be noted that, unlike the position in admission of securities to a regulated market, for AIM issuers there would be no specified content for a prospectus and therefore there is currently no clarity as to what this would look like.
  
  
• Offer to the public – One of the main aims of the reform is to clarify the distinction between "admission to trading" and "offer to the public", both of which have historically been triggers for a prospectus being published. Going forward there would be a general prohibition on public offers of securities and all public offers without a prospectus would be unlawful unless they fall into one of the specified exemptions, some of which are the same as the existing ones. The current exemption for offers below €8m would be abolished. Going forward, exemptions would include, amongst others:
  
  
• • the current 150 person exemption;
  • the current "qualified investor" exemption;
  • the current exemption allowing an offer of securities whose denomination per unit amounts to at least £50,000;
  • a new exemption for offerings of securities which are, or will be, admitted to a UK regulated market or primary MTF – this means that such admissions would not automatically trigger a prospectus;
  • a new exemption for offerings of securities to existing shareholders, subject to certain conditions including that the offer is made pro-rata to a person's existing holding – this is significant as it means that pre-emptive offers meeting the required conditions would not trigger a prospectus;
  • a new exemption for offers made by means of a "regulated platform", which is an electronic offer platform, with the FCA being able to determine detailed requirements to which such platforms would be subject, including the levels of due diligence and disclosure required on offers made through such platforms;
  • the current exemption for offers in connection with takeovers; and
  • an exemption for offers below a specified threshold, which is still to be determined.

• Liability for a prospectus – in a change to the current position, the new rules would allow the FCA to exempt persons from liability for "protected forward-looking statements" which would include statements of opinion or intent, projections and estimates. In other respects, the key elements of the liability regime would remain in place, for example the obligation to pay compensation to investors for loss suffered due to untrue or misleading statements in the prospectus; rights of investors in relation to a misleading prospectus such as a claim for a negligent misstatement.

As always, the devil will be in the detail and the efficiency of the regime will depend heavily on the extent of the new powers given to the FCA and how these will be used.

Next steps

These reforms comprise "Tranche 1" of the Government's wider programme and commitment to "building smarter financial services framework for the UK" and it expects to make significant progress on this Tranche by the end of 2023.

The outcome of the UK Secondary Capital Raising Review (the "Review") was published in July 2022 (please see our client note for further details). Some of the recommended changes have since been implemented, whilst others are still in progress and others still will take more time to be actioned. A summary of the key changes is set out below.

Already actioned: Pre-emption Rights and inclusion of retail shareholders

In November 2022, the Pre-emption Group published a new Statement of Principles and template resolutions (please see our client note for further details). As before, these apply to Main Market companies although AIM companies are also encouraged to comply.  The key changes include:

• An increased general disapplication threshold - the revised Principles increase the limit of the general authority that can be sought for non-pre-emptive issues to a maximum of (i) 10% of issued ordinary share capital for disapplications for any purpose; and (ii) an additional 10% of issued ordinary share capital for acquisitions or specified capital investments announced contemporaneously with the issue or in the last 12 months (increased from six months). The revised thresholds reintroduce, on permanent basis, the temporary flexibility granted to companies during the COVID pandemic;
  
  
• Consideration of retail investors - In order to give due consideration to whether retail investors (and existing investors who are not allocated shares) should be able to take part in the placing, there is a new concept of a "follow-on offer", which can be a further 2% in relation to each limb on the basis that it is:
  
  
  • limited to 20% of the number of shares issued in the placing using the 10% general disapplication;
  • capped at a £30,000 purchase per ultimate beneficial owner;
  • at an issue price which is equal to or less than the offer in the placing; and
  • announced at the same time as, or as soon as reasonably practicable after, the announcement of the placing.

• Concept of "capital hungry companies" (i.e. companies that need to raise larger amounts of capital more frequently) – such companies will be granted more flexibility in terms of the duration and thresholds of the disapplication of pre-emption rights. The new concept aims to attract high-growth companies in sectors such as tech and life sciences.
  
  
• Reporting requirements – A post-transaction report must be announced via a regulatory information service, as well as being submitted to the Pre-Emption Group for inclusion in its Pre-Emption Database. This information should also be included in the company's annual report following the issue.
  
  
• Curtailment of status of cashbox structures – a cashbox structure should be regarded as an issue of equity securities for cash and is therefore subject to the disapplication limits. 

Already actioned: expanding scope of rights issue authority to open offers

In February 2023, the Investment Association published a revised version of its Share Capital Management Guidelines (last updated in 2016). Whilst the Investment Association still regards as routine an authority to allot up to two-thirds of a company's existing issued share capital, it extends, as recommended by the Review, the application of the second one-third to all fully pre-emptive offers, not just rights issues as was previously the case. However, companies are expected to explain why they have chosen their capital raising structure and why it is appropriate for the company and its shareholders.

Still to come: Reducing regulatory involvement and cost

The remaining recommendations within this section will take more time, as many are dependent on (i) legislative changes and (ii) the outcome of the other changes taking place in relation to the listing and prospectus regimes, as described in this note. Examples of such changes are:

• raising the dilution threshold for a prospectus;
• removing the need for a sponsor;
• changes to the FCA's approach to working capital; and
• shortening the rights issue timetable (both the minimum period for rights issue and the minimum notice period for general meeting).

Still to come: Increasing range of fundraising options

Increasing the range of options is also more of a long-term goal. Options being looked at include:

• the concept of a cleansing notice; and
• a set of standard form terms and conditions with institutional investors.