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Radical prospectus reform: balancing access, agility and protection

Overview

Following Brexit and the Hill Review, the Treasury is looking to carry out a radical overhaul of the rules governing public offers of securities and prospectuses in the UK.  Even to the staunchest remainer, the proposals appear to remove some of the less logical constraints imposed by the EU Prospectus Regulation, minimising legislation and allowing the FCA freedom to act more nimbly in deciding when a prospectus is actually necessary, and when investors are adequately protected by market information or other means.

A delicate balancing act is required to fulfil the government's objectives of keeping the UK markets attractive and competitive by improving issuers' access to capital, while providing both equal access and adequate protection for the retail investors which the government hopes to attract to the equity markets. Will the proposed reforms achieve this balance?
 

The objective

The aim of the proposals is to:

  • facilitate wider participation in the ownership of public companies and remove the disincentives that currently exist for those companies to issue securities to wider groups of investors, in particular their own shareholders;
  • improve the efficiency of public capital raising by simplifying regulation and removing the duplications that currently exist in the UK prospectus regime;
  • improve the quality of information investors receive under the prospectus regime; and
  • make regulation in this area more agile and dynamic.

The current regime: fundamentally flawed?

According to Lord Hill's conclusions, one of the issues to be considered as part of a fundamental review of the regime is that it covers both public offers of securities and admission to markets and listing.  By dealing with these two issues separately in the future, the government aims to remove duplication and complexity for quoted companies raising further capital, as well as disincentives to offer participation to retail investors, while re-examining how private companies can seek alternative forms of finance outside of traditional stock exchanges.

The proposals

In summary, the Treasury is seeking input on the following proposals:

 

Two-stage reform

The government proposes that the replacement of the current prospectus regime will be achieved through a two-stage process:

• a government consultation followed, assuming the government decides to proceed, by legislation; and

• an FCA review and consultation on the rules that will replace the Prospectus Regulation, where they are now empowered to make rules.

Comment

Access to investments for a wider pool of investors

It is clear that these reforms have the potential to open the capital markets to a wider range of non-institutional investors by, for example, allowing offers to existing shareholders to take place without the requirement for a prospectus and by allowing the FCA to determine the necessity for, and contents of, a prospectus.

Flexibility for companies in raising capital

The reforms will also allow companies to raise capital more flexibly by removing the "all or nothing approach" whereby allowing access to non-institutional investors, or raising funds above a certain amount, necessitate a full prospectus.

International Offerings

The proposed new regime is a significant departure from the EU prospectus regime. However, the effect on most cross-border fundraisings is likely to be minimal. Although many institutional fundraisings by UK companies include a European element, passporting of prospectuses is not common and it is usual to rely on exemptions within the EU Prospectus Regulation which will remain available in European member states. Therefore (subject to any rule changes which the EU may make) companies should be free to benefit from a more flexible regime in the UK while continuing to use the current EU exemptions.

With regard to US offerings which require delivery of a 10b-5 letter, these are unlikely to benefit from any reduced disclosure requirements due to the disclosure standards required under US market practice in that context. This is similar to the position under the current rules where Article 14 of the Prospectus Regulation permits a simplified prospectus for secondary offerings. The simplified prospectus is not considered to contain adequate disclosure to a Rule 10b-5 standard.

Retail shareholders

The new rules will need to balance retail investor access with protection of non-institutional shareholders. Rules which currently hinder retail investors' access to the markets are there to ensure that except on very small offerings, there are strict rules as to the information which must be produced and approved by the FCA. 

The proposals suggest that prospectuses may be less likely to be required and that, where required, may in certain circumstances be less likely to be reviewed by the regulator.

However, as regards quoted companies, the consultation paper rightly points out that retail investors do have access in the aftermarket, and therefore there is no logical reason to exclude them from e.g. a placing where a discount would be available.

As regards offerings by private companies, the proposed approaches require either the involvement of an authorised person or the continued requirement for a prospectus. The first two options (see Offers by private companies and the maximum fundraising exemption above) propose that offers will be made via FCA regulated entities, and the third reflects the status quo.

FCA "taking back control"

A lot will depend on the FCA's approach to exercising its new powers, and the rules which it will put in place to implement these reforms.  However, the proposals have the potential to create a dynamic and flexible system which allows companies to raise capital more efficiently and cost-effectively on the UK markets.

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