Legal briefing | |

Second to none: Redefining the UK's secondary fundraising regime


On 19 July HM Treasury issued a report on the outcome of the UK Secondary Capital Raising Review (the "Review").

The Review followed on from the 2021 Lord Hill Listing Review recommendations and subsequent call for evidence, and looked at ways in which to improve the process for secondary fundraisings for  UK listed companies to make it cheaper, quicker and more efficient. The conclusions of this "once-in-a-generation opportunity for meaningful reform" – a series of 21 recommendations – have received widespread support from a broad range of market participants, including institutional investors, trading venues, settlement agents and advisers. The government also announced that it had accepted all the recommendations of the Review.  

Although some recommendations will be implemented earlier than others, the measures should be viewed as a holistic package and it is intended that when implemented, they will, together with the changes resulting from the FCA's Primary Markets Effectiveness Review, the reforms outlined in the HM Treasury's Prospectus Regime Review (the outcome of which was published in March) and the further changes in relation to the structure of the listing regime currently being discussed with the market, result in a regime that is fit for purpose and enables London to compete globally and bolster its attractiveness as a listing venue.

This briefing note summarises the key recommendations and their practical implications. The corresponding traffic lights indicate the Review's proposed timeframe for the implementation of each one: green signifying that the recommendation should be implemented "immediately"; amber being "near term" and red being "medium term".

Pre-emption rights

Pre-emption Group: membership, transparency & process

The Review comes down firmly in favour of retaining pre-emption rights – described as a "cornerstone of UK company law" – and its recommendations include that the Pre-emption Group should:

  • be placed on a more formal footing, with revised terms of reference, expanded membership and enhanced transparency;
  • publish an annual report on the operation of the regime;
  • receive, and make available on a publicly searchable database, data on pre-emption and requests for disapplications; and
  • publish a template reporting form to standardise post-transaction reporting by issuers.

Increasing disapplication threshold to 20%

The Review recommends that the temporary flexibility introduced during the COVID-19 pandemic, whereby companies could issue up to 20% of their shares (instead of the usual 10%) non-pre-emptively, be made a permanent feature of the fundraising regime. Key points to note include the following:

  • As with the current "5% + 5%" formulation, the first 10% will be available for use for any purpose, with the second 10% being available only for an acquisition or specified capital acquisition, as defined in the Pre-emption Group's Statement of Principles.
  • The exercise of the authority will be subject to conditions similar to those that existed in 2020 – companies will need to:
    • (to the extent (i) reasonably practicable and (ii) permitted by law), consult with a representative sample of the company's key shareholders;
    • give due consideration to the involvement of retail investors;
    • explain the background to, and reasons for, the fundraising and the proposed use of proceeds;
    • as far as possible, proceed on a "soft pre-emptive" basis – this usually takes the form of a company working with its book-runners to ensure due regard is given to protecting the existing investors' interests;
    • involve company management in the allocation process; and
    • after completion of the issue, make disclosure in relation to the conduct of the placing and compliance of the conditions.

Consistent with the positive experience of the temporary measures during the COVID-19 pandemic, these changes will make it easier for companies to raise smaller amounts more quickly and cheaply with the expectation that the new flexibility will be used effectively and responsibility.

After a placing has been carried out, companies will be required to report publicly via an RIS using a short template form which will be downloadable from the Pre-emption Group's website. The form will address the above points, as well as the basis for allocations; the discount to market price and the net proceeds.

Allowing for higher disapplication threshold on a case-by-case basis

In order to provide even greater flexibility for "capital hungry" companies, such as those in the tech and life sciences sectors, the Review recommends that requests for a disapplication of over 20% in any one year should be supported on a case-by-case basis, subject to prior shareholder approval. The Review identifies examples of circumstances where flexibility may be appropriate, including in relation to:

  • growth companies, which have a relatively small market capitalisation at the point of listing;
  • early-stage growth companies; and
  • strategic investors.

Accordingly, the Review recommends that the revised Pre-emption Group guidance should contain specific provisions for growth companies including:

  • informed shareholder approval (so that investors are made aware of management intentions at the point of their investment decision);
  • a higher disapplication threshold – if the FCA follows the recommendation to increase the threshold for an admission to trading prospectus to 75%, this is likely to represent the practical upper limit of an annual disapplication request; and
  • longer disapplication periods – although annual authorities are standard market practice, a company with a consistent long-term growth strategy may be able to seek a longer period in certain circumstances.

Cash box structure

The Review also recommends that the revised guidance should restrict the use of the cash box structure used to circumvent pre-emption rights and state that a cash box is permitted only for non-pre-emptive issues up to the percentage disapplication authority that was granted at the company's last AGM.

Transitional approach

Recognising that the AGM season will be underway before the necessary changes have come into effect, the Review has agreed a transitional approach with the Pre-emption Group, which should be followed by issuers in relation to non-pre-emptive offers between publication of the revised Statement of Principles and the next AGM. The report sets out in detail how this will work so that companies can make use of the revised approach whilst preparing for their next AGM.

Retail investors included in all capital raisings

Due consideration

The Review recommends that companies should give due consideration to retail investors on all capital raisings, including undocumented non-pre-emptive placings. They should choose the most appropriate method by which to do this, taking into account the company's circumstances and the market conditions at the time of the offer.  Whilst there should be no single mandated structure, the below two options have been suggested:

"Follow-on offer" – the Review suggests that:

  • A follow-on offer could be made to shareholders as at a record date prior to announcement of a placing and exclude any shareholder allocated shares in that placing.
  • There should be a monetary cap determined by the issuer of not more than £30,000 per ultimate beneficial owner.
  • The number of shares issued should not exceed 20% of those issued in the placing.
  • The issue price of shares in the follow-on offer should be equal to, or less than, the offer price in the placing.
  • The follow-on offer should be announced at the same time as, or as soon as reasonably practicable after, the announcement of the placing.
  • The offer period should be at least five business days.
  • A full prospectus should not be required, and the documentation should consist of a cleansing statement (confirmation that the company is in full compliance with its market disclosure obligations and that it is not delaying the disclosure of any inside information) and offer booklet (information on the secondary offer itself).

Retail investor platformThe Review notes the historic drawbacks of this route and suggests that a number of features would help align these platforms with the aims of retail participation:

  • Soft pre-emption – the facility to prioritise the access of existing investors will improve the ability of issuers to observe soft pre-emption in relation to retail investors.
  • Streamlined process – minimising steps such as pre-registration with a platform provider.
  • Payment options – allowing payment through tax-wrappers such as ISAs and SIPPs may assist retail investors with investable funds in these products, thereby maximising their available funds.

Other changes

The Review recommends shortening the period a prospectus for an IPO involving a retail offer has to be made available to the public from six days to a maximum of three working days.

It is also noted that, once the proposals in the HM Treasury's Prospectus Regime Review have been implemented, the current €8 million constraint on retail offers will no longer apply by default, with the FCA having flexibility to determine when a prospectus will be needed.

Reducing regulatory involvement and cost

When the reforms following the HM Treasury Prospectus Review are implemented, a secondary fundraising will not automatically trigger an "admission to trading" prospectus and the FCA will have the flexibility to decide when this is required. The reforms will also enable the FCA to determine when prospectuses will require its review and approval prior to publication.

Raising the threshold for a prospectus being required

The Review states that an admission to trading prospectus should only be required where there has been a "material shift in what it means to be invested in an existing listed issuer". Accordingly, the threshold for prospectuses being published in connection with secondary offers should be raised from offers of 20% to 75% of a company's existing share capital. Such prospectuses would remain subject to FCA review and approval.

Removing the need for a sponsor  

The Review recommends that a listed company should not be required to appoint a sponsor for a secondary offer, including even for large secondary offers of 75% or more of existing share capital where a prospectus (please see above) would be required. The future of the sponsor regime is being considered more widely by the FCA in the second phase of its Primary Markets Effectiveness Review.

Changes to the FCA's working capital approach

The FCA's approach to working capital statements in prospectuses should be reconsidered and revised to allow greater flexibility and allow for assumptions to be included. The Review notes that, based on the experience during the COVID-19 pandemic when COVID-related assumptions in working capital statements were allowed, this should not lead to disruption in the markets.

The Review states that the approach taken to prospectus working capital disclosure should better reflect the expectations of investors accustomed to annual report-style disclosure, and to give a fuller picture of a company's financial position.

The Review also recommends reducing the current overlap between working capital diligence exercises and annual report disclosures. It is noted that the upcoming BEIS audit reforms will incorporate going concern and viability requirements within the new resilience statement and this is already being discussed by an FCA and FRC working group.

The fact that a sponsor will no longer be required (please see above) also means there will be a reduction in the level of working capital due diligence, particularly where there is no prospectus.

Shortening the timetable

The Review notes that two of the factors which contribute to a prolonged timetable are the length of the offer period and the need to hold a general meeting. Accordingly, it recommends that:

  • the minimum offer period for rights issues and open offers should be reduced from ten to seven business days; and

  • companies should have flexibility to reduce the notice period where a general meeting (other than an AGM) is required from 14 days to seven days.

    Although this would be a big improvement as regards timetable, the Review notes that the quicker turnaround periods involved would present challenges for investors holding through an intermediated shareholding chain.


Expanding scope of authority

The scope of the "two thirds" authority should be expanded so that the second third would apply to any pre-emptive offer, not just rights issues as is currently the case. This will give companies more flexibility as to the choice of their fundraising method as well as reducing the need for a general meeting in relation to a larger proportion of open offers.

Other changes to pre-emption rights and rights issue process

The Review recommends:

  • aligning the pre-emption provisions in the Companies Act 2006 with the process that is usually followed on a rights issue, including the ability to exclude overseas shareholders where the cost and burden of extending the offer to them would be disproportionate, and flexibility to deal with fractional entitlements; and

  • having excess application mechanics attached to rights issues, in contrast to the current position where a waiver from the Listing Rules is required.

Overseas investors: optional enhanced disclosure regime

It is often the case in UK secondary offers that shares or, in the case of rights issues, rights not taken up by existing shareholders need to be capable of being offered to institutional investors in other jurisdictions, particularly the United States. In order to extend an offer into the United States, investment banks involved in the offer will typically require the provision of the customary US comfort package from legal counsel and auditors in order to provide a defence against potential liability in the United States, which results in a prospectus or offer document being produced that conforms generally to US disclosure standards.

The above approach conflicts with the proposed elimination of a prospectus for most secondary offers and the stated goal of the Review to make secondary fundraisings more efficient and less costly for issuers. The Review, therefore, has recommended that an optional enhanced continuous disclosure regime be introduced that companies who are likely to want to include US or other international investors in future secondary offers could opt in to. Companies that adhere to this optional regime would be expected to include more detailed disclosures in their annual reports that would more closely adhere to US expectations in areas of disclosure such as risk factors, business description, operating and financial review, regulatory environment and material contracts. Such information could then be incorporated by reference into a shorter offer document for a secondary fundraise, which together with any necessary updates or amendments to the existing disclosure, would form a "disclosure package" that the requisite US comfort could be provided on without the need for producing a lengthy and duplicative prospectus or offer document.

While the inclusion of such enhanced disclosures would likely involve US securities lawyers in the drafting and review process and add some additional time and cost to the process of preparing an annual report, particularly in the first year of implementation, we believe that many listed companies would benefit from adopting this approach as it would allow them to take full advantage of the benefits of the proposed reforms and raise funds more cheaply and quickly than is currently the case.   

Increasing range of available fundraising options

Australian concepts

The Review recommends adopting some features of other jurisdictions, in particular, two concepts borrowed from the Australian regime:

  • Cleansing notice:

    Where a secondary issue involving a public offer does not require a prospectus, the company could issue a cleansing notice whereby it confirms publicly that it is in full compliance with its market disclosure obligations, and it is not delaying the disclosure of any inside information.

  • Standard form terms and conditions with institutional investors: 

    These should be agreed by the market and be publicly available.
Increasing drive to digitisation

The Review recommends that the drive to digitisation should become a priority.

This would entail moving to a system where both institutional and retail shareholders hold their shares in a digitalised form. Following the Review's recommendation that there should be a new Digitisation Task Force,  the Government has now launched  the taskforce and published the terms of reference.


As can been seen from this summary, the Review is part of a much wider backdrop of ongoing and proposed reforms and some of the recommendations are reliant on other changes from the FCA and HMT reviews being implemented, with legislation being required in order to give effect to some of the recommendations. This means the implementation process will be fragmented and it will be some time before the full benefits of the Review are realised. There will also be an inevitable period of adjustment for both issuers and investors as they get to grips with the changes. However, this is an important step on the road to a much more streamlined, efficient and less costly regime for UK listed companies looking to undertake secondary fundraisings.

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