The Financial Conduct Authority has published a discussion paper on the availability of information during the UK equity IPO process. The FCA focuses on 2 key issues:
- the fact that in the vast majority of London IPOs (in the absence of a retail or other public offer) an approved prospectus is not published until immediately prior to admission to trading, rendering the document ineffective as a basis for an investment decision by investors;
- the use of analyst research in the IPO process, in particular the potential bias of connected research, the lack of availability of unconnected/independent research, the timing of the publication of research (and the perception that there is a lack of other information available for investors upon which to base their investment decision) and the related market practice and rationale of blackout periods.
The FCA is seeking views on the need for reform in the UK IPO process to address these issues and has developed 3 different models for possible reform (although it is at pains to point out that these are not definitive proposals for reform at this stage). All 3 models propose the use of a tri-partite prospectus with the publication of a FCA approved registration document at the same time as an Intention to Float announcement and prior to the publication of research. Both connected and unconnected research could then be published after an appropriate blackout period. Following the marketing and pricing of the transaction, the securities note and summary parts of the prospectus would be approved and published immediately prior to admission in the usual way.
The FCA’s suggested “re-sequencing” of the IPO process is designed to give unconnected analysts and potential investors formal disclosure from the issuer at an early stage thus affording them more time to conduct due diligence and to consider the investment case. The FCA believes it would give independent research analysts a more level playing field from which to author unconnected research and to publish that ahead of any marketing process. One of the FCA’s additional ideas is to allow unconnected analysts equal access to the issuer’s management to assist them further in producing research.
This paper is likely to generate significant market interest and feedback. The FCA’s starting position seems to be that the UK IPO process is inefficient; and yet London’s success as an IPO venue over the last few years suggests otherwise. There are some obvious points that seem to have been overlooked in the analysis, for example, certain issuers may be concerned to preserve confidentiality (or at least to limit the amount of disclosure that is put into the public domain) for as long as possible during an IPO process (particularly if a twin track exit strategy is being pursued); the assumption that a registration document would be more effective disclosure than a pathfinder prospectus (which would contain the same information); the assumption that independent research would be commercially viable and readily produced; concerns around the control of information to a wider analyst community and the potential commercial and legal risks for an issuer if a wide range of potentially inconsistent disclosures and valuations are available to potential investors.
Brokers should also note the FCA’s words of warning to those who deploy research analysts formally or informally in the pitch process for IPO mandates.
Stakeholder responses are due by 13 July 2016.