New guidance on how unconnected analysts can participate in the UK IPO process and access information from prospective issuers (Guidance) has been published by the Association for Financial Markets in Europe (AFME) and the European Association for Independent Research Providers (Euro IRP).
Why has the Guidance been published?
New Conduct of Business Sourcebook (COBS) rules, which came into force on 1 July 2018, introduced provisions to improve the range, quality and sequencing of information for investors in the UK IPO process. The new rules apply to IPOs on a UK regulated market - although, the FCA has encouraged firms providing underwriting and placing services to larger companies pursuing an IPO on a multi-lateral trading facility, such as AIM, to consider following the new regime.
You can read our summary of the impact of the new COBS rules here.
Amongst other things, the new rules seek to address the concern that there is little, and often, no availability of 'unconnected research' during the IPO process, as analysts within non-syndicate banks and independent research providers lacked access to sufficient information, including the opportunity to hold meetings with an issuer's management. Consequently, the new COBS rules require that if connected research is intended to be published in connection with an IPO and connected analysts wish to have access to the management team, then the syndicate banks must ensure that a range of unconnected analysts have the opportunity to engage with the issuer team on the same terms as those granted to connected analysts.
To support the application of these new rules, the Guidance provides the market with a standard process by which the syndicate banks can facilitate access for unconnected analysts who wish to be in communication with the prospective issuer team.
What is an unconnected analyst?
The Guidance defines an unconnected analyst as a research analyst not employed by one of the proposed members of the underwriting syndicate, who produces research, which is disseminated to one or more third parties who are also external clients of the research analyst's employer's group.
A list of unconnected analysts who have confirmed their interest in writing research on prospective IPOs is available via the link in Appendix II of the Guidance (Unconnected Analyst list).
How are unconnected analysts invited to participate?
The COBS rules provide syndicate banks with two options for giving connected and unconnected analysts access to the issuer team:
- Option I – unconnected analysts are invited to join connected analysts in any communication with the issuer team prior to the dissemination of connected research. In this case, connected research may be released from one day after the publication of the prospectus or registration document.
- Option II – unconnected analysts are invited to have communication with the issuer team separately from connected analysts but in a manner that allows unconnected analysts to have access to all information provided to connected analysts. In this case, connected research may be published no earlier than seven days after the publication of the prospectus or registration document.
The Guidance sets out the practical steps for prospective issuers and the syndicate banks to take when inviting a range of unconnected analysts (being at least those who are on the Unconnected Analyst list) to communicate with the issuer team pursuant to either Option I or II. The processes for both Options are designed to ensure that connected and unconnected analysts have equal opportunities to engage with issuers and have access to the same information. Note that the process for Option II allows issuers to opt to deliver information to unconnected analysts in person or via a website.
What must unconnected analysts do if they wish to take part in an IPO?
Unconnected analysts wishing to engage with the issuer team under either of the Options will be required to confirm that they will agree and comply with the 'Market Standard Research Guidelines' set out in Appendix I of the Guidance. These include agreeing to:
- keep the IPO confidential until it is announced;
- be bound by the same geographic restrictions relating to the distribution of research prior to the completion of the IPO as connected analysts;
- not publish their research until the relevant dates that connected analysts are permitted to publish their research under Options I or II;
- use reasonable endeavours to publish research, wherever possible, prior to the publication of the price range prospectus, or in the case of a tripartite prospectus, the securities note and summary; and
- acknowledge that there is an expectation that research will not be published in the seven calendar day period prior to pricing.
The Guidelines also set out a disclaimer which must be applied to any research relating to the issuer or its group published between accessing the information and the IPO's completion.
What is the impact?
The Guidance plays a key role in supporting the market's 'infrastructure' for the effective application of the new COBS rules. Prospective issuers and IPO advisers are provided with clear and practical steps on how to involve unconnected analysts in the IPO process and this certainty should facilitate deal execution as the market navigates its way through the new regime.
Whilst the new rules and Guidance pave the way for an emerging market in independent research, it remains to be seen whether the changes will result in an uptick in demand amongst investors, particularly on smaller deals and taking into account the other recent pressures on the research market imposed by MiFID II legislation. In any event, the removal of these barriers to entry will create an even playing field for connected and unconnected research analysts - allowing the market to properly assess how much value is placed on research by investors when making their investment decisions.