In December 2022, HM Treasury published an illustrative draft statutory instrument in connection with proposed reforms of the UK’s regime for public offers and admissions to trading. An illustrative policy note was also published at the same time which sets out how HM Treasury may use powers that are established in the Financial Services and Markets Bill (‘FSM Bill’) to change to a comprehensive FSMA model for regulating the UK prospectus regime.
The draft statutory instrument will continue to develop before final legislation is laid before Parliament following Royal Assent of the FSM Bill. The FSM Bill had its second reading in Parliament on 10 January 2023 and is expected to receive Royal Assent in early 2023 (with the final statutory instrument following later in 2023).
This article provides a summary of the background to the proposed changes to the prospectus and public offers regime and highlights some of the key features set out in the illustrative statutory instrument and policy note. The changes mean that the FCA will be replacing the prospectus regulation rules and is being given more freedom to rewrite the landscape for the offer of securities to the public and in respect of listings. This is likely to have a big effect on the listing process but also will impact mini bonds significantly. These will be much more restricted with the aim of pushing retail investors towards regulated platforms by allowing public offers through those platforms such as securities based crowdfunding platforms. There is also to be a clear split between offers to the public and admissions to trading with the FCA developing its own rules for each as opposed to the current framework where they are regulated together but with different exemptions.
A large proportion of the current UK regulatory approach to financial services is based on legislation prescribed by EU (‘European Union’) prior to the UK’s exit from the EU. When the UK left the EU at the end of 2020, law makers opted to incorporate EU law into English law with only the changes that were needed to ensure that the rules continued to work in a UK-only context such as removing or replacing references to the EU and European institutions in legislation.
Prior to the UK’s EU exit, the government had commissioned Lord Hill to carry out an independent review of the UK listing regime with a view to proposing a range of recommendations for how to boost the UK as a destination for IPOs and optimise the capital raising process for companies seeking to list on the main UK markets. The review obtained input and evidence from market participants and when published in March 2021 included a range of recommendations for how to boost the UK as a destination for IPOs and optimise the capital raising process for companies seeking to list on the main UK markets. The key recommendation was that HM Treasury should conduct a fundamental review of the prospectus regime so that it better fits with both the breadth and maturity of UK capital markets and the evolution in the types of businesses coming to market as well as those that are already listed.
The government accepted Lord Hill’s recommendations and in July 2021 launched a consultation on its proposals to address them. In March 2022 the government announced the results of this consultation and its conclusions. These included a decision that the UK listing regime currently contained in the UK Prospectus Regulation needed to be replaced with the aim of making regulation in this area more agile and effective; facilitating wider participation in the ownership of public companies and delegating a greater degree of responsibility for the regime to the Financial Conduct Authority (‘FCA’). It was decided that these changes would be implemented under the powers being taken forward in the new FSM Bill that was introduced to Parliament in July 2021 and is currently working its way through the House of Lords and expected to come into law in 2023.
Key changes proposed
On 9 December 2022 the government released the draft statutory instrument (Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023 (‘POAT Order’) containing details of the new prospectus and public offer regime, which it is anticipated will replace the existing Prospectus Regulation Rules. The main elements of this legislation are as follows:
- New FCA power to make rules in respect of designated activities: the FSM Bill introduces the concept of ‘designated activities’ which are activities set out by the Treasury (in statutory instrument) under the power in a proposed new section 71K of the Financial Services and Markets Act 2000 (‘FSMA’). Under POAT Order the FCA has power to make rules in respect of designated activities, which hopefully should enable the FCA to be more dynamic in their rulemaking rather than needing to wait for legislative changes to be implemented. This is a shift of focus from the previous regime which centred around the general probation of ‘Regulated activities’ being conducted without FCA authorisation which gave the FCA control over who conducted certain activities and an obligation to monitor those firms’ compliance with the minimum threshold conditions. The POAT Order specifies that public offers of relevant securities, admissions to trading on regulated market and admissions to trading on primary MTF are designated activities and we will look at each of these below. However, it should be noted that the FSM Bill therefore provides the government with an ability to set specific ‘have regard’ that the regulators must consider when making their rules in specific areas of regulation. This means that the government can seek to use the FCA to implement its policy but fortunately this cannot interfere with the FCA’s broader supervisory responsibilities.
- A new public offer architecture: the government is concerned that the existing prospectus regime which is designed to protect retail investors places a disproportionate burden on issuers. The government wishes to create a regime which facilitates the offers of securities to a wide range of investors. Under the new regime the prohibition in s. 85(1) FSMA on public offers and applications for admission to trading is being modified so that the details of when securities can be offered to the public (including in connection with a list) are contained in POAT Order (including exemptions such as where the securities are admitted to trading on UK markets or offered by means of regulated platforms). These exemptions were previously contained in the Prospectus Rules and the exemptions have not changed a great deal although the minimum denomination exemption has changed from €100,000 to £50,000 and the amount of the total consideration exemption has been left blank (it is currently €8million). The principal exemptions will apply to offers where securities are admitted to trading on UK markets or offered by means of regulated platforms.
- General prohibition on public offers of securities: this will be created by amending the criminal offence contained in s. 85(1) FSMA. There will then be exemptions from this prohibition. The principal exemptions will apply to offers where the securities are admitted to trading on UK markets or offered by means of regulated platforms.
- Minibonds brought within regime: previously so called minibonds (high interest debt instruments usually issued by private companies to retail customers) were outside of the prospectus regime as they were not ‘transferable securities’. The new draft POAT Order brings mini bonds within the definition of ‘Relevant Securities’ and makes the public offer of relevant securities a designated activity and the FCA will create detailed rules for the offering of regulated securities.
- Admissions to trading on Regulated Markets: the current Prospectus Regulation requires publication of a prospectus (unless there was an available exemption) prepared in accordance with the Prospectus Rules stipulated by the FCA which were based on the EU requirements for prospectus content. In the new regime the concept of a prospectus is being retained but the preparation is to be in accordance with ‘Admission Rules’ which will be made by the FCA and will replace the prospectus regulation rules. These rules will specify when a prospectus is required, what a prospectus should contain and address the manner and timing of validation and publication. FCA’s rulemaking responsibilities will also cover other matters that currently sit in the Prospectus Regulation.
- Admissions to trading on Multilateral Trading Facilities (MTFs) operating primary markets: the operators of MTFs currently write the rules for their own exchanges. Under the POAT the FCA are being given rulemaking powers in respect of admission of securities to trading on an MTF such as AIM or the Aquis Growth Market and how such offerings are advertised. These powers include an ability to force operators of certain MTFs to include in its rule’s provisions requiring the issuer of transferable securities to publish a document described as a prospectus. These admission documents will therefore also be subject to the statutory compensation remedy for prospectuses.
- Profit forecasts to be made more practical: making profit forecasts (which is construed quite widely) is currently rare as the liability related to such statements is judged on a negligence standard and therefore it is prudent for an issuer to obtain comfort on the forecast from its accounting advisors before publication which is usually prohibitively expensive. The new regime will introduce a different liability threshold (based on fraud and recklessness) for certain categories of forward-looking information in prospectuses, which means the liability profile of making such statements is much lower.
- Offers of securities not admitted to trading: the new regime will continue to allow companies to offer securities to the public without having them admitted to a securities market. The government is reforming the requirements for such offers, making it easier for companies to raise capital. The current requirement for a prospectus to be published in respect of offers over €8million is to be removed and instead private companies will be able to offer securities to the public provided it is done via a ‘public offer platform’. It is intended that the operation of these platforms will be a new regulated activity and the FCA will have power to determine the requirements that will apply to them. Where an offer is not otherwise exempt from the prohibition on public offers and where its total value is: above a certain threshold (still to be determined), companies will be required to use a public offer platform.
The overall effect of the illustrative statutory instrument is intended to delegate a greater amount of responsibility to the FCA to establish a regime that is designed for the UK markets and reflects the difference between public offers and admissions to trading. The full set of reforms will take effect once the FCA has consulted on and implemented rules under its expanded responsibilities pursuant to the FSM Bill.