As part of the UK government’s package of Edinburgh Reforms announced in December 2022, HM Treasury published a draft statutory instrument setting out a new regime for public offers and admissions to trading on UK public markets.  Under the proposed new regime, the Financial Conduct Authority (FCA) will have an enhanced role in regulation and a greater discretion on whether and how to set requirements for a prospectus for issuers seeking admission to trading.

The FCA has published the first four in a series of engagement papers, which are intended to reshape regulation to better meet the needs of issuers and investors. Three of those papers are relevant to the prospectus regime in relation to equity capital markets, and consider admission to trading on a regulated market, further issuances of equity on regulated markets and the new proposed category of protected forward-looking information. We consider some of the key issues arising from these three engagement papers below.

1. Admission to trading on a regulated market

The FCA requests views on when a prospectus should be required for admission to trading on a regulated market, and when exemptions should apply. The FCA’s starting point is that the requirement for a prospectus should remain for issuers seeking admission to trading of securities on a regulated market.

The FCA proposes to:

  • Carry forward into the new regime an exception from the requirement to produce a prospectus for takeover transactions. It will be clarified that the takeover exception applies to acquisitions that are affected by schemes of arrangement.
  • Retain the requirement for a prospectus for all admissions to regulated markets and for readmissions following a reverse takeover.
  • Retain the exception for transfers between regulated markets.
  • Mirror the current requirements of the UK Prospectus Regulation in relation to “excluded securities”. 

Content requirements

The new regime will give the FCA rule-making powers that will cover the content requirements for a prospectus, allowing greater discretion to better tailor the content.

The FCA sets out some alternative proposals and invites views in relation to the following areas:

  • The requirement for and contents and format of the summary.
  • Whether any changes should be made to the financial information requirements in the prospectus.
  • Whether incorporation by reference should be made mandatory, and whether the FCA should consider extending forward incorporation by reference.
  • Whether more specific requirements for environmental, social and governance (ESG) disclosures should be specified (ie aligned to those for the annual report) to ensure investors receive reliable and accurate information on ESG matters in the prospectus.

The format of the prospectus

The FCA is minded to transpose the current format requirements of the prospectus for admissions to trading on a regulated market into its Handbook as a starting point for the new regime, due to investor and issuer familiarity. However, the FCA is interested in views about whether and how it might make changes or improvements to the current format at a later point or whether more urgent changes are needed as part of transposition.

The FCA also seeks views on the following:

  • In the light of the low uptake by SMEs of growth prospectuses, whether this option should be removed.
  • Whether it is useful to continue to allow issuers to use Universal Registration Documents, given the very low usage in the UK of such documents.
  • Whether or not the FCA should allow issuers to publish a voluntary prospectus, and if so, whether such prospectus should be approved or validated.

Rules and rights relating to a prospectus

The FCA’s initial view is not to change the current regime for responsibility for a prospectus but it is interested in views on the issue.

The FCA also seeks views on shortening the period that an IPO prospectus is available to retail investors, the period of validity for a prospectus and whether or not it should change the process of FCA approval for a prospectus.

2. Further issuances of equity on regulated markets

The FCA’s starting assumption is that a prospectus should not be required for further issuances of equity securities admitted to trading on regulated markets, unless there is a clear argument that to do so is necessary for investor protection, considering other existing disclosure requirements on issuers. The FCA therefore sets out possible ways of scaling back current requirements, setting a threshold for requiring a prospectus and what document should be required if the FCA does not require a prospectus.

Reduced requirements for further issuances

The FCA does not believe that generally there is a lack of transparency in the market (to justify the need for a prospectus) in the case of a further issuance, given that investors can see the performance of securities in the market, and will benefit from periodic financial reporting and event driven announcements under the UK Market Abuse Regulation. However, it notes that there may be certain cases of information asymmetry, for example in the case of an issuance that represents a significant proportion of additional shares compared to existing share capital.

Setting a threshold for requiring a prospectus

In terms of requiring a prospectus only when an issuer undertakes a transaction of a certain percentage of the existing share capital, the FCA considers that it is unlikely that it will be able to determine what is an optimum level of such a threshold based on a quantitative analysis. However, it can make an indicative assessment of what may work best based on the interaction between the level of transparency for investors without a prospectus requirement, the level of risk to investors and other potential effects of an issuance on investors.

The FCA notes that the reasons for the issue can also be indicative of the level of risk, for example capital raising for a rescue funding or refinancing to bolster the balance sheet may present additional risks. Where investors are facing particular risks, there are arguments that it is appropriate that they get additional information and assurance around this information through publication of a prospectus.

What document should be required below a relevant threshold?

The FCA is considering whether to:

  • Leave it to issuers to decide on the type of offer document that they may choose to provide for investors below the threshold for a prospectus.
  • Prescribe a particular type of offer document below the threshold for a prospectus. This could include setting a requirement that issuers publish an announcement via a Regulatory Information Service within a week of the offer or adapting a Cleansing Notice type document used in Australia for UK requirements.

In connection with the above, the FCA:

  • Invites views about whether and how it may tailor requirements to take pre-emption into account.
  • Notes that issuers may be looking to make an issuance in more than one jurisdiction, and changes to the UK regime should not create additional obstacles or unnecessary documentation.
  • Notes the need to consider the potential for greater participation of retail investors.
  • Could prescribe minimum content requirements to make it easier for investors to access the information they need, for example, by requiring links to recent disclosures that issuers may have made under the UK Market Abuse Regulation and to their most recent financial information published on the National Storage Mechanism and information about the securities being issued.
  • Could set requirements to include a working capital statement where the issuance is to finance a major project (but is below the threshold for a prospectus).
  • Is considering whether the ‘alternative’ document should be reviewed by the FCA.

The FCA also sets out how it might develop options calibrated across a number of different permutations of the scale of the issuance, conditions it may set on issuers and the type of document or prospectus required.

3. Protected forward-looking statements

The FCA notes that forward-looking statements, such as projections of future profitability, are useful for investors when making investment decisions. The existing prospectus regime, however, has a negligence liability standard and reverse burden of proof that may deter issuers from including forward-looking statements in their prospectuses.

To encourage companies to include forward-looking statements in prospectuses and, therefore, provide investors with more useful information on which they can base their investment decisions, the government intends to reduce this deterrent by establishing a recklessness/dishonesty liability standard, with the burden of proof on investors, for certain categories of forward-looking statements in prospectuses that will be specified by the FCA's rules.

Regulations will create a concept of "protected forward-looking statements" (PFLS) which will be defined by the FCA, and which will be subject to the amended liability standard.

This paper goes into quire a lot of detail as to what PFLS might include and how the concept would work in practice, but in essence, it sets out the FCA’s initial considerations regarding the rules as to what types of information can be considered PFLS, any conditions as to how it is prepared, and how it is presented within a prospectus.

Next steps

The FCA welcomes written responses via email to the questions raised in the engagement papers by 29 September 2023.

The FCA will then provide feedback on the key points raised and will then work on developing specific rule proposals for consultation during 2024.