New rules governing the availability of information during an IPO have been announced by the FCA, which will take effect on 1 July 2018. Under the new rules a prospectus or registration document must be published before any connected research is released and providers of unconnected research must be given access to the issuer’s management.
The FCA has published a policy statement, “Reforming the availability of information in the UK equity IPO process“ (PS17/ 23), which includes amended Conduct of Business Sourcebook (COBS) rules. This follows a FCA consultation launched in March 2017 (CP 17/5), in which the timing, sequencing and quality of information provided to market participants were identified as areas for improvement in the equity IPO process. The proposals have been implemented in substantially the same form as set out in CP 17/5.
The main objectives are to restore the centrality of the IPO prospectus as the main source of information to investors and to increase the quality and amount of unconnected analyst research available to investors. Specifically the new rules will:
- ensure issuers publish a prospectus (or registration document) earlier in the IPO process than is currently the case;
- prevent connected analysts from having access to the issuer’s management earlier than (or on a preferred basis to) unconnected analysts; and
- reduce the scope for conflicts of interest that may arise when connected research on issuers is produced by banks who are also pitching for underwriting or placing mandates on the IPO.
Who do the changes affect?
These changes affect banks providing both underwriting / placing and research services on IPOs (and in the case of COBS 12, secondary issuances).
The burden of compliance in an IPO will be placed on the bank rather than the issuer, including detailed record keeping requirements as to the chronology and content of analyst meetings to demonstrate an even playing field for all analysts, whether connected or unconnected. The FCA has indicated it will work with trade associations to develop industry guidelines on how information flows and meetings should be organised by banks.
For the time being, IPOs on AIM and other multi-lateral trading facilities (MTFs) will not be affected by the COBS 11A changes, but will be subject to the restrictions in COBS 12. However, the FCA encourages banks to apply COBS 11A processes to larger AIM IPOs as a matter of best practice, but acknowledges that analysts are unlikely to produce unconnected research for smaller transactions (indeed MiFID II’s impact on analyst fees may apply further pressure here).
The question of whether the rules should be extended to IPOs on MTFs will be reconsidered in the future, but the FCA will allow at least one year from the date the new COBS provisions come into force before conducting such an assessment.
COBS 11A (early publication of prospectus and restrictions on connected research)
Under a typical IPO process, only connected analysts (employed by the underwriting or placing bank) are permitted to attend management meetings. After production of their research and expiry of a blackout period, a pathfinder prospectus is made available to selected investors during the marketing process. The final prospectus is only published at the end of the marketing process when the price is fixed.
Changes to COBS 11A will instead require publication of either a registration document or prospectus at the start of the IPO process, following which either:
- connected research may not be published for seven days, during which period unconnected analysis are given exclusive access to management and the opportunity to publish their research; or
- connected research may be published the following day, but only if prior to publication of the prospectus/ registration document, unconnected analysts have had equal access to management and information.
This is to avoid investor’s primary source of information in an IPO process being connected analysts research which creates a risk of bias, or a perception of bias, in favour of the issuer and its prospects.
Most investment bank respondents in the consultation expressed a preference for the first route to avoid compromising the confidentiality of the IPO before the IPO is made public. It was also felt by some analysts that the quality of their research would be improved if they had seen the prospectus/ registration document before meeting management.
Most bank respondents indicated that where a standalone registration document was published before the release of connected research, they would prefer a tripartite prospectus to be published as a single document at the beginning of marketing, containing a price range, rather than a separate summary and securities note.
The FCA has provided guidance on some practical implications of the early publication of a standalone registration document including:
- Its preparation and publication at the start of the process will not require a sponsor to be appointed, but a sponsor will be required once later application for approval of the full prospectus is made.
- The FCA will provide a preliminary view on eligibility of a new applicant based on information provided to it at the date of the registration document, although eligibility will only be confirmed at the date of approval of the final prospectus.
- Updates to the registration document (such as changes to financial information) can be included in the securities note or in the final prospectus.
- A standalone registration document satisfying only the minimum Annex 1 disclosure requirements will generally not constitute a financial promotion or an advertisement.
COBS 12 (restrictions on interactions between analysts and management during the period in which banks pitch for IPO mandates)
New guidance is being added to COBS 12 to restrict any interactions between analysts and issuers (and their management and representatives) during the period when the bank employing the analyst is pitching for the IPO mandate.
The new guidance clarifies that the FCA would consider “participating in pitches for new business” to include where an analyst interacts with the issuer’s management, shareholder or corporate finance advisers until the firm has accepted a mandate to carry out underwriting or placing services for the issuer and the firm’s position in the syndicate has been contractually agreed.
This is expected to remove the risk, or perception of risk, that the objectivity of the analyst is compromised. The FCA has not given definitive guidance on what starts the relevant period, but the rules allow for interactions when the analyst is unaware of a pitch taking place, subject to banks’ existing obligations to prevent or manage conflicts of interest. The FCA has acknowledged that engagement letters may not be signed until very late in the process and that the relevant period would end when the placing or underwriting mandate and scope is “confirmed in writing” between the issuer and the bank.
These COBS 12 changes will apply to IPOs on AIM and other MTFs, and will also apply to secondary issuances.