What can we learn from the FCA’s latest engagement papers, and how do they compare to the EU’s recent proposals?
As part of its update of the public offer and admission to trading regime (i.e. the UK’s rules on when a prospectus will need to be published and what it will have to include), the FCA has started to publish a series of engagement papers to shape discussions with market participants. So what can the first round of papers tell issuers (of shares) about the FCA’s direction of travel?
What about IPOs? The first engagement paper deals with admission to trading on a regulated market. The UK reform process follows the December 2022 publication of EU market proposals through the draft EU Listing Act; while in some areas the FCA is proposing similar measures, it has not replicated unpopular elements of the EU reforms, with no suggestion of a maximum prospectus length or a specified order for disclosures, and no firm view on making incorporation by reference mandatory. It looks like the requirement for an operating and financial review (the OFR or “MD&A”) will be retained.
While the FCA’s starting point is that it should broadly maintain existing UK Prospectus Regulation requirements, the paper does pick out a number of areas where the FCA may consider incremental changes.
- Summary: Should a summary still be required, and if so should the current prescriptive requirements be relaxed?
- Historical financial information: The FCA is minded to keep the current requirements, including those in relation to ‘complex financial histories’, significant financial commitment and pro forma financial information, as it considers it necessary for investors to make an informed assessment. It is seeking views on published quarterly financial information recognising, however, that inclusion may act against investors taking a longer-term view of the securities. Changes to prospectus disclosure may also be needed because of the FCA’s proposed relaxation of the financial track record eligibility requirement that currently applies to the premium segment.
- ESG: The FCA is considering whether to introduce specific requirements for ESG disclosures, currently left to issuers to determine under the general ‘necessary information’ test along with enhanced expectations for disclosure of risk factors. This is an area that the EU is also considering, with a proposal for revised disclosure schedules to take into account the climate-related and sustainability reporting obligations of issuers.
- Shortening six-day rule: The FCA has suggested shortening to three days the current rule requiring a retail IPO prospectus to be made available six days before the end of the offer period. This welcome proposal to increase flexibility for IPO candidates seeking to include retail investors follows a recommendation of the UK Secondary Capital Raising Review and would align the UK with similar proposals made in the EU Listing Act.
The FCA has not proposed any change to prospectus responsibility or the current format (although it may remove the little-used URD and growth prospectus options). There is also no current suggestion to make any changes to the advertisement regime or COBS 11A rules on the sequencing of information in an IPO as part of this process, although the FCA is interested in views about whether it should look to do so.
What about takeovers? The first engagement paper also covers admission prospectus exemptions, notably discussing the documentation that should be required when a listed issuer issues shares as consideration for a takeover or merger. The FCA is considering only requiring an admission prospectus in these circumstances where the transaction amounts to a reverse takeover; for smaller transactions, the FCA is considering what form of documentation should be required, including the question of alignment with overlapping Takeover Code requirements, and whether the FCA should have a role in approval.
What about secondary offers? The second engagement paper sets out the FCA’s starting assumption, following the UK SCRR, that a prospectus should only be required on a secondary issuance by an existing listed issuer if it is necessary for investor protection.
- Change from status quo: The FCA does not see the current scope of exemptions and form of simplified prospectus as a credible policy option. It is accordingly seeking views on when a prospectus should be required, and the steps that should be required of issuers on exempt secondary issues.
- Eligible issuers: The FCA may – in line with current qualification requirements for the simplified prospectus – require that issuers must have been listed for 18 months in order to benefit from any admission prospectus exemption for a secondary offer.
- Size and other factors: One possible framework, based on the size of an issue, is no offer document for an issuance below 50% of existing share capital, an offer document with prescribed content for those between 50% and 75%, and a “full” prospectus only for those of 75%+. Other options on which views are sought include distinguishing pre-emptive and non-pre-emptive offers, and a potential requirement for retail participation. This is an area in which the changes currently under consideration by the FCA are more far-reaching than equivalent EU proposals, which anticipate a prospectus exemption for issues of up to 40%, with no alternative disclosure document requirements.
- Working capital statement, links to existing information: Where no prospectus is required, the FCA is considering whether it would be of benefit to require an issuer to prepare a working capital statement (that may or may not be subject to FCA review), and whether to require issuers to publish collated links to relevant UK MAR and historical financial information. Although FCA proposals in this area are quite open in anticipation of feedback, there is no express mention of the proposals made by the UK SCRR around enhancement of annual report disclosure for use in conjunction with offer documentation.
What is changing for forward-looking statements? A new element of the new regime is the introduction of a category of protected forward looking statements (PFLS) which will be subject to a reduced liability standard (recklessness, rather than the negligence standard that applies to all other prospectus content). This is not an area covered by the EU Listing Act, with the EU unable easily to harmonise the civil liability regimes across its member states. The third engagement paper sets out the FCA’s thinking on how the PFLS requirements should be applied.
- Definition: The FCA is considering whether only to specify exclusions from the definition, or whether to impose either broad or prescriptive criteria. One possibility mentioned in the paper is the use of criteria similar to those in IAS 1, as used in current UK Prospectus Regulation guidance for profit forecast disclosure.
- Interaction with mandatory content requirements: The FCA’s starting assumption is that PFLS should be optional and that the definition should not include most mandatory information requirements. In particular, the lower PFLS liability standard will not apply to the working capital statement, profit estimates (although profit forecasts could be covered) or expert statements. For other existing forward-looking prospectus content the FCA sees some benefit in allowing overlap where it might encourage more fulsome disclosure, for example around business plans and strategies, and proposes to be permissive around outlook guidance for earnings, revenue, capex or other financial metrics. PFLS may also have a role in encouraging elaboration on sustainability plans.
- Presentation: In addition to general disclaimer language the FCA is considering whether for certain types of PFLS it should require that key assumptions and inputs are included, with a distinction made between those within and without director control.
What next? Overall, the papers published so far reflect the determination of the FCA to establish an open dialogue with market participants. The FCA has noted strong investor protection and market effectiveness arguments in favour of retaining existing UK Prospectus Regulation requirements, but the papers show a path to using the new regime to both reduce existing frictions and introduce new flexibilities where this will benefit issuers, investors and the market as a whole.
This round of engagement papers also included a further paper on non-equity securities; the next set – covering public offer platforms and admissions to ‘primary’ MTFs – are expected in early June. The FCA plans to engage with industry focus groups over the summer and then to publish an autumn feedback summary. A formal consultation paper on the new rules will follow, likely in early 2024, after changes to the FCA's reforms to the listing regime are finalised later this year.