UK Listings Review: The FCA's "Engagement Papers" and the new proposed UK prospectus regime

Background

HM Treasury commenced the current revamp of the UK prospectus regime in 2019, appointing Lord Hill of Oareford CBE to chair a review to make sure the UK remains one of the most attractive places to list and grow high-quality innovative companies. Lord Hill and his team were to look, amongst other things, at the rules governing how companies raise equity capital on UK public markets and make recommendations to optimise the process.

Lord Hill's findings were published on 3 March 2021. These included a number of recommendations, including that there should be a fundamental review of the prospectus regime so that it fits better 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. On 1 July 2021, HM Treasury published a consultation on the UK prospectus regime and this was followed, on 1 March 2022, by HM Treasury's confirmation that it intended to move forward with those proposals largely as consulted.

In December 2022, HM Treasury published a Policy Note explaining how it intended to use its new powers - now set out in the Financial Services and Markets Act 2023 – to repeal the current prospectus rules, based on EU law, and replace them with a regulatory framework using the new Designated Activities Regime (DAR). The DAR will enable the Financial Conduct Authority (FCA) to regulate certain activities connected to fundraising and admission to trading, in parallel to the existing concept of "regulated activities" for which FCA authorisation is usually required, and will include making certain advertisements and other disclosures around a public offer of securities. In general, it is envisaged that the new prospectus regime will delegate a significant amount of responsibility to the FCA.

The new public offer architecture

The new regulatory regime for public offers will have some fundamental differences to the current legislative framework, including the following:

1. There will be a general prohibition on public offers, with exemptions from this prohibition (such as for offers below £5 million in aggregate and, as today, offers to "qualified investors"). The principal exemptions will apply to offers where the securities are admitted to trading on UK markets or offered by means of regulated platforms.
2. Whilst the concept of a prospectus will be retained as an important part of regulating the admission of securities to trading on UK markets, the FCA will have responsibility for specifying when a prospectus is needed, what it should contain and the manner and timing of publication – see our comments on FCA Engagement Paper 1 below.
3. Where appropriate, admission documents for markets such as AIM (multilateral trading facilities) may be treated, under new rules to be made by the FCA, as prospectuses (an "MTF admission prospectus").
4. A different treatment of some "forward-looking information" – see our comments on FCA Engagement Paper 3 below.
5. A revised approach for offers to the public which are not combined with a stock exchange listing. The current €8 million threshold, which is seen as restrictive, will be abolished; and offers of any size will be permitted through a "public offer platform" (subject to exceptions for certain small offers).
6. Certain "non-transferable securities", such as "minibonds", will be brought within the scope of the regulation of public offers.

The necessary changes to primary legislation will, in part, be made through The Public Offers and Admissions to Trading Regulations, a draft of which has been published (the "draft Regulations").

The FCA's "Engagement Papers"

In May 2023 the FCA published a series of "Engagement Papers" on the new "Public Offers and Admission to Trading" regime. These papers set out the FCA's emerging policy thinking on how the FCA may use its rule-making powers under the new regime, including so that admission to a regulated market is treated separately from offers to the public. Feedback on these papers is intended to inform further development of the proposed rules, on which the FCA proposes to consult formally in 2024.

The FCA has asked for written responses by e-mail to the questions raised by the engagement papers to be submitted to the FCA by 29 September 2023.

Admission to trading on a regulated market (Engagement paper 1)

As now, under the new regime the concept of a prospectus will be retained as an important part of the regulation of securities admitted to trading on regulated markets. However, the FCA will be given enhanced rulemaking responsibilities to cover a variety of matters connected to the admission, or proposed admission, of securities to trading on a regulated market. The FCA will have power to decide when a prospectus is required. New FCA rules may cover also topics including procedure and circumstances governing notification to the FCA, prospectus publication requirements, form and content of a prospectus, procedures surrounding approval or validation of a prospectus and periods of validity of a prospectus.

The FCA considers that there are strong arguments for retaining the bulk of the current prospectus requirements on issuers seeking to have transferable securities admitted to trading on regulated markets, given the market's familiarity with them. This may, in turn, mean that the contents requirements for AIM admission documents under the new regime are also, as now, based largely on the corresponding requirements for prospectuses. In this Engagement Paper, the FCA seeks views on whether its proposed approach – retaining most current requirements – is right.

In the Engagement Paper, the FCA also proposes (amongst other things) that, subject to views received:

1. The current concept of a "growth prospectus" should be abolished, given the apparent low uptake to date of growth prospectuses.
2. The existing framework for responsibility for a prospectus should be retained.

Further issuances of equity on regulated markets (Engagement paper 2)

The draft Regulations will give the FCA the opportunity to tailor its approach to the needs of issuers and investors in the specific context of admission to market and capital raising. The FCA will have discretion regarding whether or not to require a prospectus and to interpret what "necessary information" needs to be contained in such a document.

The Secondary Capital Raising Review, as well as previous engagement initiatives, have found that the current requirements to prepare and publish a prospectus and have it vetted and approved may create frictions for issuers in their capital raising, stemming from the length and potential unpredictability of the process, and reduce the ability of issuers to raise capital quickly and at scale, in a manner calibrated precisely to their financing needs.

In this Engagement Paper, the FCA considers the starting assumption that it should not require prospectuses for further issuances for equity securities admitted to trading on regulated markets unless there is a clear argument that to do so is necessary for investor protection, taking into account other existing disclosure requirements on issuers. The FCA wants to test this assumption with stakeholders and consider in broad terms how this may work.

Accordingly, the FCA is asking, amongst other things:

1. Should the FCA be more ambitious in seeking to reduce requirements for a prospectus for further issuances (as compared to share issues on an IPO), not least because the FCA believes that, in the case of an issuer which is already listed, there is less risk of an imbalance in information as between issuers and investors?
2. Whether market participants share the concern (see the reference to the Secondary Capital Raising Review above) that the current requirements may create frictions for issuers in their capital raising?
3. Should an exemption from the need for a prospectus be available where the size of a new issue of securities is below a certain percentage of an issuer's existing capital (similar to the current 20% Main Market exemptions)?
4. Should issuers be able to publish a full prospectus even where the new rules would allow them to publish a simplified prospectus?
5. Where an offer of securities falls below a certain threshold, should a different type of document, other than a prospectus, be required? For example, the Secondary Capital Raising Review suggested that an Australian-style "cleansing notice" might be appropriate. Whether or not an offer is pre-emptive may also influence the thinking here, as well as the availability of information published pursuant to MAR.

Protected forward-looking statements (Engagement paper 3)

Forward-looking statements, such as projections of future profitability, can obviously be useful for investors when making investment decisions. However, the FCA recognises that the current prospectus regime sets a liability standard for the content of a prospectus that may deter issuers from including forward-looking statements in these documents.

The new regime will create a concept of protected forward-looking statements (PFLS) that will be subject to a higher liability standard that is intended to encourage companies to include forward-looking statements in prospectuses. In this paper the FCA sets out its initial thinking on the rules it will make to specify what types of information can be considered PFLS, any conditions for how it is prepared, and how it is presented within a prospectus.

It is proposed that PFLS will be subject to a recklessness/dishonesty liability threshold, further set out in Part 2 of Schedule 2 to the draft Regulations. This would be higher than today's negligence-based standard, which also often puts the onus on the issuer to show why it thought a particular statement was fair and reasonable. This new approach will need to be balanced, for investors, with appropriate warnings.

The FCA is considering the scope of PFLS. A starting point could be that any information required to be included in a prospectus or admission document under the applicable rules should not be PFLS, with possible exceptions for certain statements around, for example, the description of future plans for the business and climate-related disclosures. The FCA also thinks that the "working capital statement" should not be a PFLS, and nor should the special disclosure regime for mineral companies and other specialist issuers. Views are sought on whether, otherwise, the scope should be open-ended or defined in some way, perhaps by reference to similar rules for the preparation of financial accounts.