HM Treasury: UK prospectus regime review – Consultation
On July 1, 2021 HM Treasury published a consultation document which takes forward three of the recommendations made by Lord Hill in his March 2021 UK Listings Review, including that the Government carry out a fundamental review of the UK prospectus regime.
In the consultation the Government sets outs how it proposes reviewing and potentially replacing the prospectus regime the UK has inherited from the EU. In doing so it is responding to Recommendation 7 of the UK Listings Review. The consultation document also represents the Government's response to Recommendation 8 of the UK Listings Review concerning the recognition in the UK of prospectuses drawn up in other jurisdictions. It sets out how it is proposed to give the Financial Conduct Authority (FCA) the discretion to recognise overseas approved prospectuses should it choose to do so in order to facilitate more secondary listings. Amendments to the liability regime that applies to prospectuses are also proposed in order to encourage companies to include more forward-looking information in prospectuses. This in line with Recommendation 9 of the UK Listings Review.
Reform of UK prospectus regime – overall approach
It is proposed that there will be a new approach to admissions to trading and to public offers of securities, with these being dealt with separately:
- Admissions to trading – Currently section 85(2) Financial Services and Markets Act 2000 (FSMA) prohibits requesting admission to trading on Regulated Markets without first having published an approved prospectus. However, an application not supported by an approved prospectus where required could simply be refused by the relevant market and the consultation notes that this may be more proportionate. As a result, in parallel with the proposal for reform of the law on public offers of securities (see below), it is proposed to remove the section 85(2) prohibition and the FCA will be given new rule making responsibilities on admissions to trading on Regulated Markets. These would replace the Prospectus Regulation (which forms part of retained EU law in the UK).
- Public offers of securities - Section 85(1) FSMA makes it an offence to offer ‘transferable securities’ to the public unless an FCA-approved prospectus has been published. It is proposed that the section 85(1) prohibition on public offers of securities and the accompanying sanction applicable to non-compliant offers be retained. However, new exemptions for companies with (or applying to have) securities admitted to trading on stock markets of various types are proposed. Such exemptions would cover offers of securities admitted to trading on Regulated Markets or junior markets like AIM or the Acquis Growth Market. Exemptions for companies admitted to trading on overseas equivalents of Regulated Markets would also be introduced so that offerors of securities admitted to trading on stock markets or subject to an application for admission to a stock market would be exempted from rules governing public offers of securities.
New FCA powers on admissions to Regulated Markets
In looking at these new powers, a number of questions are raised. These include the following:
- What is the purpose of a prospectus when seeking admission to a regulated market? The UK Listings Review calls for careful consideration of the overall purpose of a prospectus. In this consultation, the Government argues it is a tool of securities market regulation but accepts that this raises the question of what regulators should use the tool for.
- When should a prospectus be required for an admission to a regulated market? It is proposed that the FCA be given discretion to determine whether or not a prospectus is required when securities are admitted to trading on UK Regulated Markets, including flexibility to establish rules or exemptions equivalent to Article 1(5) of the Prospectus Regulation, or to extend them should it deem it appropriate. It is also recognised that consideration of the purpose of a prospectus needs to encompass the issue of prospectuses for further issues.
- Recognition of prospectuses for secondary listings - The UK Listings Review recommends that the Government should consider the recognition of prospectuses drawn up under other jurisdictions’ rules as meeting UK requirements. The general approach proposed in the consultation is to give the FCA broad discretion to determine whether a prospectus is required in relation to an admission to trading on a Regulated Market. The FCA could use that discretion not to require a UK prospectus where a prospectus is published in another country. It is thought that this should be sufficient to enable the FCA to accept an overseas prospectus in certain circumstances should it deem it appropriate.
- Retention of provisions in statute – The Government’s initial view is that provisions that contribute to the establishment of the liability attaching to prospectuses should be located in statute. However, since the overall rationale for giving the FCA rule making powers is to make the regime agile and flexible, it is suggested that the main design principle should be that provisions are retained in statute only where strictly necessary.
Prospectus content and ancillary provisions
The consultation document considers issues around prospectus content including the following:
- The ‘necessary information’ test – The Government proposes retaining in statute an overall standard of preparation for a prospectus based on the existing ‘necessary information’ test, while acknowledging that what is ‘necessary information’ may vary depending on certain factors. However, amendments to better accommodate further issues and non-equity securities such as debt securities are being considered.
- Prospectus content - While retaining in statute the high-level standard of preparation applicable to a prospectus, the ‘necessary information test’, the Government proposes to give the FCA the responsibility to make detailed rules on content. This would enable the FCA to specify the component parts of the document should it wish to, as well as the detail of individual items of content. Similarly, the FCA would have discretion to determine how base prospectuses (used to launch issuance programmes for fixed income securities) should work or to establish the procedure for setting a final price in a price range prospectus. The FCA could also choose how to modify the content requirements for secondary issuances and could depart from the narrow approach currently contained in Article 14 of the Prospectus Regulation.
- Review and approval of prospectuses - The Government is minded to include in the revised regime an ability on the part of the FCA to require that the prospectus is approved by the FCA prior to publication. However, in looking at the question of whether the FCA should review the prospectus prior to approval and publication, the Government is minded to remove the requirement to review prospectuses and the FCA would have the flexibility to establish its own policy in this area.
The consultation document discusses reform of prospectus liability as it relates to forward-looking information (projections of future profitability of a company), and how reform could help to achieve the objective of improving the quality of information that investors receive. It considers the existing standard of liability in prospectuses and other standards of liability in UK law.
In light of this, the Government is considering applying the same 'recklessness standard' applied in relation to misleading statements by section 463 Companies Act 2006 and Schedule 10A (3) FSMA to forward-looking information in prospectuses. That standard is that a person ‘knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading’. To address omissions, it is also proposed that the standard applicable in section 463 and Schedule 10A(3) of FSMA be applied. That standard is: ‘knew the omission to be a dishonest concealment of a material fact.’ This reduction in liability from the section 90 FSMA standard that currently applies to prospectuses would apply only in relation to statements in a prospectus which project or predict a future state of affairs. It would not apply to statements of fact, namely any statement on the state of affairs at the date of the document or any statement of historic fact. Nor would it apply to the working capital statement in a prospectus. These would still be subject to the existing section 90 FSMA standard.
Where a company includes forward-looking statements and wishes these to be subject to the proposed new lower standard of liability for forward-looking information, additional warnings would be required, including that the information is explicitly identified as forward-looking information so there is inherent uncertainty as to whether the projection or prediction will prove to be accurate.
The consultation document sets out options for addressing companies whose securities are or will be admitted to trading on a multilateral trading facility (MTF), including SME Growth Markets (AIM and Aquis Growth Market in the UK), and it considers how alterations could also help to achieve the objective of facilitating wider participation in the ownership of public companies and removing disincentives that currently exist for those companies to issue securities to wider groups of investors.
Currently, a prospectus is not required on initial admission to an MTF unless a public offering occurs. Instead a document will be required by the MTF operator’s own rules. However, if a company on an MTF wants to make a public offering of securities a full prospectus is required. As a result, the Government has developed two options for addressing companies admitted to MTFs including SME Growth Markets which it seeks views on. The first, Option 1, is a simple exemption from the section 85(1) FSMA restriction on public offerings of securities. The second, Option 2 , is an exemption from section 85(1) plus a new MTF admission prospectus. Under Option 2, the exchange operating the MTF would be able to specify through its own rulebook the content of the ‘MTF admission prospectus’, together with procedures for ensuring it meets the requirements of the MTF. The FCA would retain oversight of MTF rules as it does now.
The scope of the UK’s public offering rules
In looking at the key elements of the UK's public offering rules, the consultation document includes the following proposals:
- Adding a new exemption from the public offer rules for existing holders of securities - This new exemption would have the effect of taking all rights issues, by all types of companies, outside of the restrictions imposed by the public offering rules. It would also exempt all share-for-share offers (or security for security offers) because only the existing holders can receive such offers.
- The 150-person threshold in the Article 1(4)(b) exemption in the Prospectus Regulation and the ‘qualified investors’ exemption – The Government believes that the overall package of proposals is sufficient such that there is no need to change these exemptions but seeks views on this.
- The Article 1.4(i) exemption for public offers to employees, former employees, directors and ex-directors – The Government seeks views as to whether this exemption works effectively.
Public offerings by private companies
The size threshold for an offer under which an offeror is exempted from the requirement to publish a prospectus is €8million. Research shows that the FCA approved very few ‘public offer only’ prospectuses (i.e. prospectuses issued in connection with a fundraising but with no admission to a stock market (of any type) between 2017 and 2020, while securities-based crowd funding has increased considerably. The Government notes that while the €8million threshold is intended to provide a level at which additional obligations apply to public offers, data appears to show that fundraisings over the threshold at which a prospectus is required are rare and while the exemption is intended to operate as the threshold, it is in fact operating more like a cap.
As a result, the Government is interested in looking at alternative options to the requirement that an offeror publish a prospectus where a private company offers securities which are not to be admitted to a stock market of any type. These include the following:
- Option 1 – requirement for the offer to be made through an authorised firm.
- Option 2 – requirement for the offer to be made through an authorised firm subject to a new bespoke permission.
- Option 3 – status quo option.
Public offers by overseas companies
The consultation document sets out three options for overseas securities being admitted to UK stock markets and views are sought on each:
- Option 1 - A status quo option with overseas issuers being able to extend an offer (in association with an admission of securities to an overseas stock market) into the UK provided an FCA-approved prospectus is reviewed and approved.
- Option 2 - A new deference mechanism which would provide a new regime of regulatory deference to replace the equivalence regime set out in Articles 29 and 30 of the current Prospectus Regulation. This would allow companies with securities listed on a non-UK stock market to extend an offer of those securities to the public in the UK, on the basis of offering documents prepared in accordance with the rules of that market’s jurisdiction. However, there would be no FCA review of the documents, and such a mechanism would consider investor protection on a wider and more holistic basis than is currently the case.
- Option 3 - No right to make a public offer into the UK.
In relation to overseas private companies, the Government considers the risks of cross-border public offerings in the securities of overseas private companies to be in a different category to those presented by listed companies. The Government is minded not to provide a facility enabling these companies to make public offerings into the UK, with the Qualified Investor exemption continuing to facilitate the access of UK institutional investors to overseas private equity markets.
The consultation closes on September 24, 2021.
(HM Treasury: UK prospectus regime review – Consultation, 01.07.2021)
HM Treasury: Wholesale Markets Review – Consultation
On July 1, 2021 HM Treasury published a consultation document setting out proposals for specific changes to the UK’s wholesale markets regime in light of the Wholesale Markets Review which was established to determine how the UK’s approach to regulating secondary markets needs to adapt following the UK’s withdrawal from the EU, and to ensure that the framework continues to cater for future challenges and opportunities.
This consultation is part of the Chancellor of the Exchequer’s broader vision to enhance the competitiveness of UK capital markets, while maintaining high regulatory standards and it follows the March 2021 UK Listings Review and the July 2021 consultation on the UK prospectus regime.
The consultation document includes a section on SME Growth Markets. The Government wants to explore whether a new class of trading venue with regulatory requirements tailored for smaller SMEs would increase their ability to access public markets, while preserving the high levels of investor protection that currently exist. For example, a new trading venue could be targeted at SMEs with a sub-£50m market capitalisation. A new category of venue could introduce a more proportionate framework of regulation for smaller SMEs, similar to the current MTF framework. The Government envisages this would require amendments to the UK version of the Market Abuse Regulation, a new offer document regime (likely formulated by market operator(s)), and the creation of eligibility criteria for a smaller subset of SMEs within the current MiFID II definition.
The rationale for a new venue or an additional segment on an existing platform would be to ensure appropriate and proportionate disclosure rules. The key regulatory change needed would therefore be the reduction of the requirements around company disclosure, while ensuring investor protection is upheld. As a result, a number of questions relating to this are raised in the consultation document.
The consultation closes on September 24, 2021.
(HM Treasury, Wholesale Markets Review – Consultation, 01.07.2021)
FCA: Primary Market Bulletin No. 35
On July 2, 2021 the Financial Conduct Authority (FCA) published the latest edition of its Primary Market Bulletin (PMB) which sets out the FCA’s proposed approach to assessing eligibility and listing applications for companies with cannabis-related activities.
The FCA’s proposed approach is set out in a new technical note, Primary Market/TN/104.1 Listing applicants with cannabis-related businesses, which is to be to be included on its Knowledge Base. This is subject to consultation.
The proposed technical note confirms that the FCA will not admit the securities of a company with any recreational cannabis business, directly or indirectly, to the Official List. This is because the possession and supply of cannabis for recreational purposes are criminal offences in the UK. Proceeds from those activities, even where generated in jurisdictions where it is legal, are criminal property under the Proceeds of Crime Act 2002 (PoCA). Companies carrying on cannabis-related activities such as the development, production and sale of cannabis-based medicinal products (CBMPs) and products containing cannabidiol (CBD) may be admitted to the Official List provided that the criteria for listing are satisfied and the FCA is satisfied that their business does not give rise to any money laundering offence under PoCA.
Due to the legal risks outlined in the technical note, the FCA considers that additional due diligence is necessary for companies carrying on cannabis-related activities. The scope and extent of the due diligence will be determined on a case by case basis, and the FCA will consider the specific risks presented by the new applicant. This may include evidence regarding relevant licenses and appropriate legal opinions. The FCA advises these companies and their advisers to be pro-active and approach the FCA with any questions about the legality of the company’s operations or areas of significant legal uncertainty as early as possible as otherwise the eligibility review is likely to be prolonged.
Comments are requested by August 12, 2021.
(FCA, Primary Market Bulletin No 35, 02.07.2021)
(FCA, GC21/2: Primary Market Bulletin No. 35, 02.07.2021)
FCA: Primary Market Bulletin No. 34
On June 24, 2021 the Financial Conduct Authority (FCA) published the latest edition of its Primary Market Bulletin (PMB) which consults on changes it proposes to make to the UKLA Knowledge Base in relation to the prospectus regime.
Changes to the Knowledge Base
The FCA proposes to create a new Technical Note, Primary Market/TN/619.1, to adapt, as FCA Guidance, the European Securities and Markets Authority’s (ESMA) Guidelines on disclosure requirements under the Prospectus Regulation published in March 2021. This will also augment the measures on specialist issuers in the ESMA update of the Committee of European Securities Regulators (CESR) Recommendations published in March 2013.
The FCA will also incorporate certain explanations in the ESMA Prospectus Directive Q&As (PD Q&As) published in April 2019, on its Handbook site, into Technical Notes. It will no longer refer to the CESR Recommendations and the PD Q&As on its Handbook site, with the relevant substantive content being consolidated into the FCA’s Technical Notes as the FCA considers this a more appropriate place for such content in the context of the UK’s regulatory regime.
Summary of proposed changes
The FCA is consulting on the following proposed changes to the Knowledge Base:
The addition of four new Technical Notes
Amending one existing Procedural Note:
Amending ten existing Technical Notes
The FCA summarises its proposals in Primary Market Bulletin No. 34. A number of the changes to Procedural and Technical Notes reflect changes arising from the Prospectus Regulation, when it repealed and replaced the Prospectus Directive, resulting in the need for new guidelines to replace the earlier CESR Recommendations, as well as changes made as a result of the UK withdrawal from the EU. The FCA also proposes to incorporate elements of the PD Q&As into FCA guidance. This guidance will be contained in Technical Notes and a Procedural Note and will supersede the PD Q&As.
Other amendments to the Technical Notes reflect current practice and changes to underlying legislation and rules that have been made since the Technical Notes were last updated.
The FCA is not replacing the Prospectus Regulation Q&A at this stage because it will need to fit in with any changes arising from the recommendations relating to the prospectus regime made in Lord Hill’s UK Listing Review report of March 3, 2021. The Prospectus Regulation Q&A as at November 2020 were onshored as part of Level 3 materials on December 31, 2020 and the FCA will continue to have regard to them in light of its general approach to non-legislative EU materials.
Comments on these proposals should be received by August 4, 2021.
(Primary Market Bulletin 34, 24.06.2021)
(GC21/1: Primary Market Bulletin No. 34, 24.06.2021)