On 10 July 2023, the Chancellor of the Exchequer, Jeremy Hunt, delivered his first Mansion House speech in which he announced a series of measures designed to unlock pension investment in private companies whilst also increasing returns to pensioners, to incentivise companies to start-up and then grow in the UK by making the UK a more attractive listing venue for the world’s fastest growing companies and to reform the UK financial services regulatory regime in order to make it more growth-friendly without compromising financial stability. This package of reforms and announcements builds upon the so-called Edinburgh Reforms which the Chancellor announced in December 2021.

The Mansion House Compact – Unlocking Pension Investment in Private Companies

Currently, just 1% of the £4.6 trillion of UK pensions and insurance assets, and just 0.5% of UK defined contribution assets, are invested in unlisted UK companies. This means that UK long-term savers are not able to benefit from the potential returns of growth capital, and UK-based high growth businesses struggle to obtain the funding they need to reach their potential. As a result, a number of UK-based high growth companies have looked to outside the UK to find the capital they need. In fact, Innovate Finance has estimated a £15 billion gap in growth capital requirements in the UK.¹ The “Mansion House Compact” with nine of the UK’s largest defined contribution pensions schemes, representing about two-thirds of the UK’s entire defined contribution workplace market, seeks to address this by committing these funds to allocating at least 5% of their default funds to unlisted equities by 2030. The Chancellor noted that if the rest of the UK’s defined contribution market follows suit, this could unlock up to £50 billion of investment into high growth companies by that time. “Unlisted equities” are defined as equities that are not already listed on a recognised trading venue and therefore capture equities quoted on the Alternative Investment Market (AIM) and the Aquis Growth Market. Notably, the Chancellor did not outline any requirement that investment be made into UK-incorporated or UK-based companies.

Moreover, the UK Government is also proposing the consolidation of the fragmented local government pension scheme landscape by proposing these schemes pool their assets with the aim that each pool created would have in excess of £50 billion in assets. The aim for these pools would be to double existing local government pension scheme allocations in private equity to 10%, which the UK Government says could potentially unlock a further £25 billion by 2030.

Finally, the London Stock Exchange recently announced the proposed launch of its “intermittent trading venue”, a private exchange that will allow companies to access public capital without having to list. The exchange is expected to open before the end of 2024 and will be the first of its kind globally.

These measures show the  continued efforts to make the UK a competitive and attractive venue for growth companies to start, develop and then go public. The pension specific proposals also highlight the widely held belief amongst London market participants that regulatory reforms of the listing regime can only go so far in achieving this outcome and that more commercially-focused initiatives are required to increase the availability of later stage capital and risk appetite for investing in growth companies so that such companies see the UK as a viable place to scale and therefore stay.

Further Reforms to Improve the UK’s Capital Markets

Prospectus Regime Reform – Facilitating Secondary Capital Raising for Public Companies
In his speech, the Chancellor announced the publication of a near-final version of the Public Offers and Admissions to Trading Regulations and associated policy note that will replace the retained EU law version of the Prospectus Regulation. The new legislation seeks to address one of the key recommendations set out in Lord Hill’s UK Listing Regime Review - a “fundamental review” of the prospectus regime — by creating a more effective and agile framework that allows companies to raise larger sums from investors more quickly by reducing the circumstances which require the publication of a prospectus. This would benefit capital hungry growth companies looking to tap back into the markets post-IPO to fund their growth strategies.

The key reforms being proposed are:

• A new framework governing when a prospectus needs to be produced.
  Under the current regime, a prospectus is required where transferable securities are to be (i) offered to the public (e.g. a retail offer on an IPO or a rights issue by a listed company) and/or (ii) admitted to trading on a UK regulated market, unless the transaction falls within an exemption. As AIM is not a UK “regulated market”, AIM quoted companies only trigger the prospectus requirement when there is an offer to the public; in all other instances, they  must simply produce an admission document.
  
  The new public offers regime
  Under the new regime all public offers of relevant securities will be prohibited unless the offer falls within certain exemptions. These exemptions will be based on existing exemptions in the UK Prospectus Regulation (such as offers to qualified investors), but will be expanded for greater flexibility. The main exemptions will apply to offers where securities are (or will be) admitted to trading on UK regulated markets or multilateral trading facilities (MTFs) (which includes AIM) and a new public offer regime for offers that are made outside the scope of these markets (for instance in the case of crowdfunding raises) as described below. 
  
  Admissions to trading on regulated markets
  Under the proposed reforms, the Financial Conduct Authority (FCA) will be granted new powers for implementing and maintaining the rules governing when a prospectus is required to be published on admissions to trading on UK regulated markets and specifying what information prospectuses should contain. IPO candidates applying for their shares to be admitted to a regulated market for the first time will continue to be required to publish a prospectus but companies that are already listed will be afforded greater flexibility.

  Currently, a listed company is required to publish a prospectus when shares representing 20% or more of its existing share capital are being admitted to trading on a regulated market. The FCA has put forward possible proposals involving thresholds of 50% or 75% of an issuer’s existing share capital, far above the current 20% threshold, which would permit much larger follow-on offerings to take place without the listed company having to produce a prospectus. 

  Reducing the instances in which a prospectus will need to be produced for follow-on offerings will enable listed companies to tap back into the markets more quickly and with less cost than presently – which is one of the current drawbacks of the UK regime compared to the US. By way of comparison, in the US there is no equivalent threshold above which a registration statement is required to be published. Instead, companies that want to have the flexibility to carry out follow-on offerings typically file a shelf registration statement with the Securities and Exchange Commission in advance. Such shelf registration statement covers a maximum number of shares that can be issued over a three-year period and only requires a short prospectus supplement at the time of an offering (largely containing mechanical information and otherwise relying on incorporation by reference of existing public disclosures). This allows companies to carry out equity raises very quickly and in some cases overnight. 
  
  Admissions to trading on MTFs
  The FCA will have the power to require the issuance of an  “MTF admission prospectus” by those admitted to trading on primary MTFs (such as AIM) that are open to retail investors. In addition to the FCA’s powers, primary MTF operators (such as the London Stock Exchange in the case of AIM) will be able to require the publication of an MTF admission prospectus in relation to the admission of securities to trading on their markets. Primary MTF operators will retain broad discretion to set rules on the content and approval mechanisms for MTF admission prospectuses. MTF admission prospectus will therefore not require FCA approval. All MTF admission prospectuses will be subject to the same statutory compensation liability regime and will have to comply with the same overall disclosure standard applicable to regulated market prospectuses (which is not the case currently for AIM admission documents). It will be interesting to see how the implementation of the new rules impacts AIM’s current admission document content requirements which are lighter than those for a prospectus and which typically make admission documents easier and cheaper to prepare. Whilst it is helpful that the FCA has made clear MTF admission prospectuses will not require FCA approval prior to publication, which is one of the current benefits of the AIM listing process in terms of time and expense savings of just needing to produce an admission document on IPO, it will also be interesting to see what new approval mechanisms (if any) may be implemented by the London Stock Exchange as a primary MTF operator under its new powers.

• Forward-looking statements. The reformed prospectus regime will establish a different liability threshold (based on fraud or recklessness standard as opposed to a negligence based one) for certain categories of forward-looking statements in prospectuses or MTF admission prospectuses, with the FCA specifying the categories of forward-looking information in scope. Greater flexibility in the use of forward-looking statements in prospectuses would be of benefit to growth companies by allowing them to disclose their expected growth strategies in a more detailed manner. How widely companies make use of this greater flexibility will, however, need to be assessed as market practice develops given the potential greater risk of US litigation on UK equity offerings involving US investors. 
• Offers of securities not admitted to trading. The current regime requires offers to the public of €8 million or more to have a prospectus, which has acted as a cap on private fundraising involving retail investors (e.g. crowdfunding). Under the new regime, a prospectus will no longer be required for any such offers, but offers of securities above a £5 million threshold will need to be made through a public offer platform, or under another exemption. The ability to raise larger amounts through crowdfunding platforms should strengthen the capital raising ecosystem in the UK and enable greater public participation in the growth companies. For comparison, similar rules facilitating capital raising by smaller companies have been in place in the US for almost a decade, after being introduced as part of the broader framework overhaul driven by the JOBS Act. Regulation Crowdfunding (Reg CF) allows eligible private US companies to raise up to US$5 million within a year, subject to certain limitations and requirements (including individual investment limits and the manner of conducting the offering). While companies relying on Reg CF need to provide certain information to investors on Form C, such disclosures are less extensive than those required in a registered offering.

The FCA is currently engaging with market participants on the new rules listed above ahead of publishing an autumn feedback summary this year and a formal consultation in early 2024, with the rules expected to come into effect in 2025.

Investment Research Review —Improving the Provision of Information on Companies to the Market
The Chancellor also announced that the UK Government has accepted all the recommendations of the Investment Research Review which was published on 10 July 2020. The review was tasked at looking at the rulebook that applies to investment research, with the aim of assessing the link between levels of research and the attractiveness of the UK as a destination to list and evaluate options to improve the UK market for investment research.

The following recommendations were made:

• Introduce a “research platform” to help generate research. The platform will provide a central facility for the promotion, sourcing and dissemination of freely available research on publicly traded companies, particularly smaller cap companies.
• Allow additional optionality for paying for investment research by allowing research charges to be bundled with other costs which would replace the current unbundling rules inherited from the EU.
• Allow greater access by retail investors to investment research.
• Involve academic institutions as a potential resource in relation to investment research to help address the potential shortfall of analysts in certain sectors.
• Support issuer-sponsored research by implementing a voluntary code of conduct which should apply to all such research. 
• Clarify aspects of the UK regulatory regime for investment research, and potentially introduce a bespoke regime.
• Review the rules relating to investment research in the context of IPOs, including suggestions for connected analyst research to be made available on a similar basis as the prospectus and for amendments to potentially be made to the rules governing the timing of the publication of research on IPOs, which have led to IPO timetables being made seven days longer without a significant uptake in the production of unconnected research.

One central theme to the proposed reforms is to make investment research (whatever the context for which it is prepared) more accessible, including to retail investors, which up until now has not been the case. The publication of connected analyst research on UK and EU IPOs is one of the main marketing differences compared to a US IPO and helps drive the price discovery process with investors before a company determines its IPO price.

The FCA has indicated that it will start engaging immediately with market participants and —  subject to receiving detailed consultation feedback and FCA Board approval — it will aim to make relevant rules in the first half of 2024.

Digitising the UK’s Shareholding System
An interim report has also been published by the Digitalisation Taskforce which is looking at reforms to digitalise the UK’s shareholding system by eliminating the use of paper share certificates by traded companies and by requiring additional options to cheques for cash remittances made by them (such as when paying out dividends). The recommendations set out in the interim report include bringing forward legislation to stop the issuance of new paper share certificates and requiring the dematerialisation of all share certificates by a future date, to be determined as soon as possible. As set out in the Secondary Capital Raising Review published in July 2022, reform of the UK’s shareholding system is viewed as a key driver for improving the efficiency of the capital markets, ensuring investors are able to properly exercise their rights, and supporting innovation in UK capital markets. The taskforce is expected to publish its final recommendations and implementation plan to the UK Government in early 2024.

Conclusion

As the above confirms, the UK financial regulatory landscape is currently undergoing a significant level of review, particularly when the FCA’s proposed changes to the UK listing regime (please see our previous alert here) are also factored in. The anticipated timeframe for the implementation of the reforms being proposed means that the next 12 to 18 months will see the UK shift away from many of its established regulatory frameworks of the past couple of decades as well as a divergence from the European capital markets framework.

^[1] Conor Lawlor et al., UK Capital Markets: Building on strong foundations, UK Finance & EY, May 2023.

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