Lord Hill’s UK Listing Review made a series of recommendations to the Government for the reform of the UK’s listing regime, one of which was to “completely re-think” the entire prospectus framework by going back to first principles and considering the purpose of a prospectus. In response, the Government has published a consultation “UK Prospectus Regime Review” (“Consultation Paper”) which proposes fundamental reforms to the current regime. 

To focus the debate, the Consultation Paper invites comments on the following proposed statement of the purpose of a prospectus: “a document of record, available to the public free of charge, that provides potential investors with the information they need and that they can rely on to make an investment decision in a security.” 

The key objectives of the consultation are:

• to facilitate wider participation in the ownership of public companies and remove disincentives for companies issuing securities to wider groups of investors (including retail investors);
• to improve efficiencies in capital and debt raising by simplifying regulation and removing any duplications;
• to improve quality of information available for investors; and 
•  to make regulation more agile and dynamic so that it can quickly adapt to change.

What are the key proposals?

Overall approach

The Government’s thinking can be broadly summarised as follows:

• Prospectuses should be required for initial public offerings, but not necessarily in other cases, especially not rights issues or other follow-on offerings.
• The FCA should have wide powers to determine both when prospectuses are required, and what the contents of prospectuses should be. 
• The regulation of admission to securities markets and public offer rules should be dealt with separately in future.
• The current exemptions (including the wholesale exemption for debt securities, offers to 150 people and qualified investors) are likely to remain unchanged.

Therefore, the Consultation Paper is conceptual rather than detail-orientated – the day-to-day changes to the existing prospectus framework will be for the FCA to decide.  The Consultation Paper does not address the timing of the provision of information to potential investors – a source of some friction in the market following the FCA’s 2018 IPO reforms aimed at accelerating the publication of registration documents and encouraging more unconnected pre-IPO research. 

The Consultation Paper is based on the assumption that the existing continuing disclosure regime for publicly traded issuers should largely alleviate the need for prospectuses but does not consider whether any changes should be made to that regime.  Equally, the Consultation Paper does not go into detail on the regulatory status of documentation that may replace approved prospectuses, for instance under the UK financial promotion regime. 

Admissions of securities to trading

The main proposals include:

• removing the prohibition in s85(2) FSMA 2000 on requesting admission to trading on regulated markets without first having published an approved prospectus;
• empowering the FCA with new rule-making responsibilities in relation to regulating the admissions of securities to trading on regulated markets. Notably, the FCA would have broad discretion to determine the circumstances in which a prospectus is required - including whether it should be required for further issues of securities following an IPO, or for secondary listings where a prospectus has already been published in accordance with overseas regulation;  
• allowing  the FCA to establish its own policy on reviewing and approving prospectuses, including rules around publication of prospectuses, advertisements and withdrawal rights;
• providing that the FCA should determine the content of a prospectus and bringing parts of the UK Prospectus Regulation into the FCA Handbook so the FCA has the power to make detailed rules. The Government proposes that the existing “necessary information test” should be retained, together with the current clarification which acknowledges that the necessary information may vary depending on certain factors. Rather than creating a new test for further issues, the Government is proposing to amend the current clarificatory wording to facilitate debt securities and further issuances. However, the Government is proposing to remove the reference to non-equity securities with a minimum denomination of EUR 100,000 from the “necessary information test” .  Instead, FCA would consider such a threshold as part of its rule-making responsibilities.  The Consultation Paper notes that the FCA and others have previously argued that the EUR 100,000 threshold potentially distorts debt capital markets and should be reviewed; and
• granting the FCA discretion to determine how base prospectuses for debt securities should work. 

Public offers – scope

The Government has considered the key elements of the public offering rules and its proposals include:

• introducing new exemptions for companies with (or applying to have) securities admitted to trading on regulated markets – on the basis that these securities will be freely trading in a highly regulated environment;
• amending the definition of “public” by exempting existing holders of securities from the public offer rules, differentiating them as stakeholders with interests in the company, rather than the general “public”. Consequently, all rights issues will not require a prospectus and all share-for-share offers (or security-for-security offers) would be exempt, removing the need for the exemptions for securities offered in connection with various forms of M&A activity.  Although not discussed in the consultation, this change would also similarly appear to remove the requirement for a prospectus in relation to exchange offers. These are offers where existing securities holders are offered new securities of the same issuer in exchange for their existing holdings – a type of offer that is common in the context of debt restructurings;
• retaining the EUR 100,000 "wholesale" debt securities exemption, 150 person threshold and the Qualified Investor exemptions, whilst querying whether the exemption for employees clearly covers the position of employees working for a group company, rather than the main member of the group issuing the relevant securities; and 
• restating all monetary thresholds in the regime as sterling.

Forward-looking information – reducing the standard of liability

The Government has considered feedback that the existing prospectus framework discourages disclosures of forward-looking information compared to other regulated disclosure mechanisms (such as in the annual reports and regulatory announcements), which the Government attributes to the differing liability standard attaching to prospectuses. 

Persons responsible for prospectuses must reasonably believe that statements made in prospectuses are true and not misleading and that omissions of information are properly made in order to avoid liability (the so-called negligence standard).  In contrast, persons responsible for other regulated disclosures (including annual reports) are liable in respect of statements known by them to be untrue or misleading, or where they have been reckless as to whether a statement is untrue or misleading (the so-called recklessness or dishonesty standard).   

The Consultation Paper proposes that the standard of liability for forward looking information in prospectuses should change from the negligence standard to the recklessness standard, provided that the relevant information is explicitly identified as forward looking and that the lower standard of liability applies to that information.

This reduction in liability would apply only in relation to statements in a prospectus which project or predict a future situation. It would not apply to statements of fact or to the working capital statement in a prospectus for equity offerings which would still be subject to the existing negligence standard.

Junior markets

The Consultation Paper seeks views on whether companies whose securities are traded on multilateral trading facilities (“MTFs”), which includes the London Stock Exchange's Alternative Investment Market (AIM), and, for non-equity securities, the International Securities Market (ISM), should either be permitted to make public offerings of their securities without preparing a prospectus (on the basis that the admission document or similar offering memorandum regarding their admission to the MTF should serve the same purpose) or whether such MTF admission documents should be treated as a form of prospectus, with the intention of bringing them within the scope of the prospectus liability regime.

Public offerings by non-traded or “private” companies

The Government is interested in considering alternative obligations for companies making public offers of securities which are not to be admitted to any public market. This is especially relevant to crowd-funding, where the Government queries whether the existing EUR 8 million prospectus threshold has artificially distorted fund-raising.

The following options are proposed:

• A requirement for the offer to be made through an authorised firm. Instead of a company preparing a prospectus, an offer of securities over a threshold amount would instead be required to be registered with, and to offer its securities via, an authorised firm, regulated by the FCA’s conduct of business rules.
• A requirement for the offer to be made through an authorised firm subject to a new bespoke permission. The offeror would be required to register the offer with a firm authorised to operate a platform for the public offering of securities. A bespoke permission would be created for such a platform, allowing the FCA to frame specific rules and supervisory practices to ensure the appropriate standards of disclosure, due diligence and verification. The Government also seeks views on whether the threshold amount of €8 million equivalent could be reduced so that more offers go through firms authorised with the new permission.
• Maintaining the status quo. The obligation for a prospectus over the EUR 8 million threshold, restated into sterling, would be retained.

Public offers by overseas companies

Options for addressing public offers made by overseas listed companies are also considered in the Consultation Paper, together with the overall merits of implementing a mechanism to permit public offerings into the UK by overseas companies. The options proposed are:

• Maintaining the status quo. Under this option, overseas issuers would be able to extend a non-exempt (retail) offer (in association with an admission of securities to an overseas stock market) into the UK provided an FCA-approved prospectus was reviewed and approved. 
• Creating a new deference mechanism. A new regime of regulatory deference would replace the equivalence regime set out in the Prospectus Regulation, allowing companies with securities listed on a non-UK market to extend a retail 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. There would be no FCA review of the documents but the FCA would require that UK investors have access to the same information as those investors in the home jurisdiction.
• No right to make a retail offer into the UK. Note that this would not prevent the Government from including such a mechanism on a reciprocal basis in any future mutual recognition arrangement it may conclude with other countries. The Government does not propose providing a facility enabling overseas private companies (meaning for these purposes companies with no listed securities in any country) to make public offerings into the UK.

Next steps

The Consultation Paper presents a valuable opportunity for market participants to voice their views on the current prospectus framework and contribute to replacement regime in the UK. It is also complemented by the publication of a series of consultations seeking to re-shape the UK’s capital markets landscape, including the simultaneous publication of the Government’s Wholesale Markets Review and FCA’s recent consultations on Primary Markets reform and SPACs. For more information on these consultations please see our alerts: A new dawn for the UK’s capital markets  and FCA consults on SPACs.

The consultation closes on 24 September 2021. Any proposals to reform the current regime will require further Government consultation followed by legislation (if the proposals are taken forward), together with a corresponding FCA review and consultation on the more detailed rules. 

For cross-border transactions, market participants will want to keep abreast of developments and in particular track how the UK prospectus rules diverge from the prospectus rules in the EU. It will also be important to monitor how the proposals around equivalence develop as, to date, the equivalence regime under the prospectus framework has been rarely, if ever, used  in the UK or EU.