Radical prospectus reform : A step closer

Earlier this week HM Treasury published the outcome of its UK Prospectus Regime Review. As proposed in the July 2021 consultation paper, the government will be replacing the current prospectus regime it inherited from the EU Prospectus Regulation. The main aims of the reform are simplifying regulation in this area; making it more agile and dynamic; facilitating wider participation in the ownership of public companies and improving the quality of information received by investors. The key areas of change are noted below.

The government will legislate when Parliamentary time allows; however, as the FCA will have greater responsibility to set out the detail of the new regime through rules, and will need to undergo further consultations in order to make the rule changes, it will be some time before we not see the full effect of the reform.

For details of the original proposals, please see our client note : Radical prospectus reform.

Issuers should bear in mind that, although the UK will be departing from the EU prospectus regime, the EU rules and thresholds will remain relevant when offering into EU jurisdictions.

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Admission to trading on regulated markets: more FCA powers

The familiar concept of the prospectus will remain; however, the FCA will have the ability to specify the following in relation to a prospectus:

if and when it is required;
its contents;
the manner and timing of publication; and
whether, and in what circumstances, it must be reviewed and approved by the FCA prior to publication.

In this way, the regime will become more fluid and flexible, with the FCA having the power to determine, for example, if a prospectus is needed for a secondary offering or whether an overseas prospectus could be relied upon.

Also, the criminal offence of requesting admission to trading on a regulated market without a prospectus will be removed as it is seen as disproportionate.

Public offers: new rules

Whilst admission to trading on a regulated market may continue to trigger a prospectus, a 'public offer' will cease to be another trigger. Instead, there will be a general prohibition on public offerings of securities, subject to exemptions which will be based on those under the current regime (e.g. the '150 person' and 'Qualified Investor' exemptions) and expanded to include:

offerings of securities which are, or will be, admitted to a UK regulated market; and
offerings of securities to existing shareholders, subject to certain conditions including the offer is made pro-rata to a person's existing holding (i.e. rights offerings, rather than offering shares as merger consideration).

Such exempt offerings will be subject, as is currently the case, to an "equality of information" requirement.

Necessary information test

The government intends to retain a single statutory "necessary information" test in relation to prospectuses, but with the following three changes:

there will be a clarification that "necessary information" may vary depending on whether the offer is an IPO or a secondary issuance;
denomination will not be included as a factor which would permit differing disclosure standards for non-equity securities; and
for debt securities, creditworthiness rather than prospects will be the focus.

Forward-looking information : new liability threshold

In order to facilitate the provision of forward-looking information, the threshold for liability that applies to certain categories of such in a prospectus will be raised – a person responsible for the preparation of a prospectus would only be liable to pay compensation if:

that person knew the statement to be untrue or misleading;
was reckless as to whether it was untrue or misleading; or
in the case of an omission, if that person knew the omission to be a dishonest concealment of a material fact.

This is designed to encourage issuers to offer more helpful guidance. The current "negligence" standard for liability for statements in prospectuses is seen to discourage inclusion of forward-looking information in prospectuses, as opposed to other communications where there is a higher bar to liability.

The FCA will be responsible for specifying the categories of forward-looking information to which the new liability threshold will apply.

Junior markets

Offers of securities which are, or will be, admitted to trading on certain multilateral trading facilities will be added to the list of exemptions. We anticipate that AIM will be included in the list.

Private companies

The current threshold of EUR 8 million, below which a prospectus is not needed, will be removed. Instead, securities will be allowed to be offered to the public provided the offer is made through a platform operated by a firm specifically authorised for this purpose. Operating an electronic platform for the public offering of securities will become a new regulated activity. The FCA will be able to determine the detailed requirements of the platforms.

The government is still considering the new threshold below which offers of securities from private companies will be exempt from the prohibition on public offers.

Overseas offerings

Offers will be capable of being extended into the UK on the basis of offering documents prepared under the rules of overseas jurisdictions. There will not be an FCA review and approval; instead, there will be an overall assessment of overall effectiveness of the regulation of the overseas market in question.

Other upcoming changes

At the same time, HM Treasury has also published its response to the Whole Markets Review, in which it sets out a package of reforms intended to create a simpler and less prescriptive regime in relation to wholesale capital markets.

As we also await the outcome of the review of the listing regime, it is safe to say that we have a year of change ahead.

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