HMT has set out its policy approach to the reform of the UK prospectus regime following its consultation in July 2021. The proposals are intended to create a simplified regime which significantly diverges from the current “EU based” framework, embedded in the UK Prospectus Regulation. We outline the key features of the new regime below:
Admission to trading on UK regulated markets
As proposed in consultation, the regulation of public offers of securities and the admission of securities to trading on a UK regulated market, such as the main market of the London Stock Exchange, will be separated in the new regime. The Government will remove the criminal offence prohibiting requests to admit securities to trading on a UK regulated market without first having published an FCA-approved prospectus. Instead, the FCA will be given enhanced rule-making responsibilities regarding admissions of securities to trading on UK regulated markets, including the power to allow the FCA to specify if, and when a prospectus is required – including for further issuances by listed issuers. Additionally, the FCA will be able to determine content requirements for a prospectus, the manner and timing of its publication and whether or not it requires FCA review and approval prior to publication. In delegating these greater responsibilities to the FCA, the Government believes that this will allow for a more agile and dynamic regime which can be more responsive to the markets’ requirements going forward.
Instead of requiring prospectuses to be prepared for any public offer irrespective of whether the relevant securities are being admitted to trading on a regulated market, the starting point will be that public offers of securities will be prohibited unless a specific exemption applies. These exemptions will be based on the existing list included in Article 1(4) of the UK Prospectus Regulation but will also be expanded to include:
- offers of securities which are, or will be, admitted to UK regulated markets;
- offers of securities to those who already hold equity securities in the offering company (that is, existing shareholders), subject to certain conditions, including that the offer is made pro-rata to existing holdings. (Note that this exemption will not apply to securities of another company offered as consideration (for example in a merger or acquisition - the existing exemptions for these offers will be retained);
- offers of securities which are, or will be, admitted to trading on certain multilateral trading facilities (MTFs) – such as AIM. The Government intends to develop a mechanism by which admission documents published in accordance with the rules of the relevant MTF will be treated as a type of prospectus. It is not clear whether this will apply to other MTFs such as the International Securities Market (ISM) and Professional Securities Market (PSM), which were not mentioned in the consultation paper;
- offers of securities by private companies through an authorised platform, regulated by the FCA. The current requirement for an FCA-approved prospectus for offers over €8 million will be removed allowing private companies greater flexibility to make larger offerings on the regulated platform;
- the established ‘Qualified investors’ and ‘150 persons’ exemptions, together with directors/employee offers exemptions will remain; and
- the threshold below which offers of securities from private companies are exempt is currently being considered. Note that overseas private companies will not be excluded from offering securities to the UK public, subject to UK regulation.
All prospectus-related thresholds in Euros will be re-stated into Sterling on a one for one basis. However, the Government intends to change the current €100,000 threshold in the Article 1(4)(d) exemption for offers of wholesale non-equity securities to £50,000 (or equivalent in alternative currencies) to minimise any disruption to UK institutional investor access to international wholesale bond markets. It is welcome that the UK wholesale threshold exemption has been retained and will be lower than the EU threshold, although wholesale debt issuers making pan-European offerings under the EU Prospectus Regulation will still need to comply with the higher €100,000 threshold.
The proposals do not address how the financial promotion regime might apply to any offering materials that are not prospectuses and do not otherwise qualify from an exemption from approval as a financial promotion – presumably any non-prospectus offering document will require such approval unless a non-prospectus related exemption applies.
The “necessary information” test– removal of the distinction between retail and wholesale debt disclosure
The existing statutory “necessary information” test for the preparation of a prospectus will be retained but subject to three key amendments:
- the removal of the distinction in disclosure for “wholesale” debt securities with a minimum denomination of €100,000. Going forward, there will no reference to the denomination as a factor in allowing different disclosure for wholesale debt securities from “retail” securities. It will be important that careful consideration is given as to how this will work in practice so that this does not introduce additional and disproportionate costs for issuers of wholesale bonds;
- the regime will clarify that necessary information may vary according to whether an offer of securities relates to a first-time admission or a secondary issue; and
- a modified necessary information test will apply to debt securities focussing on the issuer’s or guarantor’s creditworthiness, rather than its prospects.
Forward looking information – higher threshold for liability
The Government will raise the threshold for liability that applies to certain categories of forward-looking information in prospectuses so that it meets the “recklessness” threshold (rather than the stricter “negligence” standard). Such categories will be determined by the FCA. Consequently, persons responsible for the preparation of a prospectus will be liable to pay compensation only 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, knew the omission to be dishonest concealment of a material fact.
Forward looking information disclosures must be explicitly identified as such in the prospectus.
Overseas deference regime
The Government confirms its intention to develop a new regime of regulatory deference for offers into the UK of securities listed on certain designated overseas stock markets, which would permit offerings into the UK on the basis of documents prepared in accordance with the rules of the relevant overseas jurisdiction and market. There would be no FCA review and approval of the offering document; instead, reliance would be placed on an assessment of the overall effectiveness of the regulation of the relevant overseas market, although the FCA would have the relevant powers to intervene to protect UK investors in exceptional circumstances.
A step in the right direction?
These reforms seek to break down one significant barrier to entering the UK’s capital markets – that being a widely held perception that the UK has inherited a complex and burdensome EU prospectus regime. Indeed, the outline of these changes should instil some optimism. Private companies are provided with greater opportunities to structure larger transactions on an authorised platform, paving the way for the crowdfunding industry to thrive in a regulated sector - whilst overseas companies will have a pathway to readily access UK investors. Companies are also able to raise capital from existing shareholders more easily as the reforms recognise existing shareholders as key stakeholders in the company. This means, for instance, that rights issues and open offers may no longer require prospectuses as a matter of UK law – a key factor for companies when determining the best way to raise capital and allowing them to encourage stakeholder involvement.
The devil, however, will lie in the detail. The success of these proposed reforms will largely depend on the scope and text of the new rules to be determined by the FCA. It is difficult to assess the precise impact at this stage although a more agile regime will be beneficial and it seems sensible that the FCA has power over much of the detail, given its expertise in this area. In particular, for issuers of wholesale debt securities, it will be important to understand the precise implications of the removal of the €100,000 minimum denomination factor in the disclosure test. Additionally, these changes are only one component in a large suite of proposed reforms designed to enhance the UK’s competitiveness post-Brexit, including the simultaneous announcement on 1 March of the reforms to wholesale capital markets and the proposed structural changes to the UK’s equity capital markets currently being considered by the FCA. Consequently, the success of these changes can only be measured when considering the overall impact of the Government's package of reforms – although, it is likely that the market will welcome this policy approach as a step in the right direction.
The Government will legislate for these changes when parliamentary time allows. Following which, the FCA will consult on its proposals for its new rules under its greater responsibilities.
Authored by Jonathan Baird, Danette Antao and Isobel Wright.
This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact your normal contact at Hogan Lovells or any of the listed Hogan Lovells contacts if you require assistance or advice in connection with any of the above.