HM Treasury has recently published the outcome of its UK Prospectus Regime Review.
The Review Outcome sets out important reforms to the UK prospectus regime for the public issuance of securities and admission to trading on capital markets, outlining the policy approach the UK Government will take following last year's Prospectus Regime Review consultation.
This briefing note sets out the key measures confirmed by the UK Government in the Review Outcome.
Why are these reforms needed?
The current UK prospectus regime is derived from the EU Prospectus Regulation.
One of the recommendations of the UK Listings Review, chaired by Lord Hill and published in 2021, was for a “fundamental rethink” of the current UK prospectus regime to create a system closer in approach to the framework in place before the introduction of the EU Prospectus Directive and the EU Prospectus Regulation.
The key issue identified in the UK Listings Review is that the EU Prospectus Regulation (which has been on-shored into UK law following Brexit) brought together the regulation of public offers of securities and the regulation of admissions of securities to trading on a regulated market (such as the Main Market of the London Stock Exchange) under a single regulatory regime. The UK Listings Review recommended that it would be better for them to be dealt with separately. The government consulted on that recommendation in 2021. The Review Outcome confirms that the government intends to take forward the separation and also implement certain other reforms.
How will the reforms to the UK prospectus regime affect admissions to trading on a regulated market?
The Review Outcome confirms that prospectuses will remain an important feature in respect of the regulation of public offers of securities admitted to trading on regulated markets but that the Financial Conduct Authority (FCA), under new enhanced rule-making responsibilities, will determine if, and when, a prospectus is required (including in respect of secondary issuances).
The FCA will also be able to make rules on:
- the content of a prospectus;
- the manner and timing of publication of a prospectus;
- whether to require a UK prospectus for a secondary listing (or whether to rely on an overseas prospectus instead); and
- whether, and in which circumstances, prospectuses will need to be approved by the FCA before they can be published.
This delegation of responsibility from the government to the FCA fits into a wider objective of the UK Government for financial services regulators to take on greater responsibilities for setting and implementing relevant regulatory requirements. Further details of this approach can be found in the recent HM Treasury Financial Services Future Regulatory Framework Review: Proposals for Reform.
Will prospectuses be required for public offerings of securities in the UK?
No – in a fundamental shift from the current regime, the Review Outcome confirms that prospectuses will no longer be a feature of the UK public offerings regime.
Instead, there will a new system based on a general prohibition on public offerings of securities, with a number of exemptions in place.
These exemptions will be broadly derived from Article 1(4) of the Prospectus Regulation and will include, for example, an offer of securities to “qualified investors” and an offer addressed to fewer than 150 persons.
There will also be a range of new exemptions, including:
- offers of securities which are already, or will be, admitted to regulated markets;
- offers of securities to those who already hold equity securities in the offering company, subject to certain conditions, including that the offer is made pro-rata to that person’s existing holding; and
- offers of securities which are, or will be, admitted to trading on certain multilateral trading facilities, such as AIM.
Can unquoted companies make public offers of securities?
The Review Outcome confirms that the government will maintain the right of unquoted companies to offer securities to the public (without admission to a regulated market) and intends to increase the capital-raising options available to these entities.
To this end, the current requirement for a prospectus to be published on offers over €8 million in size will be removed.
Unquoted securities will instead be offered to the public if the offer is made through a platform operated by a firm specifically authorised for this purpose. Coupled with this, the government will create a new regulated activity for the purposes of the Financial Services and Markets Act of operating an electronic platform for the public offer of securities. The FCA will then be able to determine the requirements to which these platforms will be subject, including the due diligence and disclosure requirements for issuers.
The Review Outcome notes that the UK Government is still to determine the threshold below which offers of securities from private companies will be exempt from the prohibition on public offers.
Finally, the Review Outcome confirms that overseas private companies will also be permitted to offer securities to the public, subject to UK regulation.
Will there be any changes to the current regime in respect of public offerings from overseas public companies?
Yes – the UK Government will create a new regime of “regulatory deference” in respect of offers into the UK of securities listed on certain approved overseas markets.
What this means in practice is that an offer from a company listed on an approved overseas market can be extended into the UK using the documentation already prepared in accordance with that relevant overseas jurisdiction and market. The FCA will not need to review and approve the offering documents but will retain a reserve power to intervene, in exceptional circumstances, if necessary to protect the interests of UK investors.
The Review Outcome does not specify which overseas markets will fall within scope of this new framework but these measures should help replace the loss of prospectus passporting rights following Brexit.
Will the “necessary information” test for the preparation of a prospectus be retained?
The Review Outcome confirms that the UK Government will keep the current statutory “necessary information” test as the basic standard of preparation for a prospectus with three key changes:
- Denomination will no longer be a factor to allow for differing disclosure for non-equity securities. This is to prevent the current artificial incentive to issue high-denomination securities.
- The UK Government will clarify that “necessary information” may vary depending on whether the offer of securities is for a first-time admission or a secondary issuance.
- A modified necessary information test will apply to debt securities. This will focus on the issuer or guarantor’s creditworthiness (instead of prospects) and is intended to ensure prospectuses contain the information needed by investors to make an informed assessment.
Are there any other changes in relation to the preparation of a prospectus?
The UK Listing Review noted that the existing prospectus regime deters companies from including forward-looking information but that this is a key category of information for investors in private funding rounds.
The Review Outcome confirms that the UK Government will raise the threshold of liability that will apply to certain categories of forward-looking information. The FCA will have the responsibility to determine the relevant categories of forward-looking information to which the higher-threshold of liability will apply.
When will these changes be introduced?
The changes contained in the Review Outcome, once introduced, should have a significant impact on the current UK prospectus regime.
The timing in respect of the introduction of these reforms is unclear from the Review Outcome. The Review Outcome notes that the UK Government will legislate to effect these changes “when parliamentary time allows”. The FCA will also launch a separate consultation in respect of its expanded rules and scope.
The Review Outcome is a high-level policy overview of the changes that the UK Government intends to make and so the relevant legislation, together with the outcome of the FCA consultation, will be useful to give us further details as to the scope, and likely impact, of these changes.
The Review Outcome is nonetheless a welcome update to confirm the policy approach the UK Government intends to take to reform the existing UK prospectus regime.