The aim of allowing smaller companies to raise money in London by moving away from the old prospectus and listing regime is surely laudable. To remind everyone, the essential features of the proposals are to:
- remove the current requirement for an FCA approved prospectus for offers of over £5 million provided the offer is made on a POP;
- make operating a POP a new regulated activity;
- create a due diligence and disclosure framework for POP operators so that they act as a “gateway”;
- information and disclosures designed to inform investors of the key features and risks associated with offers of ‘off market' securities, typically by smaller companies;
- application of various parts of the rules to POP operators, including those relating to approval of financial promotions and the Consumer Duty; and
- what the FCA says should be a proportionate regime for liability for POP operators.
The basic problem the FCA is grappling with is well known: how to get adequate capital into the London market for smaller companies and one should read the thinking here in conjunction with the secondary market proposals to come in the shape of PISCES. It is also the case that the historic prospectus regime has involved considerable costs which have been argued to disincentivise smaller companies from doing a public offering. In an even broader context, you might view the plans as an attempt to level the playing field with the smaller end of the private equity market.
To my mind, the big question here is how the costs and the mechanics of obligations and liability are going to interact with each other. From one perspective, a POP operator will be a form of quasi regulator with a general duty to consider the appropriateness of potential issuers to the market. This raises a number of questions. The first is whether there will be a cost effective way of complying with all of the obligations in a market targeted at smaller issuers. Reading the proposals, the role of the POP operator is far from “tick box” and will require real judgment. How that is going to be compatible with a low cost service is not clear. Part of the answer might be that when compared to the costs of the full prospectus regime the proposed POP regime will be manageable. The FCA implicitly runs a version of this argument in its cost benefit analysis but whether this will be the reality remains to be seen.
There is an additional point here related to the liability standard. The FCA has sought to distinguish factual from non-factual information and set different duties in relation to each of these. There is a verification test for the former and a plausibility test for the latter which comes with certain due diligence and other conditions. The main point to be made here is that this whole approach of placing all of the onus of such verification and plausibility on the market operator rather than on specialist players who are acting for the issuer (such as under the sponsor or NOMAD regimes) is a major departure from historic market practice. There is a significant difference between a firm acting for an issuer but within the rules framework doing the due diligence on that issuer and the market operator taking the full burden of this due diligence. In some ways, this is in reality more akin to the role of exchanges in the US when they act as self regulatory organisations and it raises a number of questions about how POPs will be structured. For example, how their commercial and regulatory objectives will be matched?
To underpin the issues raised above, there is the whole question of approving the financial promotions of the issuer. The POP operator will have this obligation and it will be a qualitatively different one to the more traditional exchange role of assessing compliance with the Listing Rules. This is a holistic fair, clear and not misleading assessment. This leads to an additional pitfall. To what extent will issuers under the new structure end up using the fuller form prospectus contents requirements as a base for their approach to disclosure? If we were to end up in that position then the legitimate question is whether anything has actually been gained from this regime. This is clearly not the intention but it is a point that will need to be watched.
Underlying the above is a significant shift towards a more disclosure based regime. Generally, this is welcome by many. The question is going to be how to inject that element of judgment in this case mainly at the level of the POP operator whilst making it economic to run given the risks and duties involved.
So, overall, the POP market concept is to be welcomed but a lot to think about here in terms of how it is going to work in practice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.