Another Step On The ECM Reform Path: FCA Consultation On The New Prospectus Rules

Where are we now?

We are now another step closer to the implementation of the new UK prospectus regime. On 26 July 2024, the Financial Conduct Authority ("FCA") published a consultation paper (Consultation Paper CP24/12) on the new prospectus rules, which sets out the detailed requirements of the new UK prospectus regime. The FCA's proposals involve significant changes, particularly when a prospectus is needed on a secondary capital raising, as well as making it easier for companies to make forward looking statements in prospectuses. The proposals are broadly in line with the recommendations contained in the UK Secondary Capital Raising Review.

The consultation paper follows the publication in January 2024 of the Public Offers and Admissions to Trading Regulations 2024 (the "POATRs"), which establish the framework for the new public offers and admissions to trading regime in the UK. The POATRs also give the FCA power to make further rules to give effect to that framework.

For a reminder of the significant changes to the listing regime, as well as further changes proposed in relation to secondary fundraisings, please see our previous briefing.

What are the key points to note from the consultation paper?

When a prospectus may be required – A prospectus will still be a key feature of UK IPOs. The main change is that, for companies with securities already admitted to trading on the Main Market, the threshold for triggering a prospectus for admitting further securities is being raised from the current 20% (of existing fungible securities) to 75%. Listed issuers will, however, be able to produce a voluntary prospectus approved by the FCA for any share issuances below this threshold, recognising the varying needs of different issuers, including those with a more global shareholder base.
Content of a prospectus – In the consultation paper, the FCA is consulting on the detailed disclosure requirements, although the content of a prospectus is expected to be largely similar to the current regime with the overarching requirement for a prospectus to contain all "necessary information" being retained. More climate-related disclosures will be required where the issuer has identified climate-related risks as risk factors or climate-related opportunities as material to the issuer's prospects.
Protected forward looking statements - The POTARs introduced a new concept of "protected forward-looking statements", where the prospectus liability threshold for such statements will be recklessness rather than negligence.
AIM - Where an issuer is seeking admission to a multilateral trading facility (MTF), such as AIM, the FCA can only require a prospectus where trading on the MTF is not intended to be limited only to qualified investors, i.e. where retail investors typically participate in the market. For these MTFs (referred to as primary MTFs), the FCA is proposing to (i) require a MTF admission prospectus for all initial admissions to trading on such markets and for reverse takeovers (with exceptions for the existing simplified routes to admission) and (ii) set rules on certain rights and responsibility attaching to the production of a MTF admission prospectus.
Six-day rule – The six-day rule, referring to the period for which a prospectus must be made public before shares can be admitted to trading in an IPO, is being reduced from six working days to three working days . This is a welcome change, designed to encourage the participation of retail investors.

When will the new rules take effect?

The FCA's consultation ends on 18 October 2024, with the FCA aiming to finalise the new rules by the end H1 2025, subject to responses received and the FCA board's final approval of the rules. There will be a further (as yet unspecified) period prior to the new rules coming into force.

How do the FCA rules interact with the POATRs?

The POATRs provide the framework of the new regime and give the FCA discretion to set new rules in this area. The POATRs set out the exemptions applicable to public offers of securities, which are otherwise prohibited, but not the exemptions to the requirement to produce a prospectus when securities are admitted to trading on a regulated market – the ability to specify those rules is delegated to the FCA and the detail of those exemptions is set out in the draft FCA rules which are set out in the consultation paper.

The POATRs are currently in force only for the purposes of giving the FCA rule-making powers and will come fully into force when the FCA finalises its new rules and the existing Prospectus Regulations cease to have any further effect.

How will the changes affect Main Market IPOs?

The process will be largely the same – a prospectus will still be required on Main Market IPOs and whilst the FCA is consulting on the detailed disclosure requirements in this consultation, the content requirements are expected to be largely the same. Below are further details on the content requirements for a prospectus.

How will the changes affect further fundraisings?

Offers of securities to the public will not be lawful unless one of the exemptions in the POATRs apply. The exemptions are broadly the same as under the existing rules, although there are a couple of new additions (please see our client note for a reminder of these).

The key change is that, for companies with securities already admitted to trading on the Main Market, the threshold for triggering a prospectus for admitting further securities is being raised from the current 20% (of existing fungible securities) to 75%. As is the case currently, the percentage will be calculated over a 12-month period. This significant increase will offer companies much more flexibility when carrying out fundraisings. Notably, the FCA goes much further than the EU, where it is proposed the limit will be raised to 30%.

An issuer will still have the option to produce a voluntary prospectus, approved by the FCA, for any issues below this level, recognising the different needs of different issuers, including those with a more global shareholder base. In such cases, an issuer's brokers and financial advisers are likely to insist that information normally provided in a prospectus will be made available to investors.

Is there any impact on shares issued as consideration in a takeover offer?

Shares issued as consideration for a takeover offer may be able to benefit from:

the new 75% exemption mentioned above; and/or
the retained existing exemption applying to admission to trading of securities offered in connection with a takeover offer by means of an exchange offer. The requirement to make available a document describing the transaction will still remain and the FCA is considering providing guidance in a technical note on appropriate content for such a document. The FCA is also consulting on how to make this exemption more effective.

Do the changes affect the contents of a prospectus?

Other than as noted below, for the most part, content requirements of a prospectus will remain similar to those with which we are familiar.

Summary

The FCA cites greater flexibility in any summary as one of the factors making the prospectus more accessible to retail participation.
The FCA proposes reducing the prescribed content requirements, allowing cross-referencing and incorporation by reference into the prospectus, and removing some of the detailed financial information requirements.
The mandatory page limit will be increased from seven to ten pages.

Sustainability-related disclosures

The FCA has adopted a three-layer approach:
- More climate-related disclosures will be required where the issuer has identified (i) climate-related risks as risk factors or (ii) climate-related opportunities as material to its prospects. This flexible approach aims to reflect that risks and opportunities in this area and may not be of equal importance for all issuers.
- There will be minimum information requirements which outline the areas of climate-related disclosure that is expected – this aligns with the high-level categories of the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), namely: governance, strategy, risk management, metrics and targets.
- The FCA will update its guidance note on disclosure in relation to ESG matters.
The FCA is also seeking views on additional guidance for specialist issuers such as mineral companies.

Annexes

Other than as noted above, for the most part, the content requirements of prospectuses will remain similar to the current requirements with which we are familiar.

Historical financial information

Since the FCA's confirmation that historical financial information and working capital statements have been removed as eligibility requirements for an Official List IPO, there has been speculation as to whether, and to what extent, these elements will continue to be required to be disclosed in the prospectus.

As expected, the FCA proposes carrying forward its requirements regarding historical financial information into the new regime, with the clarification that any material uncertainty relating to going concern, or any other matters reported on by exception, be reproduced in full.
The FCA is also seeking views on whether to require that financial information be dated no more than six months before the date of the prospectus and nine months before the date of admission (these requirements formerly operated as eligibility requirements for the premium listing segment under the previous Listing Rules – they were not carried over to the commercial companies category under the new UK Listing Rules) and do not currently form part of the proposed changes to the prospectus regime. Regardless of whether or not these restrictions on the age of financial information are adopted in the final rules, our expectation is that the current market practice for Main Market IPOs will continue to include financial information in line with the age requirements of the previous Listing Rules for premium listed companies.
The FCA has included as an annex to the consultation paper draft guidance for companies with complex financial histories on the financial information they might need to provide the FCA in a prospectus, including providing some illustrative examples. The FCA is consulting on this as part of the consultation paper.

Working capital

The FCA proposes retaining the current requirement to include a working capital statement in a prospectus but is seeking views on whether:
- it should allow issuers to disclose significant judgments made in preparing the statement, including the assumptions the statement is based on and the sensitivity analysis which has been performed; and
- issuers should be able to base the statement on the underlying due diligence performed for the purposes of viability and going concern disclosures in its annual financial statements.

Are there any changes to directors' liability for a prospectus?

The prospectus liability regime is being carried over into the new rules in relation to a prospectus for admission to trading. However, there will be a reduced liability standard for certain protected forward-looking statements ("PFLS"); a concept which is new. The aim of this change is to encourage the disclosure of forward-looking statements to help investors make better informed investment decisions. In contrast to the general position, the burden of proof in relation to PFLS lies with the investor claiming a loss.

The FCA is proposing to provide a clear framework to give issuers legal certainty on what information can be deemed PFLS and to ensure investors can identify and assess such content.

What effect will the changes have on AIM companies?

For AIM and other primary multilateral trading facilities (MTFs) (i.e. MTFs where there is retail participation), there will be a new concept of a "MTF admission prospectus". This will be required for all AIM IPOs and reverse takeovers. It is our expectation that the London Stock Exchange ("LSE") will amend the AIM Rules to provide for this.
A MTF admission prospectus will be subject to the same statutory responsibility and compensation provisions as apply to other prospectuses. The FCA notes that it cannot under the POATRs require a MTF admission prospectus to be reviewed or approved by the FCA.
Detailed content requirements and the process for reviewing and approving a MTF admission prospectus will be set by the LSE. We expect that this will look similar to the current AIM admission document, the significant content of which is based on the existing prospectus rules.
Exemptions include the existing AIM Designated Market route for admission to trading on AIM, so companies moving from the Official List to AIM will not need to produce a MTF admission prospectus.
For further issues by AIM companies, the LSE will have discretion in deciding whether to include a requirement to publish a MTF admission prospectus. It should be noted that the UK Market Abuse Regulations will continue to apply and will ensure ongoing disclosure of material information to investors ahead of any further issues, irrespective of any other rules requiring specific disclosure documents.
The process and timetable for an AIM company moving to the Main Market is expected to remain the same as under the current regime.

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.

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