FCA consultation on prospectus regime reform – key changes for regulated market issuers of shares

The FCA is consulting on proposals for the new public offers and admissions to trading regime (CP24/12), utilising powers delegated to it under The Public Offers and Admissions to Trading Regulations 2024 (the POATRs).

This blog considers some key areas in which the FCA is planning to make changes relevant for issuers with or seeking admission of shares to trading on a regulated market. 

The new public offers and admissions to trading regime

Under the POATRs – which will come fully into force only when the FCA has finalised the new rules – public offers and admissions to trading on a UK regulated market are treated separately.

Public offers of securities will no longer require publication of a prospectus.  Instead any public offer of ‘relevant securities’ will be prohibited unless it falls into a specified exemption.  Listed companies and IPO candidates, for example, will benefit from an exemption for offers of securities already admitted to trading on a UK regulated market or UK primary MTF (or where the offer is conditional on such admission). 

The POATRs retain the concept of a prospectus only in the context of an admission to trading: the FCA will be able to require publication of a prospectus and prescribe its contents before admitting securities to trading on a UK regulated market.

The POATRs also apply a reduced standard of prospectus liability – based on recklessness – to a new category of ‘protected forward-looking statements’ (PFLS).  Again, the FCA will be able to decide which statements should be considered PFLS.  This reduced standard of liability will apply only in the UK, meaning issuers will still have to have regard to the liability regimes of any other jurisdiction into which they offer shares.

The consultation sets out how the FCA proposes to use these new powers and, in many areas, suggests the FCA is planning to maintain requirements consistent with the existing UK Prospectus Regulation.  Notably, no significant departures are suggested for the admission prospectus required on IPO. 

The possible new threshold for follow-on offers is another matter. 

Further issues of securities

The FCA proposes to raise the threshold at which a prospectus would be required for the admission to trading of securities fungible with existing traded securities to 75% (from the current 20%) of the number already admitted to trading, over 12 months.  This significantly higher threshold would apply to all types of securities, including shares, GDRs and debt.  Alongside this change, the FCA would continue to permit any issuer to prepare a (full or simplified) prospectus on a voluntary basis, meaning an issuer could choose to make an issue below 75% with a prospectus.  This option may be attractive to an issuer marketing an offer to a global shareholder base across jurisdictions with disparate liability regimes.  Historically investment banks have been reluctant to undertake global primary offerings in significant (~20%+) sizes on an undocumented basis, making the continued use of a voluntary prospectus (or, potentially in certain circumstances, e.g., institutional-only offerings, an unapproved offering memorandum) likely for larger offers. The FCA’s proposal goes much further than the approach taken by the EU Listing Act in its reform of the EU Prospectus Regulation (the first wave of changes, including to prospectus exemptions, are expected to come into force later in 2024).  EU changes will allow admission of fungible issues on an entirely undocumented basis only up to 30%, although certain issuers will be permitted to admit securities with no upper limit if they meet specified conditions and publish a shortform disclosure document (of no more than 11 pages).

Similarly, the UK regime will be more permissive for public offers, allowing public offers of securities already admitted to trading to be made on an undocumented basis with no upper limit – i.e. shareholders of listed companies will be able to execute secondary sales of those shares in any amount without the issuer producing a prospectus (although the financial promotion regime will still apply, making it difficult to include retail investors in such sales).  In the EU, in contrast, public offers will always require publication of at least a shortform disclosure document (again up to 11 pages); all existing issuers not in restructuring or insolvency proceedings can make public offers up to a 30% threshold and, as above, certain issuers meeting specified conditions will have no upper limit.  Both UK and EU rules would allow issuers to publish a voluntary prospectus rather than take advantage of a prospectus exemption.

The FCA consultation makes no specific proposals for further issues by companies in severe financial difficulty, but does seek views on supplementing requirements in this area.  In particular, views are sought on requiring issuers to notify the FCA of certain circumstances – for example, a rescue financing – based on which the FCA could at its discretion require publication of a prospectus.  As an alternative the FCA is also open to suggestions for a clear definition that could be used to demarcate exceptional capital raisings below 75%.

Takeovers

Shares issued as consideration for a takeover offer below the 75% threshold may be able to benefit from the fungible securities exemption discussed above.  Where that exemption does not apply, however, the FCA is proposing to retain the prospectus exemption that applies to the admission to trading of securities offered in connection with a takeover by means of an exchange offer, including the requirement to make available a document describing the transaction. 

At present, no UK regulations prescribe the content of the required exemption document; the FCA is considering providing guidance on what it considers appropriate through a technical note, using the EU requirements (in EU Commission Delegated Regulation (EU) 2021/528) as a starting point. The FCA broadly proposes prospectus-level disclosures with the addition of information on the target, the transaction and its impact on the issuer; requirements could be reduced when the securities are fungible with those already admitted to a regulated market and the transaction is not a reverse acquisition, with further reductions for smaller issues.  The FCA proposes to require FCA approval of a takeover exemption document if the securities being issued are not fungible with those already admitted to trading or if the transaction is a reverse acquisition.

Prospectus summary

The FCA proposes to reduce the prescribed content requirements for summaries, removing the detailed financial information requirements and allowing issuers to include cross-references.  A mandatory page limit would be retained, but raised from the current seven pages to 10.

Financial information and ‘complex financial histories’

The FCA proposes retaining existing financial information requirements, 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 Listing Rules – they were not carried over to the commercial companies category under the new UK Listing Rules). 

The FCA has included as an annex to the consultation paper draft guidance for companies with complex financial histories on the financial information they need to provide the FCA in a prospectus, including some illustrative examples.

Working capital statement

The FCA is still considering its position on working capital.  It proposes to retain the current requirement for a working capital statement, but is seeking views on whether issuers should be permitted to disclose significant judgements made in preparing that statement (including assumptions and sensitivity analysis).  The FCA is also interested in views on whether issuers should be permitted to base the working capital statement on diligence performed for the purposes of viability and going concern disclosures in annual financial statements.

Sustainability-related prospectus disclosure

The FCA proposes that additional disclosure requirements should apply if an issuer identifies either climate-related risks as material risk factors, or climate-related opportunities as material to the issuer’s prospects.  This flexible approach aims to reflect that risks and opportunities in this area may not be of equal importance for all issuers.  The FCA has asked for views on how its proposals in this area might impact UK market attractiveness. Where the requirements are triggered, issuers would be expected to meet minimum information standards aligned with the high-level categories common to the TCFD and ISSB standards: governance, strategy, risk management and metrics and targets. 

Where an issuer has produced a transition plan and its contents are material, the issuer should summarise key information and indicate where the plan can be located and inspected. The FCA proposes that climate-related disclosures relating to strategy, transition plans and metrics and targets should be eligible to be designated as PFLS (PFLS are discussed further below). 

Protected forward-looking statements (PFLS)

The FCA has proposed rules to provide a clear framework to issuers on what information can be deemed a PFLS and so fall within the reduced liability standard created by the POATRs. The FCA has suggested a general definition that will apply to all PFLS disclosures; category-specific criteria for financial or operational information; and specific exclusions. Accompanying statements will be required to clearly identify PFLS.

While the FCA’s proposals in this area are welcome, issuers and other market participants will continue to have regard to heads of liability outside the statutory regime, as well as liability across different jurisdictions, when drafting disclosure. As such it remains to be seen to what extent the inclusion of forward-looking information in prospectuses will increase.

General definition

The FCA’s proposed general definition requires that PFLS can relate only to future events or sets of circumstances, and therefore a statement can only be considered a PFLS if its veracity can only be determined by events that occur at a later date. The FCA also propose a PFLS must include an estimate as to when the event or set of circumstances to which it relates is expected to occur.  In addition, the FCA proposes to import the ‘reasonable investor’ test – used in the context of UK MAR inside information disclosures – to ensure that only information useful to investors can be a PFLS. 

The FCA expects that use of the ‘reasonable investor’ test will mean that issuers will need to make subsequent updates in order to comply with their UK MAR obligations.  PFLS will be inherently uncertain and therefore will be insufficiently ‘precise’ to meet the inside information definition.  When the future event or set of circumstances to which the PFLS relates are reasonably expected to occur (or have occurred), however, the FCA presumes the issuer will have information that meets the inside information test in full, potentially triggering an announcement obligation.

Category-specific criteria

The FCA’s proposed criteria for financial information are based on the existing definition of a profit forecast, combined with established accounting principles. Financial PFLS must provide a figure or sufficient information from which a figure can be calculated or estimated, as well as being understandable, reliable and comparable with the actual future result.

The proposed definition for operational PFLS also requires a figure or sufficient information from which a figure can be calculated or estimated, although, as certain types of operational information cannot be expressed numerically, the definition also encompasses objectively verifiable information.  PFLS must also faithfully represent the actual and expected performance, strategies, plans and risk analysis of the issuer – and not be created purely for the purpose of a PFLS disclosure – and be comparable with the actual future result.

These requirements are intended both to exclude overly aspiration targets and to encourage issuers to disclose precise information rather than narrative statements. 

Exclusions

The starting point for the FCA is that existing mandatory disclosures should not be considered PFLS: to do so would shift the liability treatment in favour of issuers with no commensurate improvement in information for investors.  The FCA is, however, proposing some exceptions for certain items – if they meet the other PFLS eligibility criteria – in the business overview, operating and financial review and trend information requirements, where it hopes to encourage issuers to disclose more detailed information than at present. Profit forecasts, whether mandatory or voluntary, will be eligible, while profits estimates will not.

Accompanying statements

PFLS must be clearly demarcated within a prospectus, whether they are included in a separate section or alongside other relevant content.  Accompanying statements will be required to clearly identify PFLS.  A prospectus will need to contain both a general statement (which need be included only once – likely at the start of a prospectus) and content-specific statements that identify individual PFLS and provide contextual information specific to the disclosure (which should appear alongside each PFLS).

‘Six day rule’ – shortened to three days

In a welcome step, the FCA proposes to shorten the period for which a prospectus must be made public before shares can be admitted to trading in an IPO to three working days (from six).  This proposal aims to encourage issuers to include retail investors at IPO; the EU Listing Act makes a similar change for the EU regime. 

What comes next?

The FCA has asked for comments by 18 October 2024, and aims to finalise the overall rules for the new regime by the end of H1 2025.  There would be a further period prior to the new rules coming into force. The FCA proposals would see the current Prospectus Regulation Rules (PRR) removed from the FCA Handbook and replaced with a new sourcebook, the Prospectus Rules: Admission to Trading on a Regulated Market (PRM).  Detailed content requirements for prospectuses would be included in Annexes to the PRM.

The FCA has indicated that a number of areas will be the subject of future consultations, including rules on low denomination retail bonds, certain transitional provisions and minor changes to make the applications process for further issues more efficient.

This paper is part of a wider set of consultations launched by the FCA to promote more efficient and effective capital raising for issuers and increase opportunities for investors, which also includes consultations on the establishment of public offer platforms (CP24/13) and reforms for derivatives (CP24/14). 

For more information on the proposed prospectus regime changes please get in touch with your usual Freshfields capital markets contact.