POP’ing it like the FCA

The FCA recently published a consultation paper (CP24/13) setting out its proposed rules for the new public offer platform (POP) regime. As explained in our previous blog, the Public Offers and Admissions to Trading Regulations 2024 (POATRs) provide a new framework to replace the current UK Prospectus Regulation and create a new regulated activity of operating an electronic system for public offers of relevant securities. The POP will allow companies to offer their securities to the public outside of a public market, without having to publish a prospectus, where the total value of the offer is more than £5m.

Alongside CP24/13, the FCA has published another consultation paper (CP24/12) setting out its proposed rules for companies seeking to admit securities to a UK regulated market or primary multilateral trading facility (MTF) under the new POATR framework. For more information on that consultation, see our separate blog post. Both consultations follow a series of engagement papers that the FCA published in 2023 to develop its proposals in this area.

What is the purpose of the POP?

The aim of the POP is to make it easier for companies to raise capital by removing existing barriers to large public offers, in particular the significant costs involved in meeting the requirement for an FCA-approved prospectus to be published for public offers greater than EUR8m, which has acted as an effective cap on capital-raising by companies on UK markets. The POP is also intended to close a gap in the current framework that allows potentially higher risk investments such as mini-bonds to be offered to the public without being subject to regulatory requirements such as the financial promotions regime.

The new activity of operating a POP will supplement existing regulation, such as the regulatory regime for investment-based crowdfunding. The FCA expects that crowdfunding operators and corporate finance firms are likely to consider becoming POP operators. Firms seeking to operate a POP will either need to vary their permissions or apply for authorisation from the FCA.

According to the FCA, the existing crowdfunding sector is a key baseline for its proposals. There are currently 27 crowdfunding platforms operating in the UK. Most fundraising through these platforms is well below the £5m threshold, but the FCA notes that at least 31 companies raised more than £5m over 12-month periods between mid-2018 and end-2022 through crowdfunding platforms. Furthermore, while crowdfunding is usually used at an early stage in a company’s development, it is becoming increasingly popular amongst later-stage businesses. 

Most crowdfunding platforms host offers solely below the £5m threshold and will be unaffected by the new regime as they will not fall within the new regulated activity. Although the majority of fundraising on crowdfunding platforms above £5m occurs on two platforms, the POP regime could lead to an increase in issuers wishing to raise more than that amount on platforms, which the FCA says may incentivise a greater number of platforms to enter this space. 

Based on the existing crowdfunding market, the FCA expects that most offers made via POPs will be directed at retail investors, though some platforms may choose to focus on companies seeking capital from professional investors.

The proposed rules

Companies that seek to offer securities through POPs are likely to have a limited track record and pose risks of information asymmetries. The FCA’s proposed rules therefore try to strike a balance between investor protection and disclosure on the one hand and enabling companies to raise capital efficiently on the other. The FCA stresses that consumers need to remain responsible for their investment decisions and accept a level of risk. 

The proposed rules focus on two broad elements: 

• bespoke rules and guidance for firms that wish to engage in the regulated activity of operating a POP, and
• the application of existing rules that are likely to apply already to firms seeking to operate a POP due to their other regulated activities.

With regard to the bespoke rules, the FCA’s proposals cover three key areas: 

• information gathering and due diligence by POP operators on issuers and securities to be offered through their platforms, 
• disclosures to investors regarding issuers and securities, and
• liability to investors for the content of offers made via a POP.

The rules for POP operators will be set out in a new section of the Conduct of Business sourcebook, COBS 23.

Due Diligence 

The FCA proposes to put the onus on the platform operators to carry out due diligence on prospective issuers and the securities they wish to offer through the POP. The FCA also notes the interaction that conducting due diligence under these rules should have with other relevant provisions of the FCA Handbook such as the POP operator’s obligations under the cross-cutting requirements for distributors set out in the Consumer Duty (i.e., acting in good faith towards retail customers). 

The operators’ due diligence obligations comprise two sequential steps: (i) information gathering; and (ii) an assessment of the information gathered. 

Step One: information gathering

The requirements include a set of minimum information that POP operators must collect on issuers and securities when deciding whether to facilitate a public offer. This information includes: 

• general information, such as identification, key individuals, business model and sustainability characteristics; 
• financial information;
• information on the offer itself; and
• specific information regarding closed-end funds, such as the investment policy, investment strategy and objectives, and details of any entity or persons involved with managing the investments.

The FCA stresses that these are only a starting point—POP operators must consider what information is sufficient for them to make their assessment based on the circumstances of each issuer and offer. 

Step Two: assessment 

POP operators must make an assessment based on the information gathered and decide whether it is appropriate to facilitate a public offer. As part of this assessment, the information gathered must be verified—a process which is subject to a standard of reasonableness. The FCA is proposing separate standards for factual and non-factual information. Whereas factual information should be independently corroborated, non-factual information such as forward-looking statements will require a plausibility assessment. POP operators would need to assess non-factual information in light of the circumstances and characteristics of the issuer and the public offer as well as the consistency of the information with other information provided. They will be able to rely on information provided by experts, unless they have reason to doubt the independence or credibility of the expert or the accuracy of the information. The FCA proposes to publish guidance clarifying that the plausibility assessment for non-factual information must be made in the context of the overarching fair, clear and not misleading standard that applies to communications made by POPs.

The factors which POP operators should consider when deciding whether it is appropriate to facilitate a public offer include, but are not limited to, whether all the required information has been provided, the fitness and propriety of the issuer and key individuals, and compliance of proposed disclosures with regulatory requirements such as the financial promotions rules. The FCA notes that the materiality of any one factor or piece of information alone or in aggregate with other factors should be used as a reference criterion when making this assessment. 

Further, as part of the diligence process, POP operators must assess the creditworthiness of the issuer. This will include assessing the issuer’s revenue level, diversity of sources of revenue, the risk profile of the issue, and any other circumstance of which the POP operator may reasonably be expected to be aware. 

Disclosures to investors

POP operators must provide investors with a disclosure summary, summarising the due diligence carried out on the issuers and the public offer in an adequate and sufficient way. The bulk of the information should contain the most material aspects pertaining to the issuer and the public offer such as information on the issuer’s shareholders with a 10% or more interest in the issuer or its parent, key risk factors related to both the issuer and its securities, the most recent financial accounts and reports, and the envisaged use of proceeds. 

The FCA notes that POP operators will need to:

• provide investors with an adequate and reliable level of information so they can make informed and effective investment decisions;
• comply with the client communications rules in COBS 4, including the fair, clear and not-misleading standard set out in COBS 4.2.1; and 
• take the Consumer Duty’s consumer understanding outcome into account when communicating to retail investors under PRIN 2A.5.

In respect of risk factors, the FCA is proposing guidance that reinforces the need for these disclosures to be made with reference to the specificity of the issuer and the offer, their materiality and the likelihood of materialisation. The FCA is also proposing guidance on the POP operator’s assessment of the fitness and propriety of the issuer’s key individuals.

Proprietary and commercially sensitive information may be omitted from the disclosure summary, but POP operators should consider whether disclosure of such information in a summarised form can be provided to investors. 

Alongside the disclosure summary, POP operators will also need to provide investors with additional information such as the most recent financial accounts of the issuer, terms and conditions, the current funding level of the offer as it progresses, and any other information investors may require to make an informed investment decision. POP operators will also be required to publish a statement on their approach to the due diligence requirements and how they manage conflicts of interests between issuers and investors.

The initial information provided to investors would only need to be updated if there is a subsequent offer or if there are material changes to information initially disclosed, or if material mistakes or inaccuracies are identified, while the offer is still open to the public. If significant new information or changes emerge, or a material mistake, inaccuracy or omission is discovered, investors should be given the right to withdraw from a previous agreement to purchase the relevant security (a rule which mirrors the withdrawal rights granted to investors who buy securities in regulated markets). 

The FCA does not propose to introduce disclosure requirements on POP operators after an offer is closed. However, the FCA acknowledges that this can create asymmetry of information between issuers and security holders and therefore is seeking views as to whether any post-offer requirements should be imposed. 

Systems and controls requirements

The FCA is also proposing specific systems and controls requirements for POP operators. These include requirements to:

• have adequate policies and procedures approved by the POP operator’s governing body or senior personnel to comply with the FCA’s requirements;
• review those policies and procedures at least annually and adjust them where necessary;
• have internal checks and governance mechanisms in place to assess whether the issuer and the public offer are appropriate to be made to investors and to produce the disclosure summary;
• maintain a record of the due diligence carried out on each issuer and public offer, including the basis on which the POP operator satisfied itself that it is or is not appropriate to facilitate the offer; and 
• adopt governance arrangements and internal controls to ensure compliance with the above.

POP operators should also have contractual terms and conditions with issuers in place to ensure adequate access to information and to ensure that issuers grant withdrawal rights to investors where necessary. 

Liability regime 

The FCA expects POP operators to act in accordance with what can reasonably be expected of a prudent firm when complying with the FCA’s rules. If POP operators fall short of the FCA’s proposed standards, investors may have a private right of action under section 138D of the Financial Services and Markets Act 2000, and POP operators may need to compensate investors’ losses. However, the FCA notes that there may be occasions where business failure and investor loss could not have been anticipated, even when the POP operator acted in accordance with the FCA’s proposed standards. POP operators will be less likely to face a successful action for damages  in such circumstances if they complied with the FCA’s requirements in a reasonable way.

Issuers using POPs will not be subject to direct FCA regulation. However, POP operators may agree contractual arrangements such as indemnities with issuers to manage their liability. Further, investors may be able to seek compensation directly from issuers through common law remedies in cases of issuer wrongdoing such as providing insufficient, false or misleading information or material omissions. In addition, offences relating to misleading statements or impressions under sections 89 and 90 of the Financial Services Act 2012 will be relevant to issuers offering securities through POP operators. 

Voluntary offers

The new regulated activity of operating a POP will only be relevant to public offers with a total consideration greater than £5m over a 12-month period, as below this amount offers are generally exempt from the prohibition of public offers under the POATRs. However, POP operators will still be able to communicate public offers below the £5m threshold or within any other exemptions in the POATRs such as to qualified investors without triggering the due diligence and disclosure requirements described above.

The FCA proposes to allow these offers to be made by POP operators, as long as they are clearly identified as being subject to a different regulatory treatment. The POP operator will need to identify the exemption to the general prohibition on public offers of securities being relied on, and such offers will need to feature a prominent risk warning saying that they are not subject to the same regulatory requirements as those above £5m or being made to, e.g., retail investors, together with a link to information on the POP operator’s approach to due diligence on all public offers of securities.

Regulatory reporting

The FCA is proposing a specific set of reports that POP operators would need to provide to the FCA on a periodic basis. These are based on the reporting requirements for crowdfunding firms, but with some additional items such as the total value of public offers communicated through the POP operator, the number of public offers failing to reach target amount, and default rates following public offers of equity securities. The FCA is also proposing to extend its complaints reporting rules to the new regulated activity of operating a POP. The FCA intends to consult on these reports in more detail, as well on the changes that will need to be made to its existing supervision rules in the SUP sourcebook.

Concept of client

For the purpose of the new rules in COBS 23, the FCA proposes to adopt a narrow concept of client that only includes investors or prospective investors in securities offered through communications via POP operators. For the avoidance of doubt, the FCA has adopted the concept of ‘investor client’.

Overseas issuers

The FCA proposes that POP operators should be able to communicate public offers relating to overseas issuers, as well as UK companies. 

Interaction between the POP regime and wider FCA Handbook rules

POP operators will also be subject to provisions across the FCA Handbook, including the Consumer Duty, as discussed in our previous blog post, as well as threshold conditions, Principles for Businesses, and the Senior Managers and Certification Regime. Conduct of business requirements will apply to POP operators, regardless of whether they operate from an establishment in the UK or overseas.

Additionally, POP operators will need to comply with rules relevant to the other regulated activities that they may carry out. For example, POP operators may wish to facilitate transactions in securities offered on their platform, in which case they will require the relevant permissions for arranging and dealing activities. 

Although the FCA does not considering operating a POP to be MiFID business, POP operators may carry out other regulated activities, some of which may be MiFID business. Any firm that is not already authorised will need to confirm at the authorisation gateway whether it considers itself a MiFID or a non-MiFID firm. This designation will impact whether certain other rules will apply to the POP operator such as SYSC rules, product governance requirements or prudential requirements. The FCA considers that regardless of such designation, the remuneration incentive rules should apply to all POP operators. The financial promotion rules will also apply.

POP operators should also consider whether they expect to hold client money or assets in relation to any other regulated activities they carry out. If so, they will need to comply with the relevant requirements set out in the FCA’s Client Assets sourcebook (CASS). 

The FCA has also confirmed that the regulated activity of operating a POP cannot be carried out through an appointed representative (AR), even though similar regulated activities such as arranging deals in investments may be carried out through an AR. 

FOS and FSCS

Regulated activities generally fall under the compulsory jurisdiction of the Financial Ombudsman Service (FOS). This includes regulated activities that are similar to operating a POP, such as those related to investment-based crowdfunding. The FCA will consult separately on whether to follow a similar approach for the regulated activity of operating a POP and whether to extend FOS coverage only to investors or to issuers as well. 

The FCA intends to extend Financial Services Compensation Scheme (FSCS) coverage to the regulated activity of operating a POP in relation to investors, but not issuers. 

Fees

The FCA plans to consult on proposals for charging POPs as part of its annual consultation on fees policy, which is scheduled to be published in November 2024. If the FCA decides to extend FOS coverage and FSCS protection to POPs, this would include both FOS fees and FSCS levies.

Next steps

The FCA welcomes written responses to the CP by 18 October 2024 and aims to finalise the rules for the POATR regime by the end of H1 2025. The FCA notes that it will need to consider what further time is required before the regime comes into force to enable firms to apply for permission to carry on the new regulated activity and to allow adequate preparation time for prospective POP operators to meet the proposed rules. The FCA intends to communicate further in due course on implementation approach and timing.