Prospectus review: FCA to be front and centre of new regime

The recent Hill Review of the UK listing regime (see here) made a number of recommendations to improve the competitiveness of the UK’s capital markets. In response, the Government and the FCA have published several consultations focussed on taking those recommendations forward, including the FCA’s consultations on SPACs (see here) and the Primary Markets Effectiveness Review (see here).

The prospectus review from HM Treasury consults on proposals to streamline prospectus requirements, improve the quality of disclosure and make the prospectus regime more agile and dynamic. There is also a push to widen ownership of public companies by removing disincentives to offering shares to retail investors.

Key Proposals

  • Decoupling the prospectus regimes for admission to trading and offers to the public
  • The FCA to have responsibility for developing and administering the rules on the requirement for and content of prospectuses re admissions to trading
  • Companies with securities admitted to trading on various stock markets (or those applying for admission) to be exempt from public offer prospectus rules
  • New liability regime for forward-looking information based on a fraud, rather than negligence, standard of liability
  • Greater differentiation between prospectuses for initial public offers and further issuances.

Admission to trading and offers to the public

Currently prospectuses relating to admissions to trading and making offers of securities to the public are dealt with together under the Prospectus Regulation. The Hill Review recommended dealing with these two different regulatory concerns separately and HM Treasury proposes separating the two regimes, with the FCA making the rules relating to prospectuses in the context of admissions to trading.

Offers of securities made by companies that are admitted to trading (on various stock exchanges), or where there is an application for admission, will be specifically exempted from the public offer prospectus rules. This means that a prospectus will not necessarily be required if a listed company does a rights issue and the public offer rules will largely relate to private companies wishing to issue securities to raise capital. 

Proposed new powers for the FCA

The powers that may be delegated to the FCA, should the proposals go ahead, will be broad. It will be able to specify whether a prospectus is needed, its content and whether or not the document needs to be reviewed before approval. 

The vast majority of the rules will form part of the FCA handbook, with only provisions relating to the overall standard of preparation (the “necessary information test” in article 6 of the Prospectus Regulation) and those providing for the supplementing of a prospectus, envisaged as remaining in statute. The ambition is to create a flexible regulatory environment while retaining the statutory liability regime around prospectuses which, the consultation highlights, helps to maintain high standards of disclosure.

New liability regime for forward-looking information

The Hill Review singled out forward-looking information as particularly key information for investors and pointed out that companies are disincentivised from including it by the prospectus liability regime. The consultation proposes to tackle this by changing the liability regime specifically for forward-looking information contained in a prospectus. 

The prospectus liability regime is set out in s.90 and Schedule 10 of the Financial Services and Markets Act 2000.  It provides for compensation where a person has suffered loss in respect of untrue or misleading statements or any omission of information required by the necessary information test. Schedule 10 includes an exemption to liability where a person reasonably believed that the statement was true and not misleading or that the omission was properly made. This standard is known as the “negligence standard”. 

This position is more strict than that adopted by its cousin, Schedule 10A FSMA, which covers liability for other information published by issuers. This sets a “fraudulent” or “recklessness” standard, where liability only arises if an issuer knew or was reckless as to whether a statement was untrue or misleading or knew that any omission was a dishonest concealment of a material fact.

The consultation proposes applying this “fraudulent standard” in relation to forward-looking information in a prospectus, with the specific exclusion of the working capital confirmation. This relaxation would not apply to any of the other information contained in the document. In addition, forward-looking information would need to be explicitly identified together with warnings highlighting the inherent uncertainly of projections/predictions and the lower standard of liability.

Further issuances

The consultation recognises that a prospectus is a key component in an initial public offering, but states that when a company, which is already listed, issues new securities, the need for a prospectus is not as clear. It highlights the on-going disclosure required from listed companies and the fact that the securities offered are the same as those already trading. However, it also points out that issuing new capital can represent a “material and strategic” event for a company and the fact that companies can materially alter as a result of new capital. 

Given the FCA’s position as securities regulator, the consultation proposes that it should have discretion to set rules on whether a prospectus is required for a further issuance. It  emphasises that this does not mean that there needs to be a “one size fits all” approach in relation to the content of such prospectuses.

The Hill Review argued for differentiation in disclosure for new applicants and further issuances and the consultation picks up this theme. It proposes not to have a separate necessary information test for further issuances, as currently set out in article 14 of the Prospectus Regulation, but seeks views on amending the core test in article 6, to make clear that whether an issuer’s securities have been admitted to the market before is a relevant factor in deciding what is or is not necessary information. 

Other matters

The consultation also covers other matters including:

  • Public offers by overseas companies – although UK institutions participate in overseas markets, by virtue of the qualified investor exemption, the consultation seeks views on public offers into the UK by overseas companies.
  • Scope of the public offer rules – in order to widen public ownership of companies, the consultation seeks views on adding a new exemption from the public offer rules for existing holders of securities. This would take all rights issues outside the restrictions of the public offer rules.
  • Alternatives to prospectuses for public offerings by private companies – different options include requiring an offer to be made through an authorised firm and the possibility of creating a bespoke permission for authorised firms to operate platforms for the public offering of securities.

Next steps

The consultation closes on 24 September 2021. There is no time period specified for feedback from HM Treasury. However, it does highlight that reform will be a two-stage process:

  • the government consultation following by legislation (if proposals proceed); and
  • an FCA review and consultation on the content of any new rules.

Click here for the UK Prospectus Regime Review