Developments in the London listing markets: prospectus regime & blocking listings on national security grounds26 January 2022
"On 1 July 2021, the government published ‘Consultation: UK Prospectus Regime Review’ in response to Lord Hill’s recommendation that the government carries out a fundamental review of the UK prospectus regime."
In this briefing, we consider the government’s proposals to (i) fundamentally reform the UK prospectus regime and (ii) introduce a new power to block UK public listings on national security grounds.
On 1 July 2021, the government published ‘Consultation: UK Prospectus Regime Review’ in response to Lord Hill’s recommendation that the government carries out a fundamental review of the UK prospectus regime.
The consultation paper sets out four of the government’s key objectives regarding the regime:
- to facilitate wider participation in the ownership of public companies and remove the existing disincentives which exist for the issuance of securities to wide groups of investors, including retail investors;
- to simplify the regulation of prospectuses and remove unnecessary duplications (without lowering regulatory standards);
- to improve the quality of information investors receive under the regime; and
- to ensure the regulation of prospectuses is more agile and dynamic.
The consultation paper sets out a number of key proposals relating to reforms to the prospectus regime, such as:
Admission to trading
"As the prospectus regime is re-designed, there will need to be consideration given to what elements of the regime should remain in legislation or be in the FCA Handbook."
- Under the existing regime, it is unlawful to request admission to trading on a UK regulated market without first having published a prospectus approved by the Financial Conduct Authority (FCA). The government proposes to remove this prohibition and considers whether it would be more proportionate for the relevant market to simply refuse an application without a prospectus.
- The FCA would have new rule-making responsibilities on admissions to trading on regulated markets. The FCA would have the power to incorporate a replacement prospectus regime into the FCA Handbook and tailor the regime as and when required. This would include granting the FCA discretion to determine whether or not a prospectus is required when securities are admitted to trading on a regulated market.
- In relation to the designing of new rules on admissions to trading on regulated markets, as the prospectus regime is re-designed, there will need to be consideration given to what elements of the regime should remain in legislation or be in the FCA Handbook. The main design principle should be that provisions are only retained in statute where strictly necessary.
Public offers of securities
Under the current regime, it is unlawful for issuers to offer transferable securities to the public without first publishing an FCA-approved prospectus. The government intends to retain this prohibition, as well as proposing new exemptions, such as:
"This exempts all rights issues and share-for-share offers from the requirement to publish a prospectus."
- Issuers with shares already admitted to trading on a regulated market, or who are applying for admission to a regulated market, would not need to publish a prospectus to offer securities to the public. FCA regulation would be responsible for providing investor protection.
- Offers to existing holders of issuers’ securities would not be treated as offers to the public and therefore would not trigger the need for a prospectus. This exempts all rights issues and share-for-share offers from the requirement to publish a prospectus.
- The government is not proposing substantive changes to existing exemptions which relate to offers to fewer than 150 persons, qualified investors, employees and directors, but requested consultees’ views on the same nonetheless.
Reform via a two-stage process
The government proposes that the replacement of the current prospectus regime will be achieved via a two-stage process as set out below:
- a government consultation followed, assuming it decides to proceed, by legislation; and
- an FCA review and consultation on the rules that will replace the UK Prospectus Regulation, where it is now empowered to make rules.
It is noted in the consultation paper that the FCA has indicated its support for reforming the UK prospectus regime with a view to better aligning documentation requirements with the type of transaction being undertaken and is ready to develop and consult on further rules to underpin any changes to the existing admission and public offer regime subject to the outcome of the consultation paper and in line with the FCA’s objectives.
"The government proposes that the replacement of the current prospectus regime will be achieved via a two-stage process."
The consultation closed on 24 September 2021 and the government published its formal response on 16 December 2021. Overall, there was broad support for the government’s approach to reforming the UK prospectus regime. Many respondents noted that the current prospectus regime is overly prescriptive, inflexible and acts as a deterrent to companies seeking to raise capital. Respondents welcomed the proposed separation of admissions to trading rules from those relating to public offers, particularly as this would address the unnecessary duplication in the current framework.
The government will set out its intended next steps in due course.
HM Treasury’s proposed power to block listings on national security grounds
On 7 June 2021, HM Treasury launched a consultation on a new power to block UK public listings on national security grounds. The proposed power, which is designed to complement the recommendations from Lord Hill’s review on the UK listing regime, would enable the government to intervene in cases where a listing or new admission to trading causes national security concerns.
The government intends for the precautionary power to be broad in scope, including all initial equity listings and admissions on UK public markets including:
"The proposed power would enable the government to intervene in cases where a listing or new admission to trading causes national security concerns."
- shares, securities representing equity such as Global Depositary Receipts and convertible securities;
- regulated markets and MTFs (including for example the SME Growth Markets or the Aquis Exchange) that allow primary equity listings; and,
- IPOs and non-traditional listing structures, such as introductions (also known as direct listings) and SPACs.
The power would not extend to delisting companies which have already listed.
Response to consultation
The consultation closed on 27 August 2021 and the government published its formal response on 10 December 2021. Overall, respondents were supportive of the new power, to the extent that it is implemented in a way that does not disproportionately impact the attractiveness of UK capital markets. Respondents emphasised the importance of having a narrowly targeted, precautionary power that does not impede on the role of the FCA, with clear safeguards in place.
In its response, the government notes that further policy development is required before legislation is enacted. The government plans to continue to develop this policy, taking into account the feedback it has received to the consultation.
The government views the UK’s capital markets as a fundamental part of the UK, and global, economy and strongly supports their role in promoting growth and efficiently allocating capital to growing businesses. While the government aims to enhance the functioning and competitiveness of UK capital markets through its proposed reform of the UK prospectus regimes and other changes, it also recognises that it is important that listings in the UK are not used in a way which would compromise our national security. A power to block listings on national security grounds is therefore intended to complement the government’s reforms to the listing process and the UK prospectus regime and to help maintain the UK’s status as a world-class destination for listings. The two sets of proposals outlined in this briefing are therefore linked and we will be keeping an eye on how they develop and their potential impact on issuers and the listings market.