All change for the UK Listing Regime? Time to question some fundamentals in the post-EU world

On 19 November 2020, HM Treasury announced a wide-ranging review of the UK listing regime. As a starting point, it has issued a call for evidence, inviting responses before 5 January 2021. The review is timed to coincide with the Brexit Transition Period coming to an end, whereupon the UK will regain full responsibility for its financial services rulebook. This will provide the UK with an opportunity to look afresh at many aspects of its listing regime and tailor it more precisely to the needs of companies, investors and markets, especially with more fast-growth technology, e-commerce and science companies entering public markets.

As well as seeking general responses on measures to encourage listing in UK markets, the call for evidence highlights five specific areas where views are being sought:

• Free float requirements – where, for a company to list, 25% of its shares must be available for the public to purchase (which some founder shareholders might see as being too high a proportion of equity that needs to be made available to the public);
• Dual class share structures  – which are not allowed under the current Listing Rules, even though they are favoured by some founder shareholders who can then hold a separate class of shares to retain a higher degree of voting control;   
• Track record requirements – which are arguably inflexible requirements, such as 3 years of accounts covering 75% or more of the business, but allow prospective investors to make an assessment based on actual (but alas limited) performance;
• Prospectuses – as to if and when these detailed documents (that describe the issuing company and the securities being offered) need to produced and approved by the FCA; and
• Dual and secondary listings – where securities are listed on exchanges in two different jurisdictions, with the company then being subject to the listing requirements of both markets, but which allows the company to access a greater pool of investors.

Of these, one particular area of interest for retail investors is when a prospectus needs to be produced by a company. The call for evidence suggests that the length of time it takes, and the costs involved, in preparing a prospectus can act as a barrier to companies coming to market or pursuing a follow-on fundraising.  This may be seen as unduly restrictive now that COVID-19 has put huge pressure on UK listed companies to raise further funding through share issues. Consequently, a reform of the prospectus rules could provide companies with a more cost-effective and streamlined method for raising funds, whilst still providing investors with comprehensive information on listed companies and, at the same time, affording them the necessary protections to make their investment.

When is a prospectus required?

Under the EU prospectus regulations, a prospectus is required if securities will be offered to the public in the EU or admitted to trading on a regulated market in the EU. The Financial Services and Markets Act 2000 imposes similar rules here in the UK.  

"Offer to the public" has a very wide definition, and an offer will be caught if there is communication to persons in any form and by any means.   Any document that contains such an offer will need to present comprehensive information on the terms of the offer and the securities to be offered, so as to enable an investor to make an assessment on whether to invest.

Are there any exemptions?

There are a number of exemptions from the need to produce a prospectus. For instance, if the offer is to be addressed to fewer than 150 people or if the amount being raised is less than €8,000,000 (provided, for listed companies, so long as the shares to be issued amount to no more than 20% of its existing listed share capital).  

Some of the questions raised in the call for evidence query whether the thresholds for these exemptions are appropriate and whether there should be some recalibration of these (with different thresholds for certain types of companies).

Insight/Comments

As the call for evidence highlights, prospectuses provide detailed information on an issuing company's financial health, its business model and its corporate structure in a standardised format, with the intention of helping potential investors understand the opportunities and risks involved in investing in a company, whilst aiding a comparison between different investments. In particular, the prospectus will provide a comprehensive and up to date description of that company, and may include information that was not publicly available, or was hitherto only made available in a disparate number of reports, regulatory announcements, etc. For this reason, retail investors rely heavily on prospectuses to provide a single document containing the necessary information to allow them to make an informed assessment of the investment opportunity.

If the general exemptions to a prospectus are widened, with fewer offer documents being in the form of a prospectus, the Treasury and the FCA will need to mindful of any reduction in the quality of information that will be disclosed to potential investors, and the effectiveness of protections afforded to investors who have invested in non-prospectus offers where there has been insufficient disclosure by companies and their directors.  They will also need to monitor whether, in light of directors not having direct liability for misstatements or omissions in such offer documents (like they do for prospectuses), such protections will need to be strengthened in an attempt to ensure retail investors, in particular, are protected.  Such increased protections will be even more crucial since the FCA will not have reviewed - and approved - an offer document which is not a prospectus.