Proposed Changes to the Prospectus and Public Offer Regime as a Result of the Edinburgh Reforms

The U.K. Government have continued with their plans to overhaul financial services in the U.K., also generally known as the “Edinburgh Reforms”. The most recent changes as a result of the Edinburgh Reforms have been to the U.K.’s prospectus and open offer regime, which has led to the publication of a draft illustrative statutory instrument by HM Treasury in December 2022, regarding proposed changes. This was accompanied by a policy note outlining the powers that would be introduced as part of the instrument, which were based on the findings of the HM Treasury review on the U.K. prospectus and open offer regime that took place in March 2022.

Broadly, these proposed changes will mean that the Financial Conduct Authority (FCA) will replace the Prospectus Regulation Rules and the FCA will be given more autonomy to change the landscape in the U.K. in relation to offering securities to the public and for listings. It appears the legislation intends to create a clear delineation between offers made to the public and admissions to trading, allowing the FCA to develop its own rules for each rather than the current U.K. framework wherein they are both regulated together but have different applicable exemptions.

Note that the final statute that gets passed into law may differ from the draft statutory instrument published by HM Treasury in December 2022. The Financial Services and Markets Bill (FSM Bill), introduced in July 2022, is currently under review in the parliamentary process, having completed its second reading in the House of Lords and reached the Committee stage on 25 January 2023.

Background to the Changes

In July 2021, the government commissioned a review of the U.K. listing regime, resulting in Lord Hill’s recommendations. Following this, HM Treasury published its response on 1 March 2022 (all of this is further detailed in our article from April 2022). The outcome of HM Treasury’s publication was a decision that the U.K. listing regime contained in the U.K. Prospectus Regulation needed to be replaced, with the general goal of making regulation in the U.K. more agile and efficient, and ultimately delegating much greater responsibility to the FCA for administering the regime. The government decided that it would proceed with implementing these proposed changes in alignment with the various recommendations and changes to be implemented in the FSM Bill. It is expected that the FSM Bill will pass through the House of Lords and is likely to come into force in 2023.

Proposed Changes as detailed by HM Treasury Draft Act

HM Treasury’s draft illustrative statutory instrument (full name of which is the Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023) (Draft Act) contains specific details of what the new prospectus and public offer regime will likely look like and how it will operate to replace the existing Prospectus Regulation Rules. The main elements of this new proposed regime include:

New FCA Powers to Regulate Regime

This newregime proposes the addition of a new section 71K to the Financial Services and Markets Act 2000 (FSMA), giving the FCA the authority to create rules for "designated activities”. This shift aims to grant the FCA control over the entire regime and enable quicker, more efficient decision-making without the need for implementing new legislation. Instead of focusing on prohibiting "regulated activities" without FCA authorisation, the Draft Act considers public offerings of relevant securities, admissions to trading on regulated markets, and admissions to trading on primary multilateral trading facilities as "designated activities", subject to FCA regulation and rule-making.

New Public Offer Architecture

The government is proposing a new public offer architecture as it is believed the current public offer regime (which is focussed on retail investor protection) places too much of a burden on issuers. The proposed new regime will alter the current general prohibition on public offerings of securities by amending the criminal offence outlined in section 85(1) of the FSMA. The Draft Act will then define exemptions from this general prohibition, creating the new public offering architecture (previously under the Prospectus Regulation Rules). The primary exemptions will relate to offers where securities are admitted to trading on U.K. markets or offerings made through regulated platforms.

Offers for Securities Not Admitted to Trading

The proposed new regime would still allow companies to offer securities to the public without having them admitted to a securities market. However, the Draft Act proposes to reform the requirements for such public offers making it easier for companies to raise larger amounts of capital whilst maintaining a robust level of investor protection. The existing requirement under the Prospectus Regulation that mandates companies offering securities to the public of a value over €8 million to publish a prospectus, will be removed. Instead, a new route will be implemented so that offers of any size can be made to the public through a ‘public offer platform’. In effect, if companies making a public offer are not otherwise exempt from the prohibition on public offers, and where they are raising capital above a certain threshold (which is yet to be determined), they can do so without publishing a prospectus, but they will be required to do so through a ‘public offer platform’.

Admissions to Trading on Regulated Markets

While the need to prepare a prospectus will be retained under the new regime in relation to the public offers of securities admitted to trading on regulated markets, as noted above, under the suite of new powers the FCA will be given, the FCA will be able to determine if and when a prospectus is required, what the prospectus should contain and the timing of validation and publication. These new powers will in effect replace the Prospectus Regulation and the matters generally governed by this under the current regime.

Admissions to Trading on Multilateral Trading Facilities Operating Primary Markets

Currently it is the operators of Multilateral Trading Facilities (MTFs) who make the rules for their own exchanges. Under the Draft Act the FCA will instead be given rulemaking powers to ensure that, in appropriate circumstances, the rulebooks of MTFs operating as primary markets will require an admission document to be published (to be treated as a ‘prospectus’). These admission documents would also be subject to the statutory compensation remedy for prospectuses. To do this, the proposed powers of the FCA will include the ability to force MTF operators to add this requirement into the rules for their exchange.

Profit Forecasting Changes

In the current regime making profit forecasts is relatively rare. This is because when issuers include profit forecasting statements, the relevant liability for those forecasts is determined on a negligence standard. As such, the standard practice is for an issuer looking to make profit forecasts to obtain comfort on any forecasts from their accounting advisers. The costs of obtaining this comfort from accounting advisers can be prohibitively expensive, particularly as this comfort needs to be sought prior to the publication of any forecasts. The proposed changes under the new regime will involve implementing a different liability threshold, to be based on fraud and recklessness standard (a generally higher threshold in comparison to the negligence standard) for particular categories of forward-looking information, lowering the risk profile in relation to the liability for making such statements.

Inclusion of Minibonds as a Regulated Activity

Under the current prospectus regime, ‘Minibonds’ (illiquid debt instruments usually marketed to retail investors) are considered to be outside of this regime as they do not fall within the definition of ‘transferable securities’. Within the new proposed regime, Minibonds would fall within in the general definition of ‘Relevant Securities’ as set out in the Draft Act. Therefore, Minibonds would fall within the FCA’s new purview of being a ‘designated activity’ allowing the FCA to implement rules and regulations for dealing in Minibonds.

When Will the Proposed Legislation be Implemented?

The FSM Bill has completed a second reading in the House of Lords and is now at the Committee stage. While there is no guarantee as to when the legislation will be passed by the House of Lords and receive Royal Assent, it is expected to receive Royal Assent in early to mid-2023.

How Armstrong Teasdale Can Help

Our Capital Markets team is experienced in advising clients on listing requirements in the context of U.K. capital markets transactions. If you would also like to discuss these proposed changes or need any further guidance, please contact one of the authors listed, or your regular AT lawyer.

Disclaimer: This publication is provided by Armstrong Teasdale Limited for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to Armstrong Teasdale’s U.K. Capital Markets team.