As anticipated, July has seen two significant consultations which build on the proposals of the UK Listing Review and the Kalifa Review of UK Fintech published earlier this year. Those reviews recommended significant changes to the UK listing and UK prospectus regimes with the aim of attracting the most innovative and successful firms and helping companies access the finance they need to grow.

In this alert, we look at these two July consultations: first, HM Treasury's Prospectus Regime Review and, secondly, the FCA's Primary Markets Effectiveness Review.

HM Treasury's Prospectus Regime Review

The Prospectus Regime Review consultation takes forward the UK Listing Review Report's recommendation that the government carry out a fundamental review of the UK's prospectus regime. The four key objectives that underpin the proposals put forward in the consultation are to:

• facilitate wider participation in the ownership of public companies;
• improve the efficiency of public capital raising by simplifying regulation and removing the duplications that currently exist in the UK prospectus regime;
• improve the quality of information that investors receive; and
• improve the agility of regulation in this area.

Overall approach

The consultation adopts the UK Listing Review Report's recommendation that the regulation of admissions of securities to trading and the regulation of public offers should, in the future, be dealt with separately. 

The consultation proposes removing the prohibition in section 85(2) of the Financial Services and Markets Act 2000 (FSMA) on requesting admission to trading on regulated markets without first having published an approved prospectus. While the consultation proposes retaining the section 85(1) FSMA prohibition on public offers of securities without an approved prospectus, it proposes new exemptions for companies with, or applying to have, securities admitted to trading on stock markets of various types.

New FCA powers on admissions to regulated markets

The consultation proposes granting the FCA discretion to determine whether or not a prospectus is required when securities are admitted to trading on UK regulated markets, including the flexibility to establish rules or exemptions equivalent to Article 1(5) of the current Prospectus Regulation, or to extend them should it deem it appropriate. 

On the specific issue of the recognition of overseas prospectuses, the consultation suggests that the FCA could use that discretion to accept an overseas prospectus in certain circumstances should it deem it appropriate. This could enable certain overseas companies wanting a secondary listing to come to UK markets using an overseas prospectus prepared in accordance with the rules in the jurisdiction of their primary listing.

The consultation notes that, as the prospectus regime is redesigned, there will need to be consideration as to which elements of the regime should remain in legislation and which should be in the FCA Handbook. Given the aim for agile regulation, the main design principle should be that provisions only remain in statute where strictly necessary (e.g. those provisions that contribute to the establishment of liability).

Prospectus content and ancillary provisions

The high-level standard applicable to a prospectus will remain the "necessary information test" currently set out in Article 6 of the Prospectus Regulation (subject to potential amendments regarding further issues and non-equity securities).

While this high-level standard will remain statutory, the consultation proposes giving the FCA the responsibility to make detailed rules on content.

The government is also considering replacing the requirement that the FCA review and approve prospectuses prior to publication with granting discretion to the FCA set rules on the review and approval of prospectuses. It is also in favour of giving the FCA new rule making responsibilities in relation to various ancillary provisions currently provided for in the Prospectus Regulation.

Forward-looking information

In order to encourage the inclusion of forward-looking information in prospectuses, the government proposes to replace the negligence standard of liability that currently attaches to information in prospectuses (section 90 of FSMA) with a recklessness standard.

This reduction in liability would apply only in relation to statements in a prospectus which project or predict a future state of affairs. It would not apply to statements of fact, nor to the working capital statement in a prospectus. These would still be subject to the existing section 90 standard.

Where a company includes forward-looking statements and wishes them to be subject to the proposed new lower standard of liability, the information would have to be explicitly identified as forward-looking information and the prospectus would need to include certain warnings.

Junior markets

Under the current Prospectus Regulation, the requirements governing admissions to trading on regulated markets do not apply to multilateral trading facilities (MTFs), such as AIM. However, issuers on MTFs (or applicants) are subject to the public offering rules. This means that the current Prospectus Regulation inhibits wider participation in MTF companies.

The government is consulting on two options for companies admitted to MTFs:

• Option 1: Simple exemption from the restriction on public offerings of securities in section 85(1) of FSMA. This would only apply where the issuer has itself requested admission of the securities to trading on the MTF. It would not apply where the trading on the MTF provides a secondary liquidity venue.
• Option 2: Exemption from section 85(1) plus a new MTF admission prospectus. Under this option, admission documents published in relation to admission to an MTF would be recognised as a form of prospectus in the reformed regime, with the intention of bringing them within the scope of section 90 of FSMA.

The government has stated that it will only pursue Option 2 further if it is persuaded there is likely to be sufficient benefit in the option. Such benefit could come from a reduced level of liability for those responsible for admission documents encouraging the inclusion of forward-looking information in MTF admission documents.

The Wholesale Markets Review, published by HM Treasury on the same date as the Prospectus Regime Review consultation, includes a proposal for a new type of trading venue aimed at smaller SME issuers, with a reduced regulatory framework. If this proposal is implemented, an appropriate exemption from the section 85(1) FSMA restriction on public offers of securities would be introduced for securities that will be admitted to trading on this new venue type. 

The scope of the UK’s public offering rules

Additionally, the government proposes adding a new exemption from the public offer rules for existing holders of securities. This would have the effect of taking rights issues by all types of companies outside the restrictions imposed by the public offering rules. It would also have the effect of exempting all share-for-share offers.

Public offerings by private companies

The consultation also considers how the revised regime should accommodate public offerings of the securities of private companies, including those that raise capital through crowdfunding. It explores two alternatives to the current prospectus requirement, both of which involve replacing the requirement for a prospectus with the requirement for the offer to be registered with, and made through, an authorised firm. The difference between the two alternatives is that the second involves creating a new bespoke permission for authorised firms wishing to operate a platform for the public offering of securities.

Public offers by overseas companies

The final chapter of the consultation considers public offers into the UK by overseas issuers. In relation to overseas listed issuers, the consultation puts forward three options:

• Maintaining the status quo: Overseas issuers would be able to extend an offer (in association with an admission of securities to an overseas stock market) into the UK provided an FCA-approved prospectus was reviewed and approved.
• A new deference mechanism: This would replace the equivalence regime in Articles 29 and 30 of the Prospectus Regulation. It would allow overseas issuers to extend an offer of securities to the public in the UK on the basis of offering documents prepared in accordance with the rules of the overseas jurisdiction.
• No right to make a public offer into the UK: The government seeks views on the overall value of a mechanism to permit public offerings into the UK by overseas companies.

In relation to overseas private companies, the government does not propose providing a facility enabling overseas private companies to make public offerings into the UK.

Next steps

The consultation closes on 24 September 2021. Subject to the outcome of the consultation, the proposals will be implemented by legislation and by an FCA review and consultation on the rules to replace the Prospectus Regulation.

FCA's Primary Markets Effectiveness Review

The purpose of the first part of the Primary Markets Effectiveness Review is to begin a high-level discussion on the purpose and value of listing, with a view to informing how the listing regime may be made more effective in the longer term. To inform that discussion, the review looks at recent trends across UK equity primary markets, global trends in listing and the wider regulatory context.

The second part of the Review is a consultation on a specific set of changes to the listing regime arising from recommendations in the UK Listing Review and the Kalifa Review of UK FinTech. Broadly, these changes are designed to remove barriers to listing and to improve the accessibility of the FCA's rulebooks without compromising the highest standards of market integrity. In this overview, we focus on the consultation on these specific changes.

Dual class share structures

The FCA proposes to introduce a five-year exception to the rule that restricts votes on certain matters to holders of premium listed shares only. The purpose of this change is to enable holders of unlisted shares with weighted voting rights also to participate in these votes and thereby to remove a major obstacle to a company with that kind of structure listing in the premium segment.

The specific features of the proposed regime have been designed to meet the needs of founder-led growth companies and address the specific barriers to these companies listing in the premium segment. (There are no restrictions on a dual class share structure in the standard listing segment.)

The proposed exception will apply where the shares with weighted voting rights meet the following conditions:

• they entitle the holder to more than one vote per share on votes to remove the holder as a director of the company;
• in the event of a successful change of control, they allow the holder to exercise weighted voting rights in the circumstances currently restricted to holders of premium listed shares only;
• they set a cap on weighted voting rights relative to ordinary shares of 20:1;
• they require holders to be limited to directors of the company at the time of IPO, or following the death of a director, a beneficiary of the director’s estate; and
• they include a mechanism for the end of the five-year exemption period (e.g. the conversion of the weighted voting shares to ordinary shares or their expiration).

Minimum market capitalisation

The FCA is proposing to change the premium and standard listing regimes to require new issuers seeking to list with a premium or standard listing to have an expected aggregate market value of £50 million (currently £700,000).

The FCA considers that companies with a lower market capitalisation are better suited for admission to other markets such as AIM or AQSE Growth Market, where they can get more support in meeting regulatory requirements involving market integrity and market abuse and can find a more suitable investor base.

The expected aggregate market value of shares of a closed-ended investment fund or open-ended investment company to be listed will remain at £700,000.

More generally, issuers with an existing listing at the time of the rule change will not be subject to the enhanced minimum requirement.

Free float

The FCA proposes to change the free float required under the premium and standard listing regimes from 25% to 10%, both at listing and as a continuing obligation.

The consultation notes that data suggests that a significant number of main global IPOs take place at a free float of below 25% but very few at a free float of below 10%. A reduction to 10% would therefore allow most issuers flexibility to structure their IPOs in the way that suits them.

The FCA is not proposing to accept a free float lower than 10% at listing application or subsequently, so it will no longer be possible to apply for a modification to the free float requirement.

Track record requirements

The listing regime currently requires companies wishing to list in the premium segment to provide historical financial information to cover at least 75% of an issuer's business for the last three years.

The immediate aspect on which the FCA is consulting is whether the listing requirements that go further than the prospectus regime requirements in relation to historic information constitute a significant barrier to listing. The FCA's view is that the costs associated with a change to this aspect of the track record rules may outweigh the benefits and it seeks views on whether consultees agree with this approach. Subject to responses, the FCA may consider publishing further guidance on whether it may consider waivers to the existing track record rules.

The FCA also seeks more information on specialist companies not already covered by existing bespoke track record rules. In particular, it seeks views on what types of high growth innovative companies struggle to meet the existing requirement in the premium segment for a three-year revenue track record covering 75% of the business and what alternatives could be considered for these companies. It will then seek further views and evidence from stakeholders on possible proxies for the track record that could be demonstrated by these types of companies.

Minor changes to the Listing Rules, the Disclosure Guidance and Transparency Rules, and the Prospectus Regulation Rules

Finally, the FCA is also consulting on a range of minor changes. These changes are not intended to change market practice but to update the FCA rulebook to reflect modern technology and business practices and to add clarity and remove duplications.

Next steps

The consultation closes on 14 September 2021. Subject to consultation feedback and FCA Board approval, the FCA will seek to make relevant rules by late 2021. On the discussion subjects, the FCA will provide feedback and issue a potential further consultation on the wider listing regime changes in due course, if appropriate.