The government has published a report with the results of the UK's secondary capital raising review. The report recommends significant changes to the rules governing follow-on equity fundraisings, with a view to making the UK regime for secondary capital raisings more efficient and effective. The review forms part of the proposed package of wider reforms to the UK capital markets derived from Lord Hill's UK Listing Review.
The key recommendations in the report include:
- Maintaining and enhancing pre-emption. The Pre-emption Group (PEG) should be put on a more formal footing, with (among other recommendations) a more formal and transparent governance structure and the obligation to report annually on the operation of the pre-emption regime.
- Increasing the ability to raise smaller amounts of funds quickly. PEG should make permanent the temporary concessions that it successfully introduced during the pandemic to enable companies to raise capital more quickly. This would allow companies to seek shareholder consent at each AGM to issue up to a further 20 per cent of share capital on a non-pre-emptive basis (i.e. without the cost or process involved in a rights issue or other formal pro-rata offer to existing shareholders). This would be double the current limit, but otherwise available on the same basis, with 10 per cent being available for use for any purpose and the remainder limited to use in connection with an acquisition or a specified capital investment. The use of cash-box structures in connection with undocumented placings should be restricted in line with these limits. A company should consult with its major shareholders before undertaking a placing on this basis, provide a full explanation to the market and as far as practicable conduct the placing on a ‘soft pre-emptive’ basis and involve retail investors (see below). Company management should also be involved in the allocation process. The company should report afterwards on the placing, both on a new form to be filed with PEG and in its annual report.
- Allowing additional flexibility for ‘capital hungry’ companies on a case-by-case basis. A ‘capital hungry’ company (as flagged to investors at the time of IPO) should not be discouraged from asking its shareholders for authority to issue further shares on a non-pre-emptive basis above the new 20 per cent limit (up to a maximum of 75 per cent of existing share capital), where it can make a compelling case for this to its shareholders.
- Involving retail investors more fully in capital raisings. Companies conducting a fundraising should give due consideration as to how they will involve retail investors – for example, by using a retail investor platform, or by having a separate retail offer that follows on from an institutional placing (based on a short form offer document and open for five business days, and limited to no more than 20 per cent of the size of the placing, with a monetary cap of £30,000 per investor, but otherwise on the same terms and conditions). Companies should report afterwards how they have looked after retail investor interests. For the time being, existing regulatory constraints limit the involvement of retail investors, but the government’s proposed reforms to the UK prospectus regime (including the removal of the need for a prospectus for a pre-emptive offer) should provide greater opportunities in the future. Separately, the report also recommends that the FCA reduces the current period for which an IPO prospectus must continue to be made available to retail investors before the end of the offer from six days to three days, to encourage companies to include them in an IPO fundraising.