As explained in our June 2017 ECM bulletin on the proposals, the FCA’s objective is to address two key concerns with the current IPO process. First, the primary information available to investors is not the official prospectus published by the company, which is issued too late in the timetable. Second (and as a consequence), investors’ main source of information on the company is connected research (that is, research produced by the underwriting syndicate’s own analysts), and this runs the risk of being biased. Current practice is for only the underwriting syndicate’s own analysts to be permitted to attend management presentations, with their research being issued when the company publicly announces its plans to float. This is followed by a 14-day ‘blackout period’ before the draft ‘pathfinder’ prospectus is made available to interested institutional investors, during a further 14-day marketing period. As a result, the company only issues its final-form prospectus at the end of this process.

To address these concerns, and to reposition the prospectus as the key source of information for the IPO, the FCA’s new rules will require companies to publish an FCA-approved ‘registration document’ before any connected research is released. The registration document will essentially be the first part of the prospectus, without the securities note containing information about the price or size of the fundraising, or the summary. Companies will also have to give providers of ‘unconnected research’ access to their management before any connected research is published. Here, the FCA provides two options:

• If the company allows both connected and unconnected analysts to attend the management presentation, analysts would be permitted to publish their research the day after the registration document is published, but no earlier. There would be no blackout period.
• Alternatively, if unconnected analysts are not permitted to attend the management presentation to connected analysts, the company would need to give identical information to unconnected analysts immediately after publishing its registration document (probably via a meeting/webinar presentation). However, with this route, there would need to be a gap of at least seven days between publication of the registration document and the release of any connected research, to give unconnected analysts a chance to produce their own research.

The feedback given to the FCA indicates that most investment banks will encourage IPO candidate companies to adopt the second route, to avoid the risk of the confidentiality of the IPO being compromised prior to publication of the registration document. Several providers of unconnected research have also indicated their support for this route, as they would prefer to have sight of the registration document before meeting management. Banks would need to keep written records of all information provided to analysts, together with the banks’ criteria and terms for granting access to unconnected analysts. These must not be ‘unreasonable’ (i.e., no more restrictive than those imposed on connected analysts). The FCA proposes to work with trade associations representing potential producers of unconnected research to develop industry guidelines for this purpose.

As indicated in the consultation paper, for the time being, the FCA will only apply its new rules to EU-regulated markets such as the London Stock Exchange’s main market, and not to multilateral trading facilities (MTFs) such as AIM, where unconnected research is less likely to emerge owing to the small size of the typical candidate for these markets. However, the FCA encourages banks to apply the same processes to larger flotations on MTFs as a matter of best practice. The FCA will review IPO market practice on MTFs in the future, but this will be deferred until at least a year after implementing the changes for regulated markets (i.e., not before July 2019).

Regardless of the market on which a company proposes to float, the FCA will require there to be no interactions between a firm’s analysts and the company’s management (or its other advisers or shareholders) until after the firm has been awarded the IPO mandate and its position in the syndicate has been determined. With limited exceptions, any contact would be viewed as participating in pitching activity, compromising the analyst’s objectivity. The restriction would also apply to secondary offerings where an analyst is aware that his or her ECM colleagues are pitching for new business. Where this is not the case, firms will be expected to make judgments on a case-by-case basis, bearing in mind their usual obligations to prevent or manage conflicts of interest.

The policy statement also emphasises the importance of ensuring inside information is not disclosed inadvertently during the IPO process, in particular during analyst presentations. The FCA says it will consider this issue further as part of its work in assessing the implementation of the Market Abuse Regulation.

The new rules will represent a significant change in the UK IPO process, and move it a step closer to the U.S. model, with a ‘shelf’ registration document being published early in the timetable. Inevitably, there will be greater concerns over ‘execution risk’, not least because of the need to front-load much more of the preparatory work for the IPO. However, in some cases at least, banks may be able to mitigate some of this risk by engaging in more ‘pilot fishing’ to establish investor interest at an earlier stage and provide greater certainty that the IPO will be successful.

The changes will take effect from 1 July 2018, which will allow banks and advisers time to prepare for the new regime and will also provide a window for the FCA to develop guidelines with trade associations on providing management access to unconnected analysts.

Technical changes to the Listing Rules

The FCA has also published a policy statement including technical improvements to the Listing Rules which it consulted on earlier this year in CP17/4. The final changes include:

• Clarifying the eligibility requirements for premium listing and publishing some new technical notes to provide further guidance on the rules, including the concessionary routes to premium listing for scientific research-based companies and mineral companies.
• Introducing a concessionary route for property companies seeking a premium listing. This will allow a property valuation report to be used to gauge a property company’s maturity, rather than requiring it to have the usual three-year revenue-generating record. There is also a new technical note on property company concessions.
• Revising how premium-listed issuers apply the class tests to transactions and amending the FCA’s requirements on when they should consult with the FCA. This will include a change that would allow a company to disregard an anomalous profits test of 25 per cent that would otherwise put a transaction into class 1, requiring shareholder approval, if the other class test results (turnover, assets, consideration, etc.) are all below 5 per cent.
• Changing the FCA’s approach to the suspension of listing for reverse takeovers. This will generally allow a company to avoid having its shares suspended when it announces a reverse takeover, unless it is a cash shell.

The changes to the Listing Rules and associated technical notes will take effect on 1 January 2018.

Review of the effectiveness of primary markets: the UK primary markets landscape

The FCA has also published a feedback statement on its discussion paper issued earlier this year on areas where it believes the current UK listing regime could be improved (see our June 2017 ECM bulletin for a summary of the discussion paper). As a result of the feedback, the FCA will focus on two main areas:

• The boundary between standard and premium listing categories, and whether there is room to add to the minimum requirements for a standard listing (to the extent permitted by EU Directives) so as to enhance its status and to improve confidence in this category of listing.
• Identifying any changes that the FCA could make to the regulatory environment to improve the effectiveness of UK primary equity markets in providing ‘patient capital’, particularly for early-stage science and technology companies.

The FCA will also look further at whether it could introduce measures to support greater retail participation in debt markets. It has concluded it does not need to take any further action in relation to the creation of a UK primary-debt MTF, as a result of the launch earlier this year of the London Stock Exchange’s International Securities Market (a new UK wholesale bond MTF).

The FCA intends to publish proposals for consultation in these areas after further discussions with market participants.

Client Alert 2017-263