Consideration of the new rules that alter the timing of information provided in connection with an equity IPO process and tighten the guidence around when analysts can participate in discussions with a potential issuer pre-mandate stage and which take effect on 01 July 2018.
The Financial Conduct Authority (FCA) has published its final rule changes which alter the timing, frequency and quality of information provided in connection with an equity Initial Public Offering (IPO) process and address conflicts of interest when analysts participate in discussions with a potential issuer pre-mandate stage. The new rules are substantially in the same format as proposed in CP 17/5 but with some amendments to reflect the responses received. (See Reforming the availability of information in the UK equity IPO process: FCA publishes new consultation paper for a summary of CP17/5.)
The rule changes come into effect on 01 July 2018 to minimize disruption to existing or prospective IPOs and to allow time for the industry guidelines relating to unconnected analysts to be developed (see below). The rules will only apply in relation to an IPO if all of the key events governed by the new rules (namely analyst presentations, the publication of a prospectus or registration document and the release of connected research) take place after 01 July 2018.
The FCA has also published:
- its final changes to the Listing Rules and new Technical Notes in response to its review of the effectiveness of primary markets (PS17/22) most of which are technical enhancements rather than fundamental changes and are predominantly in the same format as in the consultation (CP17/4). These changes take effect on 01 January 2018, and
- its feedback statement to its discussion on the effectiveness of primary markets (FS 17/3).
This note considers the rule changes to the IPO process. See our article "FCA review of the effectiveness of primary markets: minor rule changes and further discussion" for a summary of PS17/22 and FS 17/3.
What are the main rule changes?
The main changes are:
- a new requirement that an approved prospectus or registration document (the approved document) must be published and unconnected analysts must have had access to the issuer’s management before any connected research can be published, and
- clarification that "participating in pitches for new business" (in COBS 12) includes where an analyst interacts with the issuer’s management, shareholders or corporate finance advisers before the firm has accepted a mandate to carry out underwriting or placing services for the issuer and the firm’s position in the syndicate has been confirmed in writing.
These changes apply to both premium and standard listings.
Earlier prospectus/registration document and access to management for unconnected analysts
Access to management for unconnected analysts
The new rules, which are set out in a new COBS11A, give issuers and syndicate banks a degree of flexibility on how and when unconnected analysts are given access to management, which will determine when the prospectus can be published. The FCA’s intention is that this will restore the primacy of the approved disclosure document, improve the range and quality of information available to investors and support more balanced investor education and price discovery.
The two options are:
- to provide unconnected analysts with access to management on equal terms at the same time as connected analysts, in which case publication of connected research is permitted one day after publication of the approved document, or
- if issuers and syndicate banks want to provide management access to unconnected analysts at a later stage, this is permitted provided that the connected research is not published until at least seven days after publication of the approved document.
Assessment of unconnected analysts: the rules require syndicate banks to carry out an assessment of the potential range of unconnected analysts and use that assessment to provide an opportunity for access to management to a range of unconnected analysts which, in their reasonable opinion, “has a reasonable prospect of enabling potential investors to undertake a better-informed assessment of the present or future value of the relevant securities based on a more diverse set of substantiated opinions”. Syndicate banks have to keep a written record of their assessment and opinion and keep it for five years.
Reasonable terms: the rules also require the engagement of unconnected analysts to be on "reasonable terms" (and restrictions on access will be treated as "unreasonable" if they are more restrictive than those imposed on connected analysts, including geographical restrictions). Syndicate banks must keep records (at the time the offer of management access is communicated to the unconnected analysts) of any restrictions placed on unconnected analysts as a condition of being offered management access and keep them for five years.
Where unconnected analysts are given separate access to the issuer, they must receive identical information to the information that was given to connected analysts which is relevant for the purposes of preparing investment research on the issuer and syndicate banks will have to keep written records of the information provided to both sets of analysts.
Industry guidelines: to help facilitate these rules, the FCA envisages working with relevant trade associations to develop some industry-standard guidelines to specify "reasonable" terms of access and assist in determining an appropriate range of unconnected analysts. These guidelines are expected to be developed before the rules take effect.
Tripartite prospectus model
Where an issuer has published a standalone registration document the FCA has confirmed that issuers can choose whether to follow with a securities note and summary (the tripartite prospectus model) or with a single prospectus. Whichever route is taken the document(s) will need to be approved by the FCA before filing and publication. Where any amendments are required to the registration document, these should be in the securities note if using the tripartite model or in the registration document if using a single prospectus.
Practical issues raised
In response to queries raised in the responses the FCA has confirmed various practical issues relating to a standalone registration document, including:
- Sponsor’s obligations in relation to a standalone registration document - an issuer does not need to appoint a sponsor provided it is not applying for a premium listing at that point in time and there is no need for a sponsor’s declaration. Where a standalone registration document is published and the issuer subsequently decides to apply for a premium listing, a sponsor will be required and whether work on the standalone registration document could be regarded as "preparatory work" and therefore potentially within the definition of "sponsor services" will depend on the circumstances in which the registration document is prepared. In reality we expect sponsors will be appointed beforehand so that the registration document will be part of the sponsor service.
- Eligibility review process - the FCA does not envisage the eligibility review process materially changing as the approved registration document is not designed to be proof of eligibility for listing. They would, however, provide a preliminary view on eligibility based on the information available to them at the date of the registration document and would expect a sponsor to highlight early in the eligibility review process whether there is a risk that an eligibility rule may not be met. The FCA’s view on eligibility will only be confirmed after approval of the prospectus and LR6.1.3R (1) (b) will only apply from the date of the prospectus.
- Responsibility for a registration statement - since a standalone registration document does not constitute a prospectus, no prospectus responsibility attaches to it. Those responsible for a registration document should seek legal advice if they are unsure of their liability.
- Financial promotion/advertisement - provided certain conditions are complied with, the registration document should not constitute a financial promotion or an advertisement.
Application of COBS 11A to AIM and other MTFs
The FCA has decided not to apply the new COBS 11A rules to IPOs on AIM and other MTFs, particularly as it is unclear how much unconnected research there would actually be if it did apply them. The FCA does, however, consider it best practice for larger IPOs on MTFs to adopt the same process and encourages firms providing underwriting or placing services to larger companies raising capital through an IPO on an MTF to consider following the new COBS 11A rules.
The FCA will re-evaluate the positon when it carries out its post-implementation evaluation of the effectiveness of these reforms.
Stricter guidance on interactions by connected analysts
COBS12 currently states that an analyst should not become involved in activities which might compromise their objectivity. The existing guidance then provides examples of activities which would ordinarily be inconsistent with an analyst’s objectivity, including participation in investment banking activities such as corporate finance business and underwriting, and participation in pitches for new business.
The new guidance in COBS 12 clarifies that "participating in pitches for new business" includes where an analyst interacts with the issuer’s management, shareholders or corporate finance advisers (where the bank is proposing to provide underwriting or placing services) before:
- the bank has accepted a mandate to carry out underwriting or placing services for the issuer, and
- the bank’s position in the syndicate has been confirmed in writing (instead of contractually agreed as originally proposed).
The FCA has confirmed that this new guidance relates to producers of investment research not non-independent research and provided that it is labelled as a marketing communication, producers of non-independent research can attend pitches for new business to manage a securities offering (as this research is not within COBS12). Producers of non-independent research must still, however, consider their SYSC10 obligations and take all appropriate steps to identify and prevent or manage any conflicts of interest that arise during its production and distribution.
The FCA had sought evidence from stakeholders on how disclosure of information in analyst presentations is justified as being in compliance with MAR, and in particular whether any inside information is disclosed to analysts or their audiences in the normal exercise of an employment, a profession or duties in accordance with Article 10 of MAR.
The FCA notes that “debut issuers" financial instruments will only be within the scope of MAR if the value of their instrument depends on or has an effect on the price or value of a financial instrument in scope of MAR Article 2(1)(a)-(c). Debut issuers should be aware that once they have requested admission of their financial instruments to trading, such financial instruments will come into the scope of MAR, and the provisions around inside information will therefore apply. This would include information held by the issuer and information shared with others outside the issuer.
The FCA also comments on the market soundings regime under MAR and notes that it could apply where an issuer with debt financial instruments admitted to trading or requesting admission to trading is pursuing an equity IPO. But there may be uncertainty as to whether there is a price or value relationship between the issuers’ financial instruments and another financial instrument in scope of MAR, for example, if there is no data available regarding the issuer’s instrument. The FCA suggests following the market sounding procedures if you want to be sure of obtaining protection under Article 11 of MAR for a market sounding.
The FCA’s response states that:
- It is not possible to say with certainty that the fact of the IPO (as opposed to details relating to the transaction itself, such as timetable, structure, pricing model) is the only inside information that needs to be considered, or that it is always inside information. All information to be included within the analyst presentation should be assessed. Strategic and forward-looking information on the issuer should be especially carefully assessed to determine whether it constitutes inside information.
- The FCA does not agree that in the unlikely event that inside information is disclosed to analysts, it should be limited to information on the transaction itself and that the disclosure of this inside information to analysts would be assessed as being made in the normal exercise of employment, profession or duties in accordance with Article 10. The FCA states that market participants need to carefully consider how ant disclosure of inside information to analysts is in the normal exercise of the issuer’s employment, profession or duties.
Which model to use?
The ability for issuers and syndicate banks to decide when unconnected analysts are given access to management is useful and will allow them to flex the timetable.
We think that it is more likely that issuers and syndicate banks will continue to follow a process for connected analysts that is as close as possible to current market practice and will accept the seven-day blackout period between publication of the approved document and connected research, offering unconnected analysts the opportunity to attend a separate analyst presentation during this period, probably shortly after publication of the registration document to allow sufficient time for follow up questions. Management access for unconnected analysts can take place via webcast, conference call or email exchange, rather than a physical meeting. It is still not clear how many unconnected analysts there will actually be in practice.
It is also not clear to what extent the industry guidelines will require or encourage analysts to publish research if they attend a meeting with the issuer. The FCA envisages that producers of unconnected research will be able to sign up to the guidelines and those that do will become eligible to be offered access to management but does not clarify whether the banks will then be obliged to invite them all or will be able to select their own range of analysts using the criteria described above.
Which document to use?
Issuers are most likely to publish a registration statement as the approved document as they will not be in a position to publish a full prospectus at such an early stage in the process and will publish the securities note and summary later. We expect that issuers will combine the documents to form a single prospectus.
The FCA has said that it expects the securities note and summary document to be approved and published before the management roadshow. We think, however, that roadshows will continue to be carried out using a "pathfinder" prospectus with the final prospectus only being published after the roadshows.
Impact on timing?
The introduction of an early stage registration statement into the process adds seven or 14 days to the IPO timetable depending on when unconnected analysts are given access to the issuer. Issuers with a 144A offering will need to ensure that any extension to the timetable does not result in them breaching the 135 day rule.
Early publication of the registration document could increase the execution risk for the issuer and we may therefore see more "pilot fishing" to gauge investor interest; one of the ways suggested by the FCA to mitigate this risk.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.