On 26 October 2017, the FCA issued three response documents following consultations on the UK Listing Regime. The changes proposed by the FCA fall into two categories:
- amendments to the listing process generally insofar as it relates to the publication of research on issuers in the context of an IPO.
- amendments to the Listing Rules and the issuance of updated and new Technical Notes designed to assist issuers and sponsors in considering the appropriateness of the class tests in certain circumstances, reverse takeovers by cash shells and eligibility requirements, particularly the track record requirements as they affect specific types of business such as property companies, mineral companies and scientific research based companies.
Following hot on the heels of the changes in the way research is paid for under MiFID II, the new rules governing the production of research in the context of IPOs will apply to IPOs on regulated markets (not MTFs, though the FCA intend to keep this under review) from 1 July 2018. This latest set of rules will lead to profound changes in the IPO process, particularly insofar as it affects small and mid-cap issuers. At the larger end of the market where roadshows and book building typically follow the publication of a pricing prospectus, the effect is likely to be less extreme. For smaller IPOs, where research is typically produced prior to the management roadshow, which itself is conducted prior to publication of the prospectus, the new rules will turn the process on its head, requiring the publication of the prospectus (or at least the base registration document) before the research can be published. In all cases, provision will need to be made to allow the preparation of research by independent and unconnected analysts based on the same information as is made available to the connected analysts from the banks involved in the IPO.
The Listing Rule amendments and Technical Notes are generally to be welcomed in improving the application of the existing rules and practices. These changes come into effect on 1 January 2018.
IPOs and publication of research
The new rules on the production of research, which are intended to restore the centrality of the prospectus (or at least the base registration document component) in the IPO process, will be included in COBS 11A and apply only to IPOs on a regulated market. As such, they will not apply to IPOs on AIM or other MTFs. When they come into effect, the new rules will require that:
- research produced by a connected analyst (i.e. an analyst working for one of the investment banks engaged on the IPO) (“connected research”) cannot be produced until the earlier of (a) the business day following the publication of the issuer’s prospectus (or base registration document) if unconnected analysts have been given equal access to the issuer as the connected analyst(s) had or (b) seven days after the publication of the prospectus or base registration document.
- unconnected analysts must be given access to “all the information” that the issuer provides or makes available to the connected analyst(s).
- unconnected analysts may not be under any more stringent restrictions on the production or dissemination of their research than apply to research produced by connected analysts.
The new rules are supported by extensive record keeping requirements under which the investment bank preparing the connected research must prepare and maintain contemporaneous records of:
a) the process and decision-making process for selecting which unconnected analysts will be given the opportunity to produce unconnected research
b) the information made available to both the connected and unconnected analysts
c) any restrictions which are applied (or proposed to be applied) to the preparation and/or dissemination of the unconnected research.
As a consequence of the new rules, the historical practice of applying “black-out” periods between the publication of research and the launch on an IPO will end, and investment banks and issuers will need to consider how best to ensure that the research is sufficiently dis-connected from the prospectus and rest of the IPO process to avoid any cross-liability arising between the research and prospectus.
These new rules are likely to discourage some small and mid-cap issuers from seeking to list on London’s Main Market given the requirement to “go public” (through the publication of their prospectus or base registration document) before the publication of research (and therefore management roadshow) unless the (unusual) decision is taken not to have any pre-IPO research in the first place. Such companies may, as a result, find AIM more attractive as they can continue with the current practice of producing the pre-IPO research and conducting management roadshows before producing their admission document and going public with the IPO.
In practical terms, investment banks will need to introduce stringent rules and processes to ensure that whatever information issuers provide to their connected analysts are made available to unconnected analysts. The new rules deliberately refer to “information” in its most generic meaning to capture not just written information but also what is said. Careful consideration will need to be given as to whether to allow connected analysts to attend site visits to issuers as the same opportunity must be given to unconnected analysts.
Recognising the changes which these new rules will mean for the IPO process, the FCA has delayed their implementation until 1 July 2018 and has stated that it expects to work with the different trade associations in developing guidelines to support the implementation of the new rules.
Listing Rule and Technical note updates
The changes being introduced from 1 January 2018 broadly reflect the changes proposed in the FCA’s original consultation and can be summarised as follows:
- LR 6 is being re-ordered to make it clearer to read and it is being clarified that the historical financial information should relate to 75% of the underlying business where there have been acquisitions by the issuer within the 3-year period covered by the financial information.
- Two new Technical Notes are being adopted to help with the assessment of the 3-year track record requirement and determination of the business which it must exist for, as well as on the independent business requirements, particularly as it relates to control of the business and the relationship with a controlling shareholder.
- The Technical Note relating to scientific research based companies has been updated and a new note introduced for mineral companies.
- A new concessionary route to a premium listing is being introduced for property companies where, although there is a not a business with a 3-year revenue-earning track record, at least 75% of the underlying property assets are mature and generating rental income or the issuer has been actually developing long-term projects (as demonstrated by increases in the gross asset value of its properties) for at least the last three years. In each case, a property valuation report must be published which supports the basis of the concession.
- The Profits Class test (for Transactions) may be disregarded where it produces a result of 25% or more but all other class tests are less than 5% (such that the transaction is neither class 1 nor class 2). In addition, the profits figure may be adjusted for certain one-off costs (such as IPO costs and closure costs). While FCA approval is not required, in each case an issuer must seek guidance from a sponsor.
- Historically, the leak or announcement of a reverse takeover would automatically trigger a suspension of the issuer’s shares on the (non-rebuttable) presumption that insufficient information is in the market. Under the amended rules, this presumption (and therefore automatic suspension) will only apply to shell companies and SPACs (special purpose acquisition companies), on the assumption that through compliance with MAR, sufficient information should otherwise be in the public domain to allow the market to function properly. It will remain possible for an issuer to request suspension or for the FCA to seek to impose a suspension if there is insufficient information to allow the market to function effectively.
Future possible changes
The FCA has also flagged that there are a number of areas where it is continuing to consider reforms. These include the extension of the research restrictions being introduced for regulated market IPOs to MTFs, in effect extending the regime to AIM. While the FCA is dropping its proposed “international segment”, it does intend looking at the differences between the standard and premium segments, with an eye to potentially increasing some of the standards applying to a standard listing. The final key area the FCA intends to do further work on concerns increasing retail access to the debt markets, with particular focus on large premium-listed issuers.
