On 3 March 2017 as part of its quarterly consultation (CP17/6) the Financial Conduct Authority (FCA) announced changes to the Prospectus and Listing Rules. These were produced in response to the European Council’s Permanent Representatives Committee approving on 20 December 2016 the new Prospectus Regulation. Even when the UK government gives notice under Article 50, the Prospectus Regulation is expected to become directly effective in the UK in May or June 2017. However, most aspects of the Prospectus Regulation will apply 24 months after it comes into force by which time the UK is likely to have left the EU.
Changes coming into force this year
There are two sets of measures in the Prospectus Regulation that will apply immediately on the date that the Prospectus Regulation comes into force and it is these elements of the Prospectus Regulation that the FCA are consulting on. These measures relate to the two following exemptions from the obligation to publish a prospectus when securities are admitted to trading on a regulated market, which are:
- to raise the annual exemption on new share issues of less than 10% of shares to a new threshold of increases of 20% of securities; and
- a change to the exemption for shares resulting from the conversion or exchange of other securities.
In respect of the first bullet point the FCA is proposing to amend the Prospectus Rules to cross refer to the relevant provision in the Prospectus Regulation, which seems logical to us.
In respect of the second bullet point the FCA is proposing to reproduce the relevant part of the Prospectus Regulation in the Prospectus Rules. Previously the exemption for new securities issued as a result of the conversion or exchange of other securities was not limited in amount. Under the new regime the conversion exemption is limited to an increase of less than 20% of the number of shares of the same class already admitted to trading on the same regulated market over a period of 12 months:
- unless a prospectus was drawn up for the securities giving access to the shares;
- unless the securities giving access to the shares were issued before the Prospectus Regulation came into force;
- in relation to shares qualifying as Common Equity Tier 1 in the Capital Requirements Regulation; or
- in relation to shares qualifying as eligible own funds or eligible basic own funds in Solvency II.
Given the short time period before the Prospectus Regulation comes into force the FCA has cut its consultation period down from the normal 2 months to 1 month (i.e. responses are required by 3 April 2017). Given the proposed changes reflect directly effective European law it seems highly likely that the proposed changes will be adopted.
Changes coming into force next year
The Prospectus Regulation also contains a number of provisions that become effective 12 months after it comes into force (i.e. May/June 2018).
One of these provisions will allow member states to increase the monetary amount of the total consideration exemption from publishing a prospectus. In the UK it is currently possible to make an offer to the public of securities over a period of 12 months with a value below €5 million without needing to publish a prospectus. The Prospectus Regulation allows Member States to decide to raise the threshold for this exemption to €8 million. However, the FCA is not consulting on this change at this stage as it relates to the Financial Services and Markets Act 2000 (FSMA), which is a matter for HM Treasury.
Other consequential changes
The FCA is also proposing to update the definitions in the Prospectus Rules to reflect the latest edition of ESMA Q&A on Prospectuses published on 20 December 2016 (ESMA/2016/1674) and also the Prospectus Rules and the Listing Rules in the case of the new edition of the UK Corporate Governance Code published in April 2016.
Comment
The changes being brought in by the Prospectus Regulation will allow companies already listed on the Main Market to raise twice as much through secondary share offerings without the need for prospectus. This will be of particular interest to smaller companies on the Main Market who will be keen to avoid the cost of producing a prospectus in respect of small placing. This also will add to the attractiveness of a Main Market listing for smaller companies that plan on raising funds through secondary issues once admitted.
On the other hand, the imposition of a limit on the conversion exemption means that companies carrying out moderately sized (i.e. over 20%) shares swaps perhaps as part of acquisitions will from this summer need to publish a prospectus when previously they would not have needed to do so. Given securities convertible into shares, such as warrants, will not count towards the 20% threshold if they are issued before the Prospectus Regulation becomes effective, we may see a flurry of the issue of such securities in the run up to this date.
It will be interesting to see if HM Treasury chose to take steps now to consult on amending FSMA to increase the size of public offers that do not require prospectuses or whether they wait until closer to the time the relevant provisions come into force when we may have more visibility on the form Brexit will take.
Contact
For further information or advice on the issues outlined above, please contact Jonathan Morris, corporate partner at Thrings who has worked on a number of Main Market IPOs over the last 18 months.
