New UK Prospectus Regime - Non-Equity Securities

The UK government is creating a new UK prospectus legislative regime which will ultimately replace the current EU-derived prospectus laws.  On 11 July 2023, this process took a major step forward with the publication of a "near final" draft of the proposed Public Offers and Admissions to Trading Regulations 2023 (the PO&ATRs).  This briefing discusses the implications of the proposed new Regulations on issues of non-equity securities in the international capital market.

Key points

• The new prospectus regime will be based on the so-called FSMA model of FCA rule-making within a broad statutory framework.
• The general prohibition on public offers of securities in the UK will remain but it will no longer be possible to make a public offer simply by virtue of publishing an approved prospectus.  Under the new regime it will only be possible to make a public offer pursuant to an available exemption, primarily either the familiar wholesale market exemptions or new exemptions for offers conditional on admission to trading or made through a "regulated platform".
• The FCA will be given rule-making powers over MTFs which facilitate primary market activity (primary MTFs).
• Instruments acknowledging indebtedness which are not transferable securities (such as "minibonds") will be brought within the scope of the public offer prohibition.  Money market instruments (such as commercial paper and certificates of deposit) will remain outside this prohibition.
• The current standard of prospectus disclosure will essentially be retained, together with the current statutory responsibility and compensation regime, subject to a uniform disclosure regime for debt securities irrespective of their denomination and the introduction of a lower standard of liability (recklessness/dishonesty as opposed to negligence) for certain "forward-looking statements".
• The deadline for comments on the draft PO&ATRs is 21 August 2023.  However, as the FCA has said that it will not consult formally on its proposed new rules until 2024, the expected date for the implementation of this new regime is still some way off.

The FSMA model

The Financial Services and Markets Act 2023, which received Royal Assent on 29 June 2023, empowers the government to repeal the current UK Prospectus Regulation regime, along with much of the rest of the UK’s retained EU law on financial services, and replace it with a prospectus regime which uses the architecture of the Financial Services and Markets Act 2000 (FSMA).  In exercising its new powers granted under the FSMA, HM Treasury proposes to make new regulations - the Public Offers and Admissions to Trading Regulations (the PO&ATRs) - the purpose of which, to a large extent, is to empower the FCA to make the necessary detailed rules.  While the FCA is currently seeking views on how it should exercise these new rule-making powers (see the six "engagement papers" published by the FCA in two stages in May and July 2023), the PO&ATRs will establish the framework of the new regime.  The newly-published "near final" PO&ATRs are largely unchanged from the "illustrative" draft that was first published in December 2022.

The government's expectation is that the replacement of primary legislation with the delegation of rule-making powers to the FCA within an overall policy framework set by government and Parliament (the so-called "FSMA model") will prove to be a more agile and dynamic regime, capable of being quickly adapted and updated as times change.  

Old wine in new bottles

Broadly, with regard to non-equity securities, save for the proposed changes described below, there is currently little to suggest that the new regime will look radically different from the current UK prospectus regime.  In its engagement papers, the FCA states that on the whole it believes the current prospectus regime works well for issuers of, and investors in, non-equity securities.  The FCA also recognises that the UK capital market is itself part of a global capital market and that many participants are keen that the new regime preserves issuers’ ability to access the global market with ease and that disclosure frameworks are consistent across jurisdictions.

New regime for public offers

Under the new regime, a public offer of securities will continue to be defined in the same broad manner as under the current regime and it will continue to feature a general prohibition on public offers of securities in the UK.  However, it will no longer be possible to make a public offer simply by virtue of publishing an approved prospectus.  Under the new regime it will only be possible to make a public offer pursuant to an available exemption.

Some familiar exemptions will remain, including:

(i) an offer addressed solely to qualified investors;

(ii) an offer addressed to fewer than 150 persons in the UK, other than qualified investors; and

(iii) an offer of securities whose denomination is at least £50,000 (or an equivalent amount).

The other principal exemptions will be new:

(i) an offer which is conditional on the admission of the securities to trading on a UK regulated market or primary MTF;

(ii) an offer of securities which are already admitted to trading on a UK regulated market or primary MTF; and

(iii) an offer by means of a "regulated platform".

Primary MTF

The concept of a regulated market is familiar. A "primary MTF" is a new concept.  It will be a multilateral trading facility which maintains rules which govern the eligibility of issuers, the conditions for admission to trading, including information to be published, and the requirements for maintaining the admission to trading.  The PO&ATRs grant the FCA rule-making powers over primary MTFs which will allow the FCA to require the issuance of an "MTF admission prospectus" by those seeking admission to trading on primary MTFs that are open to retail investors.  These MTF admission prospectuses will carry protections for both investors and issuers similar to those that attach to an ordinary prospectus.  

However, the PO&ATRs do not require MTF admission prospectuses to be approved by the FCA and the accompanying policy note to the PO&ATRs states that primary MTF operators will retain broad discretion to set rules on the content and approval of those documents. 

Offer of securities admitted to trading on a UK market

For an offer of securities which is conditional on the admission of the securities to trading on a UK regulated market or primary MTF but where the securities have not yet, at the time of the offer, been admitted to trading, what information is to be available to an investor to whom the securities are offered in order for the investor to be in a position to make an informed investment decision?  

The PO&ATRs will give the FCA powers to make rules in connection with any proposed admission to trading on a regulated market or primary MTF including any related public offer.  It would seem logical that if a public offer is going to be made in circumstances where the offer is conditional on the admission of the securities to trading on a UK regulated market or primary MTF, then the relevant FCA rules would require the related prospectus to be published in good time for investors to digest before making a decision on the offer.  In such circumstances, it seems we may effectively be back in the position of requiring an approved prospectus in order to make an offer of lower-denomination securities to people who are not qualified investors. 

Offer by means of a regulated platform

Using powers in the Financial Services and Markets Act 2023, the government intends to create a new regulated activity covering the operation of electronic public offer platforms, such as securities-based crowdfunding platforms. The accompanying policy note to the PO&ATRs states that this new regime will continue to allow issuers to offer securities to the public without admitting them to a securities market.  In a significant departure from the current regime, there will not be a requirement for publication of a prospectus for offers of unlisted securities to the public by means of such platforms.  The FCA will be empowered to determine the detailed requirements to which such platforms will be subject (including the levels of due diligence and disclosure required for offers made through them).  The government's approach to this new regulated activity is not included in the PO&ATRs and we still await more details. 

Enhanced scope of the public offer prohibition

Under the current regime the prohibition on public offers extends to transferable securities with the exception of money market instruments (such as commercial paper and certificates of deposit).  Under the new regime, the prohibition on public offers will extend beyond transferable securities to what are defined as "relevant securities".  

The policy behind this extension is stated to be to bring certain non-transferable securities (including those known as "minibonds") within the scope of the prohibition on public offers.  Fortunately, the rather complex definition of "relevant securities", which appeared in the "illustrative" draft of the PO&ATRs, has been amended so that it now simply captures (1) transferable securities and (2) non-transferable securities which fall within the definition of article 77 (Instruments creating or acknowledging indebtedness) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.  Money market instruments will remain exempt from the prohibition on public offers.

Prospectus contents and liabilities

The PO&ATRs will replicate the "necessary information test" contained in Article 6 of the UK Prospectus Regulation and largely retain the current statutory responsibility and compensation regime.  However, this is subject to:

• a welcome clarification that the reference in this test to the prospects of the issuer and of any guarantor is to be read, in relation to debt securities, as a reference to the creditworthiness of the issuer and of any guarantor;
• a uniform disclosure regime for debt securities irrespective of whether they have a denomination per unit of at least €100 000 or are to be traded only on a regulated market (or segment) to which only qualified investors have access (the FCA proposes the existing wholesale disclosure standard as a starting point);
• the FCA is considering requiring different or additional disclosure requirements for certain structured financial products of the financial services industry; and
• the introduction of a lower standard of liability (recklessness/dishonesty as opposed to negligence) for certain "forward-looking statements".

Protected forward-looking statements (PFLS)

The PO&ATRs will establish a different liability threshold (based on fraud or recklessness) from the rest of the prospectus (negligence) for certain categories of forward-looking statements in prospectuses.  The government believes that encouraging the inclusion of such information in a prospectus could improve market integrity, provided that PFLS do not include information that issuers are already required to include in their prospectuses under the current regime, as this would simply shift the liability treatment of such information with no wider benefit.  Consequently, the FCA is seeking views on what types of forward-looking statements it should allow as PFLS and how PFLS should be identified as such within a prospectus.

Withdrawal rights 

HM Treasury intends to ensure that investors continue to have withdrawal rights that offer the same protections to investors as those provided by the current regime and the PO&ATRs will empower the FCA to make the necessary rules.  However, as the purpose of a prospectus will largely become that of seeking admission to trading on a regulated market, it remains to be seen whether in practice withdrawal rights will retain much of their current significance.

Next steps

The government welcomes any technical comments on the draft PO&ATRs by 21 August 2023.  

The final PO&ATRs may be laid before Parliament for approval later this year but the FCA has said that it will not consult formally on its proposed new rules until 2024, and none of this will take practical effect until the FCA's new rules are in place.  Therefore, it will be some time before the new regime comes into effect and there are likely to be further major changes during the consultation and implementation process.