UK listing review: towards a dynamic London market

Chancellor Rishi Sunak has committed to consulting on implementing proposals set out in Lord Hill’s review of the UK listing market, with a view to attracting the high-growth companies of the future. While this could lead to a reinvigorated UK IPO market, there could also be significant benefits for the businesses that are already listed in London – with reduced administrative burdens around raising new capital, and clearer and better information provided to potential investors during the fundraising process.

The perception of businesses, particularly those with a listing on the FCA’s ‘gold standard’ Premium Segment, is that the current regime is overly complex, burdensome and slow. Lord Hill’s first recommendation is for the chancellor to present an annual ‘state of the City’ report setting out the steps being taken to promote the attractiveness of the UK as a financial centre – but for this to ring true, it will have to be borne out by the experiences of companies already listed on London’s markets.

In addition, the government, lawmakers and the FCA will have to balance how best to reduce the regulatory burden without London losing the reputation for high standards which is of critical importance to its success as a global financial centre.

Redesigning the prospectus regime

Currently, a prospectus is required when an issuer either makes an offer of transferable securities to the public in the UK or applies for admission of securities to a ‘regulated market’ – including the London Stock Exchange’s Main Market, but not AIM. The Hill review believes that the trend of regulatory change in past years has led to a “ballooning in [prospectus] size and a reduction in their usefulness”, and so recommends a “fundamental review” of the regime.

The review of the prospectus regime will be carried out by the Treasury, because new legislation would be required to implement any changes. However, the Hill review proposes that existing issuers “should either be completely exempt from requiring a prospectus, or be subject to much slimmed down requirements, for example, confirmation of no significant change”.

This is a bold proposal which goes further than many market commentators were expecting, and is likely a consequence of the greater flexibility shown throughout 2020 in allowing existing issuers to access fresh capital quickly in order to respond to the effects of the pandemic on their businesses. The Pre-Emption Group relaxed its guidelines for much of last year so that existing issuers were able to issue new shares representing up to 19.9% of their existing issued share capital without pursuing a pre-emptive fundraise, such as a rights issue. This was viewed as a highly successful policy benefitting many listed companies. However, the policy only allowed for a ‘work around’ of statutory pre-emption rights but not the prospectus regime, with the cap of 19.9% being due to the 20% threshold at which a prospectus is required where the shares are to be admitted to a regulated market. Many market participants were therefore anticipating a relaxation of the prospectus exemptions rather than potentially removing the requirement to publish one at all.

However, there is tension in the Hill review around this topic. The review expresses a desire to “empower” retail investors. The age profile of DIY investors has shifted down and now includes many more under the age of 55; and auto-enrolment pensions, for example, mean far more employees are aware of how much is in their pension pots, even if few are actually stock picking. The use of technology is significantly increasing the ability of retail investors to invest in shares and to speed up that process. However, it was retail investors who suffered the most dilution in the 19.9% fundraises during 2020 because the other prospectus test – an offer of transferrable securities to the public – meant that they were often excluded from those offerings to avoid the need to publish a prospectus.

But it is not clear that Hill is settled on recommending that retail investors be allowed to participate in secondary fundraises without the protection of a prospectus. That would certainly be a likely consequence of a “fundamental review” in the terms suggested. But this jars with the recognition elsewhere in the review that investors, and especially retail investors, want more information on the companies they invest in, particularly with the rise of environmental, social and governance (ESG) investing. The point, which the review makes, is that existing issuers are required to publish significant amounts of information concerning their businesses and governance on an ongoing basis, including the recently implemented recommendations of the Task Force on Climate-related Financial Disclosures (TFCD).

While this is true, and ought to mitigate against any lack of prospectus protection for retail investors specifically, it raises at least two concerns:

• if an existing issuer is carrying out a particularly large fundraise, an effect of which will be to alter its business (e.g. through acquisition) or financial results (through a different funding profile), how will that be adequately explained without a full prospectus? And
• if no prospectus is published, and retail investors are investing through online investment platforms, how will the liability regime work between the issuer and those platforms – which will need to provide some information to their clients about participating in the transaction?

Neither of these concerns is insurmountable, but there is plenty for the Treasury’s forthcoming review to get to grips with in considering how to reduce the burden on listed companies when they come to raise further funds without denying investors the protections they ought to have when investing hard-earned savings. ‘Light touch’ regulation was blamed for aspects of the 2008 financial crisis, so it is unlikely that policymakers and regulators will want to return to that.

Forward-looking financial information

Financial forecasts are described in the Hill review as “a key, if not the key, category of information that investors ask for”; and responses to the call for evidence on which the review is based made it clear that investors are “clamouring” for that information, and that issuers are “keen to give it to them”.

A distinction needs to be drawn here between IPO candidates, the implications for which we have already addressed, and existing issuers; recognising that it is generally easier for existing issuers to give guidance to the market and that the market will have its own consensus as to what a listed company’s results ought to be in any given year.

The common disclaimer that “past performance is no guarantee of future results” is ordinarily used to mean that a successful company may not continue to be successful. However, in the high-growth listed company environment that the reforms aim to create in the UK, the opposite also applies: a disruptive tech company or blockbuster life sciences company that is loss-making one year may post significant profits in the years that follow.

The review focuses on directors’ personal liability for forward-looking information under the current regime because this inhibits the inclusion of that information in prospectuses, leaving investors with only past results as the basis for their investment decisions. It proposes that issuers ought to be able to include forward-looking financial information in prospectuses with the level of liability adjusted, albeit that “additional safeguards” may be required. It is difficult to see how additional safeguards could not be brought in if the liability regime were to be adjusted. The suggestion made in the review is to give directors a defence if they could show that they had “exercised due care, skill and diligence in putting the information together and that they honestly believed it to be true”. If directors are to be exempt from liability, that must be the minimum that is required of the defence.

Hill does not reference the current regime which regulates the inclusion of profit forecasts in prospectuses. This may be because the forward-looking financial information that the review has in mind would go out beyond the current financial year, or because it wants to make its point most audibly about the liability regime. Whatever the reason, the current regulations underpinning profit forecasts in prospectuses must provide a baseline as to what safeguards should be required under a new liability regime: setting out the assumptions on which the forecast is based; distinguishing between those assumptions that are within the issuer’s control and those that are not; a requirement that those assumptions be reasonable, understandable and precise; and for the forecast to be prepared on the same basis as the issuer’s historical financial information.

Putting aside for a moment the legal liability and regulatory requirements, and although investors would no doubt be heavily cautioned against placing undue reliance on forward-looking financial information, issuers and their directors would need to focus on the commercial consequences of making inaccurate forecasts in offering documents. Doing it once would perhaps be unfortunate, but twice could look careless, and the opposite of due care, skill and diligence. One possibility to mitigate against this would be to require some form of reporting by accountants as to how a profit forecast has been put together and the sensitivity analysis it has been subjected to – this could be in the form of a public report to be included in the prospectus or only as private comfort for the directors, the issuer and the bookrunners.