More detail emerges on the future of the UK’s capital markets

The two new engagement papers cover Public Offer Platforms and admissions to trading on primary MTFs (such as the London Stock Exchange’s AIM market).

In May this year, the Financial Conduct Authority (FCA) published four engagement papers setting out proposals for the future of the UK’s regime for bringing equity and non-equity securities to market.

The papers set out how the FCA would use its new powers under the UK’s reformed regime, which will be set out in the new Public Offers and Admissions to Trading Regulations 2023 (a draft of which the Government published in July this year).

The first four engagement papers covered:

• admitting securities to trading on a regulated market (such as the London Stock Exchange’s Main Market) for the first time (paper 1);
• further issues of securities on a regulated market (paper 2);
• forward-looking statements in securities prospectuses (paper 3); and
• issues of non-equity securities (paper 4).

For more information on the first four engagement papers, see our previous in-depth piece.

For more information on the proposed new regime for offering securities to the public (including admitting securities to different markets), see our in-depth piece from last week.

The FCA has asked for responses to the questions in its two new engagement papers by 29 September 2023.

We’ve set out the key points from each of the new engagement papers below, along with our thoughts at the end.

“Public Offer Platforms” (Paper 5)

As we note in our separate in-depth piece, under the new public offers regime, it will be unlawful to offer securities to the public unless an exemption applies.

There will be exemptions allowing issuers to offer securities through a regulated market (such as the London Stock Exchange’s Main Market) or a primary MTF (such as AIM).

To facilitate offers other than through one of these exchanges, the new regime will create the concept of a “Public Offer Platform” (POP). This is designed to allow issuers to offer transferable securities, as well as certain non-transferable debt securities (such as “minibonds”) through a regulated environment.

In effect, POPs would become the key vehicle for smaller companies looking to attract early-stage investment or finance through crowdfunding. The new regime will also include an exemption for offers with a maximum size of £5 million or less, making POPs the logical alternative for larger offers.

Operating a POP would become a new regulated activity. A person wishing to do so would therefore need to be specifically authorised by the FCA and subject to ongoing monitoring.

The FCA would be able to set rules governing POPs. A key purpose of this is to give retail investors the opportunity to invest in off-market securities with confidence in the comfort of a safe and regulated environment.

Engagement Paper 5 seeks views on how the FCA would approach POPs.

On a thematic level, the FCA is proposing to use its powers to ensure that investors have sufficient information to understand the risks they would be taking when acquiring securities, and to require sufficient due diligence and checks on companies seeking to offer securities through a POP.

To implement these objectives, the FCA is proposing the following key points.

• Where an offer is made through a POP, liability for the offer would lie with the platform operator. This differs from the current and proposed regimes for offers on a public capital market, where primary liability will rest with the issuer and persons who are responsible for the accompanying securities prospectus.
• POP operators would need to carry out minimum due diligence on issuers seeking to offer securities through the platform. This would include the fitness of the issuer’s senior management, the issuer’s financial strength and past performance, and a valuation of its business.
• Operators would then need to communicate that due diligence to investors. The FCA moots two options (namely a detailed written report or a simple “attestation” that due diligence has taken place) but seeks feedback on other potential methods.
• There would be pre-investment disclosures on the issuer and its securities. Bearing in mind that consumers are likely to make up a significant proportion of persons investing through POPs, the FCA is proposing to base this on its existing PRIIPs regime and Consumer Duty.
• The FCA proposes three options for the standard of disclosure: “information needed to make an informed decision” (option I), a minimum content standard coupled with any other necessary information (option II) and a bespoke and prescriptive disclosure framework (option III). However, it is seeking views on other potential formulations.
• The FCA is also seeking views on whether issuers should be required to make ongoing periodic disclosures after an offer of securities has closed.

Any rules would not cover secondary trading facilities offered by POPs, such as bulletin boards allowing platform investors to buy and sell securities and exit their investment.

Primary MTFs (Paper 6)

As we note above, the prohibition on offering securities to the public will not apply to securities that are to be admitted to trading on a “primary multilateral trading facility” (or primary MTF). Primary MTFs will include the London Stock Exchange’s AIM market and the AQSE Growth Market.

However, the new regime will permit the FCA to set rules governing certain aspects of admission to and the operation of primary MTFs (other than primary MTFs available solely to qualified investors). This includes imposing a requirement to produce a form of securities prospectus when seeking admission (known as an “MTF admission prospectus”).

Engagement Paper 6 sets out the FCA’s initials thoughts on when an MTF admission prospectus should be required and who should be responsible for it.

In formulating its thoughts, the FCA intends to make proportionate rules that balance the interests of all primary MTF market participants so as to both promote broader investor participation and improve the quality of information that investors receive.

The FCA is therefore proposing the following key points.

• The FCA is considering requiring a prospectus (known as an “MTF admission prospectus”) for all initial admissions to any primary MTF that allows retail participation (even if the specific offer does not envisage retail participation).
• The FCA is also considering requiring an MTF admission prospectus for securities admitted in connection with a reverse takeover.
• The FCA is also considering whether to exempt an initial admission that is an introduction (i.e. an initial admission where there is no capital raise) from the requirement to produce an MTF admission prospectus.
• Primary MTF operators would be able to set rules requiring an MTF admission prospectus in other circumstances. This will essentially allow operators to set their own disclosure requirements in a competitive landscape.
• An MTF admission prospectus would be subject to the prospectus liability and compensation schemes, whether it is required by the FCA or by the relevant primary MTF operator. The FCA recognises that this may result in increased costs. It is therefore seeking alternative views on when an MTF admission prospectus should be required.
• The persons who are liable for an MTF admission prospectus would continue to be the issuer itself and those persons who take responsibility for the prospectus, mirroring the current regime for prospectuses.
• An issuer would be required to publish a supplementary MTF admission prospectus if there is a significant new factor, a material mistake or a material inaccuracy relating to the information included in the original prospectus. This maintains the position under the current prospectus regime.
• Specific content requirements and review and approval processes would be set by the primary MTF operator.
• The FCA is also seeking views on whether issuers should be required to make ongoing periodic disclosures after an offer of securities has closed.

Our thoughts

These latest two engagement papers give a useful view of the FCA’s evolving thinking for the UK’s junior markets and for off-market offers, including crowdfunding.

Unlike for regulated markets, the FCA will have less ability to influence and control the documentary requirements for admissions to markets such as AIM, and practically no control over what kind of documentation is needed for off-market offers.

As a result, the FCA is seeking to use its broader powers of regulation of primary MTFs and public offer platforms to provide the desired level of protection for investors.

In essence, in both cases, the approach will be to set minimum standards for disclosure upon which MTF and POP operators will be free to build. This will, in theory, provide a baseline of protection above which operators will be able to produce targeted rules tailored to their desired investor audiences and generate a competitive marketplace for securities offering platforms.

AIM, once a “light-touch” market, is now more heavily regulated than it has been. Admission to AIM subjects a company to significant red tape.

If the mooted reforms to the UK’s securities listing regime are implemented, there will be less clear blue water between a Main Market listing and admission to AIM, making AIM’s purpose unclear. These changes do not seem to provide a remedy, although primary MTF operators do have a chance to reshape the regulatory burden when setting the contents of MTF admission prospectuses.

AQSE’s markets remain theoretical alternatives to those operated by the London Stock Exchange but continue to struggle to gain the latter’s volume.

If not crafted carefully, the time, cost and potential liability involved in seeking admission to a primary MTF, as well as ongoing disclosure requirements, may end up not materially different from admission to a regulated market.

Deeply capitalised issuers with a track record might well decide that, given that expenditure, a regulated market listing may provide more value, given the liquidity it provides.

POPs may provide a cheaper solution for small issuers, although they will inevitably lack the liquidity of established capital markets. Investors investing through POPs may need to reconcile themselves to a long hold, making understanding the company in which they are investing all the more key.

Moreover, requiring a POP operator to effectively underwrite offers on its platform may dissuade would-be operators from setting up shop, although equally it could ensure that only the most robust and reliable operators are permitted to carry on business.

We now await the outcome of the FCA’s engagement.