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The Financial Conduct Authority (“FCA”) issued a discussion paper on the Availability of information in the UK equity IPO process on 13 April 2016 (the “Discussion Paper”). The Discussion Paper follows a number of reports into the UK equity market, including the Association of British Insurers’ study on Encouraging Equity Investment (July 2013) and the HM Government-commissioned IPOs and Bookbuilding in Future HM Government Primary Share Disposals (December 2014), which demonstrates that there has been appetite for change for some years. Whilst in principle any change which enhances the provision of information to potential investors is to be welcomed, there are a number of risks to the changes proposed.
This article is split into three sections:
In order to understand the potential effects of the changes proposed in the Discussion Paper, it is necessary to consider the current process of providing information to potential investors. The current process can broadly be split into seven steps:
The Discussion Paper raises two main concerns about the current process. The first is that the prospectus should be the main document that investors rely on when making an investment decision, with the inference that current market practice dictates that too much weight is placed on the connected research reports, which have the potential to be biased. Additionally, the FCA raises concerns over the blackout period which currently occurs after the publication of connected research reports (before the pathfinder prospectus is published), particularly as it is suggested that the only reason for the blackout period is that it is to protect research analysts from liability by imposing a gap between publication and investment decision. The second concern is that unconnected analysts do not have an opportunity to produce pre-float reports and therefore investors do not have access to independent reports when making an investment decision. The Discussion Paper notes that of the 169 IPO transactions the FCA examined, only one transaction featured unconnected research published during the IPO process and that generally, unconnected analysts’ reports do not tend to appear until 6 to 12 months after a float.
In order to alleviate these concerns, the FCA puts forward three “models to reform” in the Discussion Paper. All three models require the prospectus to be published before any connected research is published, which is the approach taken in France and the US (although in the US, the publication of connected research is prohibited through the whole IPO process). Additionally, models 2 and 3 seek to provide mandatory access for unconnected analysts to any analyst presentation held by the issuer’s management. The three models are:
Whilst the aims of the regulator are understandably to ensure that investors are given as much and as accurate (and unbiased) information as possible, the proposed changes open up some potential risks that need to be considered.
All three models propose that the publication of the prospectus and analyst research reports (whether connected or unconnected) are inverted so that the publication of the prospectus comes first. There are a number of practical issues and concerns in relation to the proposals:
Model 3 suggests that analyst presentations should be held post publication of the prospectus. This may devalue the analyst meetings with management, as management are likely to confine what they say to that published in the prospectus, to avoid liability.
Models two and three contain a mandatory requirement to open analyst presentations up to unconnected analysts. Concerns with this centre on increased cost and time for the issuer, for example, as a result of hiring a larger space to hold the presentations. Again, query the value of these proposals for smaller, less high profile issuers who will be most likely marketing to sophisticated investors who should be able to understand the context in which analyst reports have been written (ie the potential for bias) and understand the associated risks.
It is clear that there are a number of issues with the proposals contained within the Discussion Paper. In particular, the FCA should consider providing for more flexibility for smaller, less high profile issues where issuers are unlikely to open the issue to retail investors and where building the story pre-publication of the prospectus is more crucial to the success of the float. Responses to the Discussion Paper are required by 13 July 2016.
For more information, please contact Clive Hopewell on +44 (0)20 7203 5203 or email@example.com.