What’s the news?
The FCA has published a consultation paper on the availability of information in the UK Equity IPO process (DP 16/3).
What is it about?
An Initial Public Offering (IPO) occurs when shares in a private company are sold to the public. The details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus, which contains all the material information and which is governed by strict rules (in the UK by the Prospectus Rules, which in turn implement the requirements of the EU Prospectus Directive). The prospectus is the final legal and marketing document for the offering and false representations can have severe consequences for the company and the people involved in the IPO. The prospectus needs to be approved by the competent authority, the FCA.
In most cases companies are assisted in the launching their shares by an investment bank that provides advice and helps finding institutional investors that buy the shares, which is called underwriting. The most common structure for underwriting is called “bookbuilding” where the advising investment bank(s) contact potential investors to get indications of size of demand and at what price for the shares on offer. For this process a draft prospectus is used, the “Pathfinder”, which is an almost final version of the prospectus. Apart from details of the precise size of the IPO and the subscription price of the new shares to be offered (which are unlikely to be finalised at this stage), it should include all other relevant details.
An issue that arises from the IPO process is the publication of research by analysts of a bank (or any other connected broker) that advises the company. In order to avoid any conflicts of interest or the impression of foul play and to help distance research from the prospectus a so-called “blackout period” is required. During this period, which begins two weeks before the publication of the final prospectus (and ends 40 days after admission of the shares for trading), no new information is released by the connected broker(s) and its analysts.
This complicated process is prone to conflicts of interest and particular the availability of information during the IPO process has been a cause of concern for some time for the regulator. In its initial market study into investment and corporate banking the FCA determined that, in the typical UK IPO process, the blackout period means the pathfinder and final approved prospectuses are often made available to investors late in the IPO process.
What are the objectives of the potential reform?
The FCA is aiming for an efficient and well-informed IPO process where:
- an approved prospectus is the central document in the IPO process and is made available to investors when they need it
- firms foster high standards of conduct, in particular in their management of conflicts of interest inherent during the preparation and distribution of ‘connected’ research
- conditions exist for ‘unconnected’ research to be published during the IPO process, where there is demand for it
What is the feedback to the proposal?
Investors welcome the FCA move to initiate debate about a reform of the process since the proposals would give them more time to review and make a better-informed decision and industry has sent positive signals, too.
So, what’s next?
The FCA paper contains a list of questions and comments on those or any other aspect of it are due on 13 July 2016. Since the consultation is a discussion paper and not a proposal of set rules, the regulator will analyse its findings and then decide whether it will make any specific proposal, on which, the FCA promises, it will consult further and consider obviously existing regulatory framework, not least EU law and regulation, including MiFID II.
For more on the FCA consultation and the full Discussion Paper itself, see here.
If you want more information on the IPO process in the UK, the LSE has produced “A guide to listing on the London Stock Exchange”.