UK Public Offers and Admissions to Trading Regulations Regime - New Prospectus Rules: impact on issues of non-equity securities

On 26 July 2024, the FCA published a consultation paper (CP24/12) on the new prospectus rules it proposes to make under the Public Offers and Admissions to Trading Regulations 2024 (the POATRs). This follows on from the series of six "engagement papers" published by the FCA in the summer of 2023 seeking views on how the FCA should proceed to use its new rule-making powers under the POATRs.

These proposed new rules, together with the POATRs, will effectively replace the current UK Prospectus Regulation regime. In this briefing, we highlight the principal changes that the proposed new rules will make to the format and contents of prospectuses and the circumstances in which they are used for issues of non-equity securities. With regard to the impact on equity securities, see this Ashurst briefing.

Key points

Under the proposed new regime:

• it will no longer be permitted to make a public offer of securities in the UK simply by publishing an approved prospectus; instead one of the usual exemptions must apply (e.g. an offer made solely to qualified investors) or the securities must be admitted to trading on a UK regulated market or primary MTF (or the offer is conditional on such listing).  Subject to this, it appears the format and contents of prospectuses and the circumstances in which they are used will not change significantly.
• the permissible scope of a base prospectus supplement will be slightly expanded by allowing the introduction of new terms to the terms and conditions of the securities in limited circumstances.
• it will be possible to automatically incorporate by reference in a base prospectus annual and interim financial statements published after the date of the prospectus.
• changes will be made to the permitted size and content of prospectus summaries.
• in limited circumstances certain forward-looking statements made in a prospectus will be subject to a lighter liability regime than the other information in the prospectus.
• there will be specific minimum expectations concerning sustainability-related information.
• the POATRs will not affect the law applicable to any offer of securities or admission to trading on a UK regulated market which is made in reliance on a prospectus approved in accordance with the UK Prospectus Regulation before the new FCA rules come into effect.

New sourcebook

The FCA is proposing that the existing Prospectus Regulation Rules sourcebook (PRR) will be repealed and replaced with a new Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM). The draft text of the new sourcebook is included in Appendix 1 to CP24/12. While the ordering and numbering of the new rules will be significantly different, the text of the new rules will appear very familiar to anyone familiar with the current UK Prospectus Regulation regime and the PRR sourcebook.

Gateway to the UK capital market

Under the current UK Prospectus Regulation regime, an offer of securities to the public may only be made via an approved prospectus unless an exemption to the prospectus requirements applies. Under the new POATRs regime, the position has been re-framed such that there will be a blanket prohibition on the making of an offer of securities to the public unless an exemption applies or the securities are excluded securities. The exemptions include:

• Admission to trading:  an offer of securities where:
  • the offer is conditional on the admission of the securities to trading on a UK regulated market or primary MTF, or
  • the securities being offered are at the time of the offer admitted to trading on a UK regulated market or primary MTF;
• Qualified investors:  the offer of securities is made solely to qualified investors;
• 150 persons:  the offer of securities is made to fewer than 150 persons in the United Kingdom, other than qualified investors; and
• Wholesale securities:  the offer is of securities whose denomination per unit amounts to at least £50,000, or an equivalent amount.

These last three are essentially the same as the most widely-used exemptions under the UK Prospectus Regulation regime, with the exception that the threshold for wholesale securities has become £50,000 rather than EUR100,000.

Note that there is no exemption for the publication of a prospectus in and of itself. Therefore, where no other exemption applies (and the securities are not excluded securities), securities which are to be offered in the UK will need to be admitted to trading on a UK regulated market or primary MTF or the offer will need to be conditional upon such an admission.

The POATRs define “excluded securities" in a very similar way to the list of securities placed outside the scope of the UK Prospectus Regulation by Article 1(2) of that Regulation, namely securities issued or guaranteed by the government or a local or regional authority of any country or territory.  Also money market instruments (commercial paper and CDs) that have a maturity of less than 12 months are excluded securities.

Admission to trading on a UK regulated market will remain subject to prior publication of a prospectus, approved by the FCA, unless an exemption applies.  The list of exemptions under the new rules is essentially carried forward from the UK Prospectus Regulation regime with some modifications, none of which are likely to be significant for issuers of non-equity securities.

Expanded scope for supplements to a base prospectus

Under the UK Prospectus Regulation regime a prospectus supplement cannot be used to introduce new terms to the terms and conditions of the securities described in a base prospectus.  The POATRs regime will carry this feature forward in a modified way, additionally permitting a supplement to be used to supplement a base prospectus to introduce new terms to the terms and conditions of the securities (e.g. to add the ability to issue green bonds) provided that:

(a) there is no open offer or pending application for admission to trading on a regulated market;

(b) the supplement relates only to the securities note and does not relate to a guarantee or guarantor;

(c) the base prospectus has been used to issue securities that are listed on the Official List and the new securities are to be admitted to the same listing category;

(d) the new securities cannot be asset-backed securities or securities linked to an underlying asset; and

(e) the supplement must contain the minimum information required by the relevant securities note annexes in relation to the new securities.

Incorporation by reference of future information

It is a requirement of the UK Prospectus Regulation regime that any information being incorporated by reference in a prospectus must be published previously to or simultaneously with the prospectus  This will remain the case under the POATRs regime but with one important change.  Under the new regime, in the case of a base prospectus it will be possible to incorporate by reference annual and interim financial statements published after the date of the base prospectus (but during its period of validity) provided that any such information is in English and published through a regulatory information service (or RIS) such as the London Stock Exchange's Regulatory News Service (RNS). 

With regard to whether a supplement and related withdrawal rights are triggered at the time of automatic incorporation by reference of such forward information, the consultation paper provides that "Allowing future financial information to be incorporated without the need for a supplementary prospectus is our preferred outcome of minimising costs for issuers".  However, the actual text of the new rules is currently silent on this point, and therefore it may be argued that a prospectus supplement may still be required to be published where the criteria for such publication are met and that related withdrawal rights would still arise. It is hoped that this uncertainty can be resolved during the consultation process.

Necessary information test expanded

The POATRs regime has retained the statutory "necessary information" test for the contents of a prospectus found in the UK Prospectus Regulation regime but with three key alterations:

(a) it does not expressly recognised that the necessary information may vary for non-equity securities depending upon their denomination;

(b) necessary information may vary according to whether an offer of securities relates to a first-time admission to a market or is a secondary issuance; and

(c) a modified necessary information test will apply to debt securities which focuses on the issuer or guarantor’s creditworthiness, rather than prospects.

However the Annexes to the PRM sourcebook retain the distinction for both registration document and securities note information for non-equity securities with denominations over and under £50,000, so it remains to be seen whether this new formulation of the necessary information test makes much difference in practice.

Summaries – small differences

The UK Prospectus Regulation regime's requirements for a prospectus summary are effectively carried forward into the new regime subject to:

(a) the limit of seven sides of A4 being increased to 10 sides;   

(b) the addition of a new preliminary section explaining the purpose of the prospectus;

(c) the removal of the limit on the number of risk factors; and

(d) the new ability to be able to cross-refer to other parts of the prospectus.  

Protected forward-looking statements (PFLS) 

The POATRs regime will introduce a recklessness/dishonesty liability standard, with the burden of proof on investors, for certain categories of forward-looking statements in a prospectus.  However, the circumstances in which information in a prospectus for non-equity securities can be eligible to be a protected forward-looking statement are restricted to:

(a) Information on any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the issuer’s prospects for at least the current financial year; and 

(b) Information on profit forecasts, but not profit estimates.

Sustainability-related disclosure 

Under the UK Prospectus Regulation regime prospectuses are subject to the necessary information test which, amongst other things, requires disclosure of all (if any) material sustainability-related information.  The POATRs regime supplements this general content requirements with specific minimum expectations concerning sustainability-related information.

Most of these supplementary requirements are specific to prospectuses for equity securities.  For a prospectus relating to non-equity securities, the proposed rules provides that the prospectus must include a statement as to whether the securities are:

(a) marketed as green, social, sustainable or sustainability-linked; or

(b) issued under a bond framework or equivalent document published by the issuer, a subsidiary of the issuer or an entity of the issuer's group. 

The rules provide guidance that where a bond framework on green, social, sustainable or sustainability-linked matters is available, further relevant information to be included in the prospectus may include details of:

(a) where the framework may be inspected (website or other location);

(b) the standards and/or principles according to which the framework has been prepared;

(c) whether any external review of the bond framework has been performed; and

(d) where any such external review may be inspected (website or other location).

For use of proceeds bonds the guidance suggests the inclusion of:

(a) the eligible projects that are expected to be financed or re-financed, in part or in full, with the proceeds of the bonds, including, in the case of refinancing:

(i) the maximum proportion of proceeds that is expected to be allocated to financing new projects;

(ii) the proportion of proceeds that will be allocated to refinancing existing projects; and

(iii) the expected look-back period – that is, the number of previous years that the issuer will look back to for the refinanced projects.

(b) the project evaluation prior to the issue of the bonds, including:

(i) the project objectives;

(ii) risks specifically associated with the projects and related mitigation measures; and

(iii) the criteria, metrics or performance indicators used to evaluate the projects;

(c) the criteria and rationale for selecting the projects by reference to:

(i) an external review of the bond, where available; or

(ii) details of the issuer’s methodology for determining the project’s green, social and/or sustainability eligibility.

(d) the approach and methods for managing the proceeds of the bonds, including temporary management;

(e) any post-issuance external review or assessment of the projects where arranged or intended to be arranged, including:

(i) the areas of focus of the review or assessment;

(ii) the relevance of the review or assessment by reference to the green, social and/or sustainable characteristics of the bonds; and

(iii) the persons responsible for the post-issuance assessment; and

(f) the approach to reporting on the impacts of the eligible projects including:

(i) the location of the reporting/where it may be inspected; and

(ii) how frequently such reporting will be updated.

For sustainability linked bonds the guidance suggests the inclusion of:

(a) an explanation of how any relevant targets, metrics or indicators have been selected by reference to:

(i) the process and rationale for their selection;

(ii) computation methodologies, measurability and verifiability of the key performance indicators, as well as their ability to be benchmarked; and

(iii) the materiality and alignment of the relevant sustainability performance targets with the issuer’s overall sustainability and business strategies; and

(b) whether the financial consequences of meeting or missing relevant targets, metrics or indicators represents an adequate incentive to the issuer to meet those targets, including, for example, an explanation of the materiality of any step-up or step-down for the issuer in the context of its interest costs.

Primary MTFs

The POATRs regime provides a mechanism by which admission documents published in accordance with the rules of the certain UK MTFs, known as primary MTFs, are treated as a type of prospectus. This preserves the current system in which the operators of MTFs such as the London Stock Exchange's International Securities Market (ISM) establish admission criteria and rules, subject to FCA oversight.  

Rules for primary MTFs are set out as a new Chapter to the existing FCA Market Conduct (MAR) sourcebook, MAR 5ZA (Multilateral trading facilities operating as a primary MTF) appearing after MAR 5 (Multilateral trading facilities (MTFs)).  These rules require the publication of an MTF admission prospectus as a condition of admission to trading in circumstances specified in the rules.  An MTF admission prospectus will be subject to the same statutory responsibility and compensation provisions as apply to prospectuses under the POATRs regime.  However the detailed content requirements and the process for reviewing and approving admission prospectuses will be set by the relevant MTF operator, except that rules covering protected forward-looking statements, applicable to forward-looking statements in both a prospectus and an MTF prospectus, are found in the PRM 6 sourcebook.

Where the MTF rules require an admission prospectus they must also require a prospectus supplement in the same circumstances in which the PRM sourcebook requires a prospectus supplement.  Furthermore, MAR 5ZA provides that where a supplement to an admission prospectus is published, the offeror of the securities and any intermediary through whom the securities are bought must allow any person who has agreed to buy or subscribe for the securities to withdraw that acceptance within seven working days after publication of the supplement.

Public offer platforms

The POATRs regime also creates a new regulated activity covering the operation of an electronic platform for the public offering of securities, such as an equity crowdfunding platform, which are not admitted to any UK regulated market or MTF.  Securities will be allowed to be offered to the public in the UK provided the offer is made through such a platform operated by a firm specifically authorised by the FCA for the purpose.  On 26 July 2024, the FCA published a separate consultation paper on the new public offer platform regime (CP24/13).  This consultation will be the subject of a separate briefing.

Grandfathering

Where a prospectus has been approved by the FCA in accordance with the UK Prospectus Regulation before the new rules take effect, the POATRs do not affect the law applicable in relation to any offer of securities to the public or request for the admission of securities to trading on a UK regulated market which (in either case) is made in reliance on that prospectus, together with any supplementary prospectus, during the period for which it is valid under the UK Prospectus Regulation.  

The POATRs do not make any express reference to base prospectuses but it is to be hoped that the FCA will make clear that a base prospectus is a prospectus for these purposes.  Also neither the POATRs nor the PRM sourcebook say anything about the situation where an offer is being made after the new rules take effect pursuant to a base prospectus approved under the UK Prospectus Regulation before the new rules take effect and the offer extends beyond the expiry of the validity of the base prospectus.

Next steps

The consultation closes on 18 October 2024.  The FCA say they aim to finalise the new rules by the end of H1 2025, subject to responses to the consultation, and there will then be a further period prior to new rules coming into force.

Also the FCA say they intend to bring forward a separate consultation paper in late 2024 on proposals to make it easier to include retail investors in non-equity fund raising by removing barriers to issuance of low denomination bonds.

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