In July 2018 the Financial Conduct Authority (FCA) implemented changes to the initial public offer (IPO) regime that have had a fundamental impact on the process of conducting an IPO in the United Kingdom. Companies including Aston Martin and Funding Circle have had to negotiate these new rules in practice over the past few months and certain trends are now beginning to emerge.
What are new rules and how they affect the IPO process?
The new rules are set out in the FCA's Conduct of Business Sourcebook (Rules 11A and 12) and broadly speaking, make the following changes to the UK IPO process.
Publication of registration documents Prior to the implementation of the new regime, an issuer's prospectus (comprising a registration document, securities note and summary) was approved by the FCA and published only at the commencement of the offer period for the IPO. Where only institutional investors were participating in the IPO, such investors were required to make use of a draft (or 'pathfinder') prospectus and 'connected' research (ie, reports prepared by analysts from syndicate banks) at the commencement of the offer period and prior to being provided with the approved document at a late stage in the process.
In order to give investors more time to consider the issuer's disclosure, the new rules require the publication of a registration document which has been approved by the FCA prior to the publication of any connected analyst research. This means that the registration document – which includes a description of the issuer's business, its financial results and strategy as well as the risks associated with its business – is now available to investors approximately three weeks earlier in the IPO process.
The other sections of the prospectus, which contain details of the offer (set out in the securities note) and a summary, together with an updated registration document, are published later in the process.
Presentation to unconnected analysts Under the former regime there was no requirement for issuers to engage with 'unconnected' analysts (ie, research analysts not associated with the banks who make up the underwriting syndicate) during the IPO process. Research reports produced in connection with an IPO were therefore typically published only by analysts working for the same banks that were also part of the underwriting syndicate.
In order to allow investors access to a wider range of views on an issuer the new rules require that, if connected analysts are given access to the issuer, unconnected analysts should be afforded the same opportunities and receive the same information prior to any connected analyst publishing its report.
An issuer has two options when engaging with analysts on an IPO process:
- all analysts can be invited to the same briefings and receive the same information; or
- within seven days of publication of the registration document, unconnected analysts can be provided with the same information that connected analysts have already received.
Where an issuer meets with all analysts at the same time, connected analysts can publish their reports one day after the registration document is published. If the issuer delays meeting with unconnected analysts until after publication of the registration document, connected analysts must wait seven days after the publication of the registration document to publish their reports to give unconnected analysts the opportunity to publish at or around the same time.
Enhanced conflicts rules To enhance the standards for investment banks to manage conflicts of interest in the production and distribution of research, the new rules prohibit analysts producing independent research from participating in pitches by banks for syndicate roles on an IPO.
The intention of the new rules is to remove any perception that an analyst's report is tainted by the analyst's association with an investment bank that is part of the underwriting syndicate. Excluding analysts from engaging with the issuer during the pitch process should ensure that analysts are not placed in a position where they are pressured into being supportive of the issuer in return for a bank securing an underwriting role on the transaction.
Which transactions are subject to new rules?
The new rules apply to IPOs of prospective issuers that seek admission to the trading of their shares on the Main Market of the London Stock Exchange.
They do not apply to the IPOs on the Alternative Investment Market (AIM), although the FCA has indicated that they would encourage larger issuers on the AIM to seek to comply with the new regime. No AIM IPO has, at this time, complied with the new rules.
Further, the rules do not apply to a technical listing with no issue or sale of shares (eg, a demerger or technical listing), nor do they apply in circumstances where the issuer does not engage with connected analysts. In such circumstances, an issuer would not be required to publish a registration document in advance of a full prospectus.
Since July 2018 there have been six announced UK Main Market IPOs (of which two have been successfully listed, two remain in the market and two have been postponed) that must engage with the new regime. While the sample size remains small, it is perhaps possible to identify how market practice may develop to account for the new rules.
Analyst meetings The issuers in all of the six announced IPOs have met with connected and unconnected analysts separately, leading to a seven-day delay between the publication of the registration document and connected research. A key reason for this may be a concern that involving unconnected analysts earlier in the process would risk a leak and the issuer's ability to control the timing of the announcement of its IPO.
Price range prospectuses In line with its objective to ensure the centrality of the issuer's own disclosure in the IPO process, the FCA intimated in its consultation paper (CP 17/5) that, under the new rules, it expects that issuers will publish a price range prospectus.
A 'price range' prospectus (which includes a range for the price or the number of shares to be offered in the IPO) is approved by the FCA prior to the public marketing of an IPO and is required where an IPO includes a retail offer. However, where only institutional investors are invited to participate in an IPO an issuer is not required by the new rules to have published an approved prospectus in order to market the transaction and therefore may, as was the case under the former rules, use an unapproved pathfinder prospectus for such purposes.
Broadly speaking, issuers in the United Kingdom have historically eschewed the use of a price range prospectus for an institutional-only offer, believing that a pathfinder prospectus allows more flexibility to set the offer size and price, as it affords the issuer more time to receive feedback from potential investors before doing so.
The only IPO prospectus for an institutional-only offer published to date under the new regime is a price range prospectus. However, it is too soon to draw any concrete conclusions; the announcements in connection with another IPO (which was postponed prior to publication of the prospectus) indicated that the issuer had intended to conduct its institutional-only IPO using a pathfinder prospectus.
Intention to float announcements Under the old regime, an issuer's first public declaration of its intention to IPO was the intention to float (ITF) announcement which was customarily published on the date on which the connected research was published. This announcement typically contained a short summary of:
- the company's business, directors and management team;
- its strengths and strategies; and
- a summary of the key terms of the offer.
There was no specific regulatory requirement under the former rules to publish an ITF announcement. While the new rules similarly do not make specific provision for the timing or content of an ITF announcement, the FCA intimated in CP 17/5 that companies would make their ITF announcement on the date of publication of the connected research, not when the registration document is published.
Notwithstanding this, all of the issuers that have publicly announced an IPO under the new rules have published an announcement on the date of publication of their registration document, which includes most of the information that was historically contained in the ITF announcement, although the details of the IPO itself (ie, timing and size of the offer) have been more limited. On publication of the connected research, the issuers have updated the market with further offer details and any updates to the original announcement.
It remains to be seen if this approach will continue or whether issuers will seek to include all of this information in one announcement made on the date of the registration document or when the connected analysts publish their research.
While suggestions on how market practice will develop may be gleaned in the approach taken by the first issuers that have navigated the new IPO rules, market participants are still familiarising themselves with the regulatory regime and future IPOs may look to build on the lessons learnt since July 2018.
For further information on this topic please contact Dan Hirschovits or Jamie Corner at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email ([email protected] or [email protected]). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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