New rules on the availability of information in the UK IPO process in force from 1 July 2018

The FCA's new rules on the availability of information during the UK IPO process come into force on 1 July 2018.  The changes take the form of amendments to the Conduct of Business Sourcebook (COBS) to "improve the range, quality and timeliness of information that is made available… during the UK IPO process."  The new rules broadly follow the proposals set out in the FCA's consultation paper, published in March last year, which we looked at here.

Background: the problems – late publication of the prospectus and over-reliance on connected research

The FCA is addressing two key issues: the timing of the publication of the prospectus and the perceived problems with potential investors being fed a pre-IPO information diet consisting largely of connected research. 

The prospectus – too much, too late

In the current UK IPO process, the prospectus is made available late in the process and “arguably… not… sufficiently early for it to play its proper role in informing investment decisions.”  In its earlier consultation paper on the changes, the FCA comments that “a clear majority” of respondents to its earlier discussion paper agreed “reform was required to restore the centrality of a prospectus document“.

Currently, the pathfinder prospectus (a near final form of the prospectus setting out a price range) is typically only issued following pre-marketing to a select group of institutions and the final, approved, prospectus itself issued after the management roadshow, too late for institutional investors to be able to fully digest the information contained in it before committing to the IPO.

This leads to a reliance on connected research, which becomes the “dominant source of information available to investors during a crucial stage of the process.”

Connected research – a necessary element of the process, but inherently conflicted

The late availability of the prospectus increases the emphasis placed on the quality and diversity of analyst research. For the vast majority of UK IPOs, the only pre-IPO research available is that produced by “connected” analysts – analysts from within the bookrunning bank(s) who are given access to management and financial data, often at or around the same time as when syndicate participation is being decided.

This sequence of events, together with the general potential for pressure to be brought to bear on analysts to produce favourable research by the corporate finance team within a bank, leads to an obvious conflict of interest – a conflict of interest which is recognised and dealt with in both FCA and internal bank regulation, but with that regulation currently being under significant commercial strain.

In previous discussion papers on these issues, many respondents noted the problems but also the benefits of connected research – principally brevity and the financial forecasts they contain.  As a result, rather than banning connected research, the FCA is introducing new rules to facilitate coverage of the IPO by unconnected analysts to give investors access to a greater range of views on an issuer’s prospects and enable more accurate price formation.

The key changes

Amendments to COBS 11A: restricting the timing of connected research and restoring the primacy of the prospectus

The changes to COBS 11A will apply to a firm carrying on underwriting or placing services for an issuer which is publishing a prospectus in connection with the admission of equities (or depositary receipts representing equity) to trading on a regulated market in the UK for the first time, and which is intending to publish connected research prior to the IPO.

Under the new rules unconnected analysts must be given the opportunity to be given access the issuer to enable them to prepare independent research, either by:

• joining unconnected analysts in any communications between the issuer and its team and the firm's connected analysts ("joint access"); or

• by giving unconnected analysts separate access to the issuer and its team, provided equivalent information is given to both connected and unconnected analysts during that process ("separate access").  The FCA anticipates that, due to confidentiality concerns, it is likely that the separate access model will prevail, with unconnected analysts being briefed only after publication of the prospectus or registration document.

Connected research must be published no earlier than seven days following the publication of an approved prospectus or registration document, unless joint access is given to unconnected analysts, in which case it is permitted to publish connected research the day after publication of the prospectus or registration document.

The COBS rule sets out detailed guidelines on the process for identifying the range of unconnected analysts to be given the opportunity to access the issuer, and the type of access that must be given to them if a separate access arrangement is implemented.  The revised rules also set out the detailed record-keeping requirements relating to information given to analysts, together with the process for identifying the range of unconnected analysts to be invited to participate in the process.

Application to AIM: not mandatory but best practice for larger IPOs

The new rules will affect Main Market IPOs, but not those on AIM or other multilateral trading facilities (MTFs).  That said, the FCA notes that "… considering the overlap between the larger companies seeking admission to trading on an MTF and the smaller companies seeking admission to trading on a regulated market, we consider it best practice for larger IPOs on the former to adopt the same process as on the latter. In other words, we encourage firms providing underwriting or placing services to larger companies raising capital through an IPO on an MTF to consider following the new COBS 11A rules."  The FCA intends to revisit the question of whether or not to extend the requirements of COBS 11A to AIM and other MTFs after a year of bedding down of the new rules.

Amendments to COBS 12: extending the concept of analyst involvement in pitches

The FCA's current guidance in COBS 12 states that an analyst should not become involved in activities which might compromise their objectivity. The existing guidance then provides examples of activities which would ordinarily be inconsistent with an analyst’s

objectivity, including participation in investment banking activities such as corporate finance business and underwriting, and participation in pitches for new business.

The FCA notes the considerable pressure that analysts might face to prepare favourable research in order to secure the firm's wider mandate on the transaction.  In order to alleviate this pressure, new guidance is being introduced to clarify that the FCA will regard ‘participating in pitches for new business’ to include where an analyst interacts with the issuer’s management, shareholders or corporate finance advisers until:

• the firm has accepted a mandate to carry out underwriting or placing services for the issuer, and

• the firm’s position in the syndicate has been contractually agreed.