The UK IPO process: FCA kicks off discussion on connected research and late publication of information

The FCA has released a discussion paper on the availability of information in the UK equity IPO process, focusing on the FCA’s concerns (and proposed alternative models) in relation to the diversity and stage at which information is available in a UK IPO process.

The FCA’s concerns: limited scope for independent research and information being released too late

Current UK market practice is for research to be conducted by the banks supporting the IPO. Once produced there is often a 14 day ‘blackout period’ between the research being published and the issue of the pathfinder prospectus, meaning that potential investors only have access to information well into the IPO process.

The discussion paper identifies two key issues with current market practice:

• the late publication of information – the late availability of the prospectus, combined with lack of access to the issuer’s management, means that independent research providers and analysts have little or no information on which to produce research. Therefore, the only information available in the investor education period is that produced by a sell side ‘connected’ party (generally members of the bank syndicate)
• in almost all UK IPOs research has been produced by the banks supporting the IPO. The FCA’s concern here is that the research is at a heightened risk of bias due to potential pressure on the supporting banks’ analysts – generated by the issuer and/or internally

The FCA believes these issues can ultimately lead to inefficient investment decisions and price formation.

Alternative models? Looking overseas for inspiration

The FCA notes that IPO practices differ across the EU (despite the harmonised prospectus framework) and across international markets. For example, in France the approved ‘registration document’ is published much earlier and in the US ‘connected’ research publication is prohibited throughout the IPO process. Whilst mindful of the risk of lengthening the current IPO process, the FCA is looking to create an IPO regime where:

• an approved prospectus is made available to investors when they need it in order to enable them to make informed investment decisions
• firms to adhere to high standards of conduct, in particular in the management of conflicts of interest inherent in 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)

In order to bring these conditions about, the FCA is inviting comment on three potential alternative models:

• requiring a blackout on connected research until 7 days after an approved prospectus is published
• opening up any analyst presentation to unconnected analysts and requiring a blackout on connected research until 7 days after the publication of an approved prospectus
• opening up any analyst presentation to unconnected analysts and prohibiting such a meeting from taking place before publication of an approved prospectus

The discussion paper closes for comment on 13 July 2016. The online response form can be found here.

OC Comment

We look forward to seeing the outcome of the consultation process. Clearly, to the extent any regulation around the timing and nature of pre-IPO research (which currently is driven by market best practice) improves the IPO process and, importantly, generates greater confidence in the London capital markets then it would be welcomed by all market participants.