Changes to the IPO process

3rd July 2018

Introduction

New rules in the Financial Conduct Authority’s (FCA) Conduct of Business Sourcebook (COBS) took effect on 1 July 2018, which will result in changes to the timing and events in the UK equity IPO process. The new rules were published by the FCA in October 2017 in Policy Statement PS17/12 – Reforming the availability of the information in the UK equity IPO process.

The new rules apply to all IPOs where shares will be admitted to trading on a regulated market in the UK, so will apply to IPOs on the main market, but not to AIM. The rules are intended to improve the range, quality and timing of the information made available to investors on IPOs, and to encourage investors to make their investment decisions relying on the prospectus.

What's changing?

The key reforms are:

  • Before any connected analysts (ie analysts at any banks which are part of the underwriting syndicate) can publish any research on an IPO candidate:
    • the IPO candidate must publish an approved prospectus or registration document before connected research can be released; and
    • the underwriting banks must select a range of unconnected analysts and ensure that those analysts will have access to an IPO candidate’s management, either at the same time as the connected analysts (option 1) or in a way that results in those unconnected analysts receiving the same information (option 2).


Under option 1, connected research can be published from one day after an approved prospectus or registration document is published. For option 2, connected research cannot be released until a minimum of seven days after an approved prospectus or registration document is published.

  • New guidance on conflicts of interest, which prevent analysts from the broker interacting with the issuer’s representatives when underwriting mandates are being considered.


How will the unconnected analysts be selected?

The rules set out how firms should determine the range of unconnected analysts that will be provided with access to the issuer’s management. To supplement this, the FCA is working with trade bodies to produce guidance to support firms but, these guidelines are not yet available. Unconnected analysts must receive identical information to the connected analysts. No more restrictive terms of access should be placed on them, and any restrictions imposed should not be unreasonable.

IPO candidates are likely to want as much certainty as possible that the transaction will be successful before publishing an approved registration document and making the deal public, so ‘pilot fishing’ meetings with investors may become even more important in the IPO process.

What will be the impact of these changes?

Options for access to unconnected analysts

Preliminary views suggest that unconnected analysts will have access to the issuer’s management separately from the connected analysts (option 2 above), in which case there will be a seven day gap between the publication of the prospectus or registration document and release of the connected research.  Where option 2 is followed, management meetings with unconnected analysts are likely to take place during this seven day period. There is a concern that providing access to unconnected analysts prior to the publication of the approved disclosure document might prejudice the confidentiality of an IPO.

However, transactions which are running to a very tight timetable may choose to follow option 1, with the research being published ASAP after publication of the registration document.

Choice of disclosure document

An IPO applicant must publish either a prospectus or registration document before the release of connected research. It is unlikely that companies will be in a position to publish a complete approved prospectus at such an early stage in the process, so it is likely that a registration document will be used.

The registration document will contain information on the issuer, its business/management, risk factors, any expert reports and audited financial information, together with responsibility statements. It will have to be approved by the FCA. It will be a matter of house preference, but the sponsor may not be named in the registration document and it may be issued as a company document only, in which case the sponsor will not incur liability in respect of it at that time.

It is anticipated that publication of the registration document will be followed by publication of a comprehensive prospectus, containing an annex with any updates to the registration document. Alternatively, it is possible to publish a separate approved securities note and summary. We think the first option is most likely, and that investors would prefer to continue to see a complete prospectus, rather than three separate documents. We may find that due to the early publication of the registration document which will be available during the marketing period, the information available in this means that a pathfinder prospectus may not be published on all transactions (although the pathfinder, together with the management presentation, may still be considered to assist with the marketing exercise).

Impact for IPOs on AIM

Although the changes do not apply to IPOs on AIM, the FCA have stated that they encourage application on the larger IPOs on AIM. However, conversely, IPO candidates may instead look to choose AIM over the main market in order to avoid this process if the changes result in increased costs for the issuer in an already costly and lengthy process. There is likely to be a further review undertaken by the FCA in relation to the application of the rules to AIM next year.

Impact on timetable and process

IPO candidates are likely to want as much certainty as possible that the transaction will be successful before publishing an approved registration document and making the deal public, so ‘pilot fishing’ meetings with investors may become even more important in the IPO process.

Although it will be possible to update the registration document after it is published (assuming this option is chosen), it will be preferable to avoid making substantial changes to this. Therefore, due diligence and verification will need to be completed earlier than is currently the case, perhaps by three to four weeks. 

Given that the registration document will have been made available, it may be possible to shorten the investor education process (where the connected analysts meet potential investors following the publication of research and answer their questions on the applicant) from (typically) two weeks to one week.

Is anything likely to change in practice?

Time will tell how many unconnected analysts will take the opportunity to access further information or attend meetings with management, or ultimately publish unconnected research, particularly on smaller IPOs, so it remains to be seen if investors will have access to a more diverse set of opinions and be able to make a better informed assessment of the value of the securities as intended by the new rules.

For more information about how this might impact your business please contact Stephen Nash, Daniel Hall, Mark Roe or Sarah Turner.

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