FCA proposes making independent information available earlier during the equity IPO process

Its proposed reforms will enhance conduct standards applying to the formulation and distribution of connected research, as well as ensure that the prospectus document "plays a more central role in the process", the FCA said.

During its market study of the investment and corporate banking market in April 2016, the FCA identified practices which it believed could reduce the diversity and independence of information available to investors and published a separate discussion paper on possible improvements to the IPO process relating to these concerns. With the benefit of feedback on the discussion paper, the FCA is now consulting on two potential models for a reformed IPO process, designed to improve the "range and quality" of information available to investors.

"A well-functioning IPO market with high standards of conduct is an essential part of the UK's capital markets," said Christopher Woolard, the FCA's executive director of strategy and competition.

"The IPO process has considerable strengths, but the proposals we have outlined in [the] consultation paper are designed to improve the range, and timeliness, of higher quality information that is available to investors during the process," he said.

According to the FCA, it is generally agreed by market participants that the prospectus should be the primary source of information on companies that are seeking to raise finance through the IPO process. Feedback that the FCA has received from buy-side investors indicates strong support for an early publication of an approved prospectus or registration document. However, under the current rules, this document is not made available until very late in the process, while independent and unconnected researchers do not generally have access to the information that they need to produce research about the company.

Instead, investors generally have to rely on the 'connected' research written by analysts employed by the banks involved in the IPO process as their dominant source of early information. This gives rise to potential conflict of interest issues, such as analysts coming under pressure to produce favourable research on a particular offering so that their bank can obtain a place on the book-running syndicate, according to the FCA.

The FCA has set out two potential models for reform in its consultation. Both would require the publication of an FCA-approved 'registration document', providing prospectus-like information about the company minus any pricing information, before the announcement of an official intention to float. A document including pricing would follow, and would have to be published at least two weeks before trading begins.

Under the first proposed model, the management of the issuer would host a presentation for both connected and independent analysts at least four weeks before the official intention to float announcement. Publication of any research would be banned until after the announcement. The second proposed model would allow the issuer to give an earlier presentation to connected analysts, but it would still be required to present to the independent analysts before the intention to float announcement. Again, no research would be published until after that announcement.

The consultation closes on 1 June 2017, and the FCA intends to publish final rules before the end of this year.

Corporate law expert Jonathan Beastall of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA had, overall, done "a good job of soliciting and considering views from market participants with quite different interests in the issues".

"It is clear that the way in which the IPO process has developed has reduced the primacy of the prospectus in the investment decision, and the need to redress this is common ground among all those market participants," he said. "So, the centrepiece of the proposals has to be the early publication of the registration document which gives information about the company's story, but not the offer or the pricing of the IPO as that can come later."

"The difficulty is about involving unconnected analysts and giving them time to provide their research on the company whilst also ensuring that there is a separation between the prospectus, for which statutory liability exists; and the research, which should not attract prospectus liability but runs the risk of so doing if it is published too close to the prospectus and even more so if it is published by analysts who have had privileged access to the company and who may provide certain forecasts, such as those relating to discounted cash flows, which will not be included in the prospectus. The FCA has come up with proposed rules that provide flexibility for issuers and syndicate banks in how to deal with connected and unconnected research in IPOs on a case-by-case basis. It seems to me that whether they provide sufficient flexibility to meet all the divergent concerns will only become clear at the end of the consultation," he said.

The FCA has also been looking at the marketing practices used during IPOs and, as part of its consultation, asks whether these practices could potentially be in breach of the Market Abuse Regulation. Depending on the feedback received, the FCA could publish formal guidance on this, Beastall said.

The regulator will also use the consultation process to examine the extent of commonality between the IPO process for listing on regulated markets, such as the main market, and listing on multilateral trading facilities, such as AIM, Beastall said.

"At the moment, the FCA has not proposed that the changes set out in the consultation should apply to AIM, but depending on what it finds out there may be a subsequent consultation on this," he said. "The consultation paper notes that certain respondents indicated that connected research can play a less prominent role in the context of an AIM IPO than it does in offerings on the main market." 

"There is a clear argument for maintaining differences between the main market and AIM to provide choice, but in allowing these differences to continue the FCA has to be mindful of the clear policy objective of the UK having well-functioning IPO markets with high standards of conduct," he said.