Essential Corporate News: Week ending 14 July 2023

FCA: Engagement papers - New regime for public offers and admissions to trading

On 13 July 2023 the Financial Conduct Authority (FCA) published two engagement papers in connection with the reform of the UK prospectus regime setting out its initial thinking on how (under the new regime) it might write rules in relation to public offer platforms and primary multilateral trading facilities.

A brief summary of each of the engagement papers is set out below. They form part of the FCA’s engagement process in relation to the new regime as discussed on its website and follow on from the publication in May 2023 of a number of other engagement papers relating to admission to trading on a regulated market, further issuances of equity on regulated markets, protected forward-looking statements, and non-equity securities.

Written responses to the engagement papers are requested by 29 September 2023.

Engagement Paper 5 (EP5): The public offer platform

This relates to the exemption set out in the draft Public Offers and Admissions to Trading Regulations 2023 (POATRs) which will allow offers of relevant securities to be made to the public via a public offer platform (POP). The operation of a POP will be a new regulated activity and therefore subject to FCA authorisation, rules and oversight. EP5 explores and discusses the policy options the FCA has when designing the POP regime and seeks views on what that regime could look like, the policy choices that the FCA faces, and the rationale behind those choices.

The FCA’s overall aim is that the framework created for operators of POPs should ensure that:

• Sufficient due diligence and checks on companies are conducted to prevent fraud and facilitate genuine capital raising, which will strengthen investor protection and support market integrity for such offers.
• Investors have sufficient, accurate, and useful information (on both the company and the securities being offered) to understand the opportunity and risks when investing in securities.
• Companies can raise capital efficiently and effectively through such platforms, subject to appropriate scrutiny and transparency.

The FCA notes that its approach to the regulation of operators will reflect the fact that (based on the current crowdfunding market) offers made via POPs are likely to be largely directed at retail investors. It will also focus on the risk of fraud and how to address the information asymmetry and risks that are inherent where smaller/non-publicly traded companies are seeking to issue securities to potentially less sophisticated issuers, as well as the limited liquidity and transparency post-issuance.

Whilst the FCA has presumed a largely retail investor base, it is interested to hear if some business models may consider undertaking new activity with a focus on companies seeking capital from professional investors, potentially as companies look to scale up beyond “seed” funding.

As a starting point, the FCA is focusing on a proposed regime that will impose requirements in the following areas on operators of POPs:

• Due diligence, including systems and controls to ensure that operators undertake appropriate diligence on companies and prospective offers and that investors are clear about the diligence that has been undertaken and the risks that remain.
• A consistently applied disclosure framework for operators to provide, or ensure a company provides, key information so that investors get the information they need to assess the securities being offered.
• Liability for (and the potential for redress from) operators.
• The role of the financial services compensation scheme.

The FCA’s intention is to focus any new rules on those elements of the operation of a POP that are either not appropriately addressed by existing rules (which could be extended to POPs) or where a specific approach is required in relation to POPs (e.g. by reference to the particular risks associated with the platform’s role).

Engagement Paper 6 (EP6): Primary multilateral trading facilities

The POATRs will provide the FCA with the power to ensure that certain multilateral trading facilities operating as primary markets (Primary MTFs) require issuers to produce an MTF admission prospectus in specified circumstances. Primary MTFs may also voluntarily choose to require publication of an MTF admission prospectus in their rules even if not required to do so by the FCA. (As currently drafted, the POATRs will limit the FCA’s power to require publication of an MTF admission prospectus to those Primary MTFs that allow retail investor participation. However, the FCA’s powers in relation to responsibility for MTF admission prospectuses, withdrawal rights and advertisements will apply to all types of Primary MTFs irrespective of whether they allow retail participation.)

When designing its rules in relation to MTFs, the FCA considers that it should seek to promote broader investor participation and to improve the quality of information that investors receive. Where possible, it intends to preserve the existing regulatory model such that MTF operators will specify the detailed content requirements (although MTF admission prospectuses will be subject to the general “necessary information” requirement set out in the POATRs) and the process for approval/validation of an MTF admission prospectus (as they currently do for their admission documents) subject to the FCA’s normal supervisory oversight of their activities.

EP6 sets out the FCA’s initial considerations regarding:

• The circumstances in which MTFs operating as primary markets should require the publication of an MTF admission prospectus: The FCA notes that it is considering whether to require Primary MTF operators that allow retail participation to amend their rules to require the publication of an MTF admission prospectus for all initial admissions to trading and whether this may also be appropriate for reverse takeovers that involve the admission to trading of newly issued securities. It is not otherwise intending to require the production of an MTF admission prospectus for further issuances of securities that are fungible with those already admitted to trading on the Primary MTF.
• Who should be responsible for such documents: The FCA is considering whether to maintain the rules regarding prospectus responsibility as currently set out in the Prospectus Regulation Rules. It proposes to apply these requirements to all MTF admission prospectuses (and supplementary prospectuses) to the extent relevant. If a Primary MTF operator chooses to specify in its rules additional persons who are responsible for an MTF admission prospectus, any such requirement would not have a legal effect for the purposes of the statutory liability and compensation scheme, as such additions would not be a “person responsible” within the meaning of the POATRs.
• The circumstances in which a supplementary prospectus should be required: The FCA is considering maintaining the current substantive requirements for publishing a supplementary prospectus set out in the UK Prospectus Regulation, however it would welcome any feedback on whether it should change the requirements for supplementary prospectuses in relation to Primary MTFs that allow retail investor participation.
• How and when withdrawal rights should be exercised: For Primary MTFs that allow retail participation, the FCA is considering whether withdrawal rights should exist in situations equivalent those currently set out in the UK Prospectus Regulation. It is also considering requiring Primary MTF issuers to inform investors about the availability of withdrawal rights and how to exercise them.
• Advertisements: The current rules on advertisements only relate to regulated markets and public offers. The FCA is considering whether to extend these to the admission (or proposed admission) of transferable securities to trading on a Primary MTF. It is also considering whether it would be beneficial to maintain the current requirements for advertisements as set out in the UK Prospectus Regulation and associated legislation.

EP6 also discusses and seeks views on (amongst other things):

• The voluntary prospectus regime: The FCA notes that (to ensure that Primary MTF operators retain control over the content requirements for MTF admission prospectuses and the process for their review and approval) it does not intend the voluntary prospectus regime will be available for Primary MTFs. In its view, the use of FCA-approved prospectuses for Primary MTF admissions would be inconsistent with the objectives of the new regime, and a situation where some MTF admission prospectuses are approved by the FCA while others are subject to the process set out by the rules of MTF operators could be confusing for investors.

• UK growth prospectuses: In EP1 the FCA stated that it does not intend to retain the concept of the UK growth prospectus. In EP5 it notes that it considers the use of an MTF admission prospectus (rather than a growth prospectus) will be advantageous for all Primary MTF market participants because the contents requirements will be tailored by the Primary MTF operators to their specific markets.

(FCA, The public offer platform - Engagement Paper 5, 13.07.2023)

(FCA, Primary multilateral trading facilities - Engagement Paper 6, 13.07.2023)

HM Treasury: Near-final Public Offers and Admissions to Trading Regulations 2023

On 11 July 2023, HM Treasury (HMT) published a near-final version of the Public Offers and Admissions to Trading Regulations 2023 (POATRs) and associated explanatory policy note. This follows on from the publication of earlier illustrative drafts in December 2022 as part of the Edinburgh Reforms.

Key updates made to the POATRs compared to the December 2022 illustrative draft are highlighted in the policy note. These include (amongst other things):

• Amending the definition of “relevant securities”, with the changes intended to clarify that certain securities (such as OTC derivatives) are not within scope.
• Making certain revisions to the “necessary information” test to provide greater clarity for bond issuers (although the key requirements of the test have not changed).
• Revising various exceptions to the public offer prohibition to ensure their scope is appropriate and they do not cause unintended disruption.
• Including provisions amending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to create a new regulated activity of operating a “public offer platform”.
• Confirming £5m as the threshold above which unlisted issuers will be required to make offers via a public offer platform or within the scope of another exemption – this threshold had not been determined at the time the illustrative draft was published.
• Clarifying that the FCA will only have powers to require an MTF admission prospectus where securities are being admitted to trading on markets open to retail investors.

The near-final version of the POATRs is being published for technical checks, such as any significant errors or oversights in the legal drafting which would mean that the regulations would not achieve the desired outcomes explained in the policy note or that would lead to significant unintended consequences. Any technical comments should be provided by 21 August 2023.

HMT intends to legislate for the new regime by the end of 2023 (subject to parliamentary time allowing) but notes that the legislation will only fully come into effect after the FCA has made its new rules in this area.

(HMT, Draft Statutory Instrument: The Public Offers and Admissions to Trading Regulations 2023, 11.06.2023)

(HMT, The Public Offers and Admissions to Trading Regulations 2023 Policy Note, 11.06.2023)

(HMT, Webpage: Public Offers and Admissions to Trading Regulations 2023 – Draft SI and Policy Note, 11.06.2023) 

Digitisation Taskforce: Interim Report

On 11 July 2023, the Digitisation Taskforce (DT) published its interim report (Interim Report). The DT was established in July 2022 as recommended by the Secondary Capital Raising Review, which identified digitisation of the UK’s shareholding framework as a key reform to enhance the efficiency of capital markets, including eliminating the use of paper share certificates and improvements to the UK’s intermediated share ownership system.

Whilst the primary focus of the DT’s work relates to traded companies, its objectives also include considering whether the arrangements for digitisation can be extended to newly formed private companies and as an optional route for existing private companies.

The Interim Report sets out the work that has been undertaken by the DT so far in relation to its objectives and suggests a number of potential recommendations for the UK government, regulators and market participants. The potential recommendations (and related questions) cover a number of key areas, namely: dematerialisation of paper share certificates; the design of a fully digitised share model; transparency and communication obligations in the intermediation chain; and facilitating access to shareholder rights. The Interim Report also outlines certain areas in which legislative or regulatory changes would be required to implement the potential recommendations.

Dematerialisation of paper share certificates

During its engagement with stakeholders, the DT received overwhelming support from issuers (and all sectors of the industry that support share trading and settlement) for the proposition that the UK should put in place plans to remove paper share certificates as a matter of urgency. Where there were areas of difference, these related primarily to the timing and sequence of individual steps and whether legislation should contemplate a progressive approach or a “big bang”.

The Interim Report identifies three issues to be addressed in relation to sequencing:

• The “flow” issue – at what point does the UK legislate to prevent the issuance of fresh paper certificates?
• The “stock” issue – at what point should legislation be introduced to mandate digitisation of existing certificates, and what time period would be required for this to be executed efficiently with appropriate public outreach?
• The “residual stock” issue – what arrangements need to be made for certificated shares whose ultimate beneficial owners (UBOs) cannot be identified and which therefore cannot be digitised on an attributed basis to an individual UBO?

The potential recommendations made in relation to removal of paper certificates are summarised below.

Recommendation 1: Legislation should be brought forward, and company articles of association changed, as soon as practicable to stop the issuance of new paper share certificates. The DT sees no reason why legislation should not be brought forward in short order to eliminate the issuance of fresh paper certificates for any purpose at an implementation date in the near term (within six months is suggested) to allow time for shareholder communication on the changes and for shareholders to nominate the destination for future digitised issuance. It notes that, in the absence of a direction for future digitised distributions previously taken in scrip or through a DRIP, issuers could choose to take powers to default such shareholders to take their dividends in cash.

Recommendation 2: The government should bring forward legislation to require dematerialisation of all share certificates at a future date, to be determined as soon as possible, in conjunction with Recommendation 1. The Interim Report notes that timing for dematerialisation of existing paper certificates will depend upon the architecture of the future infrastructure and the time therefore required to communicate with shareholders and to set up the routing to move physical shareholdings to their future digitised destination of record - the DT is seeking views on the appropriate timeline.

Recommendation 3: The government should consult with issuer and investor representatives on the preferred approach to ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced UBOs. A major challenge for issuers and their registrars will be deciding how to deal with certificated shareholders for whom current contact details are not held. The DT notes that the number of physical certificates is high, but the percentage shareholding represented by them in most companies is very small and declining. While digitisation, and the publicity around it, would provide a fresh opportunity for issuers to identify currently uncontactable shareholders (and to update records to include electronic means of communication, e-mail addresses or phone numbers for SMS messaging), the DT notes that it is clear many shareholders will remain untraceable. Three possibilities are identified for dealing with this:

• Issuers (or an agent acting on their behalf) could maintain a nominee account for such holdings and be required to continue, for a reasonable time, to seek out UBOs.
• Shareholder approval could be sought for changes to the issuer’s articles of association to provide that once ‘residual’ certificated shares are dematerialised, they can be sold in the market with the issuer retaining the funds in a segregated account to return to shareholders who ultimately identify themselves within a set period.
• All or a portion of the proceeds of sale of dematerialised shares without identified UBOs could be transferred to an authorised reclaim fund under the UK’s Dormant Assets Scheme, (a scheme which seeks to reunite people with their unrecognised financial assets and where this is not possible, for the money to be used for ‘good causes’), but with the scheme being obliged to compensate UBOs who ultimately come forward with a valid claim within a prescribed time limit.

Amongst other things, the DT is seeking views on what approach should be taken and whether a time limit should be imposed for identifying untraced UBOs.

Design of a fully digitised share model: Alternative depositary models

The DT notes that there were a variety of views on the architecture of the prospective fully digitised infrastructure and the Interim Report highlights and discusses four models:

• A digital version of the current system, where a subsidiary register in digitised form is maintained by an intermediary (typically the registrar). The DT notes that this has a number of advantages but retains one aspect of the current system that many of those consulted wanted to see removed – a second register of shareholdings, with consequential friction as shares move between the two registers.
• Enhancing the ability for certificated shareholders to become direct members of CREST – the DT does not see this as a viable option due to the costs involved and the lack of any meaningful support.
• Mandating all certificated shares to be moved to the central securities depositary (CSD), intermediated and administered through a nominee. The DT believes this represents the leading model for digitisation of paper certificates (especially when enhanced by the improved transparency and communication obligations recommended in the Interim Report) and will test this further in the second phase of its work.
• Re-imagining the securities holding, trading and settlement framework, stepping beyond current infrastructure to envisage the possibilities that would arise from adopting distributed leger technology (DLT). The DT notes that, while it is sure that its time will come, this is likely to beyond the envisioned timetable for the implementation of its recommendations – however, it suggests that (in the second phase of the DT’s work) there is an opportunity to explore further where adoption of DLT could be beneficial to enhancing UK market infrastructure and competitiveness.

The DT is seeking views on a number of questions in this area, including whether people agree with its view that the optimal architecture is for all digitised holdings to be recorded in the CSD and managed/administered through nominees.

Transparency and communication obligations in the intermediation chain between issuers and UBOs

Two core objectives of the DT were to identify immediate and longer term means of improving on the current intermediated system of share ownership to enable investors (as beneficial owners) to better exercise rights associated with shares which intermediaries hold on their behalf and to allow issuers to identify and communicate more easily with such investors, including on secondary capital raisings.

Recommendation 4: Intermediaries should have an obligation, as a condition of participation in the clearing and settlement system, to put in place common technology that enables them to respond to UBO requests from issuers within a very short timeframe. The Interim Report notes that two-way communication depends not only on issuers knowing who their registered shareholders are, but also (in an intermediated chain) knowing who their UBOs are. The DT believes issuers should have the right to navigate the intermediation chain to identify UBOs. It seeks views on a number of areas in the context of Recommendation 4, including service levels and “fair usage” of the process. The DT has also considered who should have access to share ownership information in a digitised system – its conclusion is that only issuers should have the ability to access information beyond the level of the share register, but it is seeking views on this and on whether there should be any restrictions on how issuers can use such information.

Facilitating access to shareholder rights

The Interim Report makes a number of proposed recommendations in relation to access to shareholder rights as well as discontinuing cheque payments. It also proposes that company law should be changed to make digital distribution of documents the default option, with shareholders having to actively opt in to receiving physical copies (including reform of the current Companies Act provisions for website communications which still require notifications to be made by paper/post if the shareholder has not requested electronic communications).

Recommendation 5: Intermediaries offering shareholder services should be fully transparent about whether and the extent to which clients can access their rights as shareholders, as well as any charges imposed for that service. The Interim Report notes that there should be no distinction in access to rights between shareholders who are directly registered and those who hold via intermediaries. However, the DT does not believe it is necessary to mandate an obligation on every intermediary to offer UBOs the ability to exercise such rights as long as they are transparent that this is their service proposition.

Recommendation 6: Where intermediaries offer access to shareholder rights, the baseline service should facilitate the ability to vote, with confirmation that the vote has been recorded, and provide an efficient and reliable two-way communication and messaging channel, through intermediaries, between the issuer and the UBOs. The Interim Report sets out the baseline service level that the DT believes should be offered where a UBO opts for a service proposition which facilitates expression of their rights.

Recommendation 7: Following digitisation of certificated shareholdings the industry should move, with legislative support, to discontinue cheque payments and mandate direct payment to the UBO’s nominated bank account. Once every shareholder is represented by a digital entry via a nominee, the DT believes it should be easier to mandate the default option for dividend and other distributions to be via direct deposit in the UBO’s bank account (which it believes would be to the benefit of all parties given that individuals change their email addresses and their bank account less frequently than their physical address).

Next steps

Feedback on the Interim Report and on the questions posed is requested by 25 September 2023. After the feedback has been considered, the DT plans to go into more detail on the practical steps needed and the related timescale for implementation.

It also suggests that it would be helpful to explore how DLT might be deployed in the future, including how DLT may be used to maintain registers of private market securities’ interests and for tokenisation of funds, including debt instruments, in part to expand market access to a wider range of financial instruments to retail investors at lower cost.

A follow up report taking account of comments received, and setting out the final recommendations, will be issued within six months of the closing date for feedback.

(Digitisation Taskforce, Interim Report, 11.07.2023)

HM Treasury: Consultation on the first Financial Market Infrastructure Sandbox – The Digital Securities Sandbox

On 11 July 2023, HM Treasury published a consultation paper on the first financial market infrastructure sandbox, referred to as the Digital Securities Sandbox (DSS).

For further information see our Global Regulation Tomorrow blogpost here.

HM Treasury: Building a Smarter Financial Services Regulatory Framework for the UK: HM Treasury’s Plan for Delivery - Policy Paper

On 11 July 2023, HM Treasury published a Policy Paper ‘Building a Smarter Financial Services Regulatory Framework for the UK: HM Treasury’s Plan for Delivery’.

For further information see our Global Regulation Tomorrow blogpost here.

HM Treasury: UK Investment Research Review

On 10 July 2023, HM Treasury published the outcome of the Independent Research Review, which was announced on 9 December 2022 as part of the Edinburgh Reforms and launched on 9 March 2023. The purpose of the review was to consider levels of financial services investment research in the UK and its contribution to UK capital markets competitiveness, as part of the government’s broader work to increase the attractiveness of the UK as a location for large and small companies to raise capital.

For further information see our Global Regulation Tomorrow blogpost here.

Insolvency Service: Director information hub launched

On 10 July 2023, the Insolvency Service announced the launch of a new online information hub aimed at providing support to company directors. The hub, specifically designed for directors of micro, small and medium-size limited companies, hosts guidance and information on a range of business themes commonly faced by companies and aims to help company directors to push their business forward by being more aware of potential pitfalls.

Topics covered on the hub are as follows:

• Getting your company started – starting a limited company and appointing a director
• Your duties, responsibilities and obligations as a director – this covers key information about being a director, the need to keep records, general director duties, information on corporation tax and VAT and information on confirmation statements that have to be filed at Companies House
• Company money – among other things, information on filing tax returns, loans and funding and paying dividends is provided
• Spotting the signs of company distress – this sets out five signs that could indicate a company is in financial distress and information on dealing with company distress
• Turning your company around – this looks at the concept of company turnaround and business recovery
• Avoidable insolvency and insolvency – these concepts are covered briefly
• Consequences of company insolvency – this looks at the consequences of insolvency for directors and at debts and insolvent companies
• Director information hub: Help and guidance resources

(Insolvency Service, Director Information Hub, 10.07.2023)

(Insolvency Service press release, 10.07.2023)