Improved IPO Transparency – FCA Consultation
April 6, 2017
The Financial Conduct Authority (the “FCA”) is proposing changes to the UK IPO process aiming to improving the transparency and quality of information for investors. These proposals are set out in a consultation paper (CP 17/5) published on March 1, 2017
The IPO consultation forms part of a larger consideration by the FCA of the UK’s investment and corporate banking markets. In February, 2017, the FCA published a separate consultation and discussion paper reviewing the broader effectiveness of the UK primary markets.
FCA’s reform proposals include:
- Restoring the primacy of the prospectus as the source of investor information, by requiring that the approved prospectus (without pricing information) be published earlier in the IPO process, prior to the publication of any connected research.
- Providing information access to both connected and unconnected analysts early in the IPO process, with all such analysts being given access to the issuer’s management prior to the publication of the pre-pricing prospectus.
The FCA hopes that these changes will provide more balanced investor information and price discovery.
Application to AIM and other MTFs
At this time, the FCA does not intend the proposals to be applicable to IPOs on MTFs, notably AIM and the NEX Exchange growth market. Instead, the FCA intends to use the consultation process to understand in greater detail the similarities and differences between the IPO processes on regulated markets and MTFs, which would help it to determine whether a separate consultation on this question should be undertaken in due course.
The Current UK IPO Process
Under the current UK market practice, prior to an intention to float (ITF) announcement, an “analyst presentation” is typically organised, where the issuer’s management presents information to “connected” analysts within the banks that are part of the IPO’s book-running syndicate, to support the preparation of their “connected” research. This analyst presentation typically takes place around four weeks ahead of the ITF announcement.
Following the ITF announcement, standard practice is for connected analysts to publish their connected research and use such research to provide select institutional investors with their views on the issuer, in a process known as “investor education”. During this period, the syndicate banks, along with the issuer, will determine the initial price range, which is then circulated to certain institutional investors alongside a “pathfinder” prospectus. The pathfinder is shared with potential institutional investors to assess the anticipated level of demand for the offer before a further period (generally 14 days) of active marketing, known as the management roadshow, during which book-building takes place. It is only at the close of the book-building period that the final approved prospectus is then typically published, with an agreed offer price and size of the offer, followed by the relevant securities being admitted to trading.
The FCA identifies two key concerns with the existing process:
First, the prospectus, which should be the primary source of information on the issuer, is currently made available only late in the process. The pathfinder is made available relatively late in the process and only to a select group of potential institutional investors. The final approved prospectus becomes publicly available only once the offer has effectively closed.
Second, too much reliance appears to be placed on potentially biased connected research. Under current market practice, analysts within non-syndicate banks and independent research providers lack access to the issuer’s management to produce “unconnected” research on an offering. As a result, connected research is generally the only source of information available to investors during a crucial phase of investor education and initial price discovery. Such connected research, however, is at heightened risk of bias due to undue pressures on the connected analysts to produce favourable research.
The FCA has proposed the following two policy measures to address these concerns.
Sequencing of Prospectus and Research
First, a series of new rules that seek to ensure that an approved prospectus or registration document is published, and unconnected analysts have access to the issuer’s management, before any connected research is released.
Under the proposed rules, so long as the unconnected analysts are given the same access to the issuer’s management as connected analysts, connected research can be released the day after publication of the approved prospectus; otherwise, the connected research cannot be released until at least seven days after publication of the approved prospectus.
The proposed new rules are intended to restore the primacy of an approved prospectus document, significantly improve the range and quality of information available to investors, and facilitate the availability of such information early enough in the process to support more balanced investor education and price discovery.
Pre-Mandate Role of Analysts
Second, new guidance on analysts’ interactions with the issuer’s management and their corporate finance advisors around the time of the underwriting/placing mandate and subsequent syndicate positioning is being considered.
Whist existing guidance states that an analyst should not become involved in activities which are inconsistent with the maintenance of their objectivity, including, for example, participation in investment banking activities and participation in “pitches” for new business, the FCA proposes supplementing its existing guidance to clarify that it would regard any interaction between analysts and issuers or their representatives in an IPO process to be “participating in ‘pitches’ in new business” until: (i) the firm has accepted a mandate to carry out underwriting or placing services for the issuer; and (ii) the firm’s position in the syndicate has been contractually agreed.
The proposed new guidance is intended to mitigate the risk of bias being imparted to connected research.
The consultation closes on 1 June 2017. The FCA expects to publish a policy statement outlining any FCA Handbook changes later in 2017.
If you would like to discuss any of the FCA’s proposals and their potential impact for your business or the IPO market generally, please contact: