The FCA has issued a consultation paper looking at ways of improving the flow of information to potential investors during a typical UK IPO process. It forms part of the FCA’s wider investigation into investment and corporate banking and follows an earlier discussion paper (DP16/3) on the availability of information in the UK IPO process.
The FCA’s main issues with the current process
In its earlier studies, the FCA identified some “areas of the current process that called for improvement, namely the timing, sequencing and quality of information being provided to marker participants“, whilst noting the “considerable strengths” of the current process. In the consultation paper, the FCA addresses two key issues: the timing of the publication of the prospectus and the perceived problems with potential investors being fed a pre-IPO information diet consisting largely of connected research.
The prospectus – too much, too late?
In the current UK IPO process, the prospectus is made available late in the process and “arguably… not… sufficiently early for it to play its proper role in informing investment decisions.” In the paper, the FCA comments that “a clear majority” of respondents to its earlier discussion paper agreed “reform was required to restore the centrality of a prospectus document“.
Currently, the pathfinder prospectus (a near final form of the prospectus setting out a price range) is typically only issued following pre-marketing to a select group of institutions and the final, approved, prospectus itself issued after the management roadshow, too late for institutional investors to be able to fully digest the information contained in it before committing to the IPO.
This leads to a reliance on connected research, which becomes the “dominant source of information available to investors during a crucial stage of the process.”
Connected research – a necessary element of the process, but inherently conflicted
The late availability of the prospectus increases the emphasis placed on the quality and diversity of analyst research. For the vast majority of UK IPOs, the only pre-IPO research available is that produced by “connected” analysts – analysts from within the bookrunning bank(s) who are given access to management and financial data, often at or around the same time as when syndicate participation is being decided.
This sequence of events, together with the general potential for pressure to be brought to bear on analysts to produce favourable research by the corporate finance team within a bank, leads to an obvious conflict of interest – a conflict of interest which is recognised and dealt with in both FCA and internal bank regulation, but with that regulation currently being under significant commercial strain.
Many of the respondents to the FCA’s discussion paper noted the potential for conflicts of interest to affect the quality and independence of connected research, but the FCA also noted buy-side views that the research was valued both for its brevity and for the forecasts based on the company’s financial data. As a result, the FCA is not looking to abolish connected research altogether – a proposal it previously mooted. Instead, it is exploring ways to facilitate coverage of the IPO by unconnected analysts to give investors access to a greater range of views on an issuer’s prospects and enable more accurate price formation.
Proposals for reform
Splitting the publication of approved registration document and pricing information
The FCA has put forward a number of policy reforms for consultation. These policy reforms are predicated on a revised IPO model where the publication of an approved registration document (essentially an approved prospectus with all offer and pricing information removed) marks the end of the “private phase” of the IPO and precedes the “public phase” of price discovery, marketing and flotation.
The “public phase” would typically comprise two weeks of pre-marketing “investor education” and initial price discovery, at the end of which price range information would be published. This would be followed by a further 14 day period of management roadshows and book-building prior to final pricing and flotation.
The split model of the publication of an approved registration document and separate pricing information in a later “securities note” – whilst a longstanding possibility under the current prospectus regime – is not current UK practice (which instead is based on a near-final pathfinder document being issued to a select group of investors at the start of the roadshow) and would represent a shift to a more continental IPO model.
Connected research to be published only after release of an approved prospectus or registration documents and unconnected analyst access to management
In order to restore the primacy of the prospectus, and to improve the quality and breadth of research, the FCA is proposing to restrict the publication of connected research until after an approved prospectus or (more likely in the revised model) an approved registration document is published.
The permitted timing of publication of connected research will depend on whether the issuer gives access to unconnected analysts at the same time and on the same terms as connected analysts, and here the FCA wants to give flexibility to issuers and their advisers.
If access is given on the same terms, both connected and unconnected research could be published from the day after the publication of the prospectus or registration document (i.e the end of the private phase) alongside the intention to float announcement. If not, then publication of connected research (and release of the intention to float announcement) will have to be delayed until at least seven days after publication of the prospectus or registration document, with the proviso that communication with unconnected analysts must be substantially completed before the connected research is published – the intention being to give unconnected analysts at least the chance of contributing to the price discovery process.
Engaging with unconnected analysts during the private phase
The FCA is proposing to require syndicate banks to provide a “range” of unconnected analysts with an opportunity to access issuer management, with that range being selected so as to create a “reasonable prospect” of enabling investors to make a better informed assessment of the issuer. Secondly, the FCA recognises that issuers and their advisers may want to place reasonable restrictions on unconnected research to prevent liability for the dissemination of research in contravention of overseas securities regulation, and the draft rules set out in the consultation paper accommodate these concerns.
Disassociating syndicate participation with the prospect of favourable connected research
The FCA is also proposing to supplement its existing Conduct of Business rules on analyst independence to provide that analysts should not interact with the issuer or its representatives until their firm has accepted an underwriting or placing mandate and their place in the syndicate is contractually agreed.
Application to AIM and other multilateral trading facilities
The proposals currently relate to the UK’s regulated markets, but the FCA notes that, as the IPO process is generally similar on AIM and other MTFs, they could in principle be extended to those markets. At this stage, the FCA is not formally consulting on that possibility but will use the current consultation process to assess the extent of differences in IPO practice in regulated markets and MTFs and decide whether to launch a further consultation on the extension of the current proposals as a result.
The consultation closes on 1 June 2017, with a policy statement setting out final Handbook changes expected in Q4 2017.