New rules in the FCA’s Conduct of Business Sourcebook take effect next month and will lead to significant changes in the timing, sequencing and documents required in the UK IPO process.
The Financial Conduct Authority (FCA) has introduced new rules in its Conduct of Business Sourcebook (COBS) which come into force on 1 July 2018. The aim of the new rules is to improve the range, quality and timeliness of the information that is made available to market participants during the initial public offering (IPO) process. The new rules apply to all IPOs where shares are admitted to trading on a regulated market in the UK but do not apply to IPOs on AIM or other multilateral trading facilities.
Under the new rules, unconnected analysts must be given the same access to, and information about, the IPO candidate as connected analysts and will have the opportunity to review an approved disclosure document containing key information on the IPO candidate to enable the unconnected analyst to produce pre-IPO research.
An unconnected analyst is an analyst in a firm that is not part of the syndicate of underwriting banks on the IPO whereas the connected analyst is one in the research division of the underwriting syndicate members. The FCA hopes that by providing this access and information to unconnected analysts, a wider range of views on the IPO candidate will be available to potential investors in addition to the views of the analysts at the syndicate banks.
The key changes to COBS are as follows:
- Before any connected analysts can receive information on the IPO candidate and publish any connected research:
- syndicate banks must select a range of unconnected analysts and give those analysts access to information on an IPO candidate and its management, either at the same time as the syndicate banks’ connected analysts (referred to as joint access) or in a manner that results in all analysts receiving access to the same information (referred to as separate access); and
- the IPO candidate must publish an approved prospectus or registration document before connected research can be shared (COBS 11A).
- New guidance on conflicts of interest which clarifies that participating in pitches for new business includes a syndicate bank’s analyst interacting with an IPO candidate’s management, shareholders or corporate finance advisers before the bank has accepted a mandate to carry out underwriting or placing services (COBS 12).
Options for access
As referred to above, IPO candidates will have two options for providing access to unconnected analysts. They can provide joint access which means that unconnected analysts are allowed access to information at the same time as the connected analysts and in which case connected research can be released one day after the approved disclosure document is published.
Alternatively separate access can be provided to unconnected analysts which means that information and access to the IPO candidate can be given after the connected analysts, provided that the unconnected analyst can access the information before connected research is published. If separate access is provided, connected research cannot be released until at least seven days after an approved disclosure document is published.
Responses to the FCA’s consultation in the rule changes indicated that most syndicate banks prefer the option of providing separate access despite the seven day delay between the publication of the disclosure document and the release of connected research. Clearly, whichever option is chosen there are implications on the IPO timetable. If separate access is chosen the due diligence and verification exercises will need to have been completed earlier than is typically the case at the moment.
The requirement to publish a disclosure document before connected research can be shared is the other major change to the rules. The disclosure document can either be a prospectus or a registration document. Since it is unlikely that an IPO candidate would be ready to publish a prospectus so early in the IPO process it is thought that a registration document will be used in most cases.
According to the FCA, it is envisaged that the UK will adopt the model of a tripartite prospectus with the registration document being published in advance of connected research, and the securities note and summary being published later in the process when marketing begins.
The Prospectus Regulation sets out the required minimum contents of the registration document. These include:
- a description of the business of the IPO candidate
- risk factors regarding the IPO candidate
- information about principal markets, properties, corporate governance and shareholders
- an operating and financial review
- audited financial information
- a statement on any significant changes to the IPO candidate’s financial and trading position since the last accounts date.
Clearly these are significant changes to the IPO process which affect timing and the documents required. As well as the main changes outlined above, the new rules will also have an impact on other areas of the IPO process such as the pathfinder prospectus and pre-deal announcements. It will be interesting to see how market practice develops.