FCA publishes engagement papers on proposals for prospectuses

Following the launch of the Financial Conduct Authority's plan for the next stage in its consultation on the new public offer and admission to trading regime, the FCA has published four engagement papers.

The four engagement papers address:

• prospectus contents on admission to trading on a regulated market;
• the need for a prospectus on a further issue of shares on a regulated market;
• the type of information that should be included within the protected forward-looking statements regime; and

non-equity securities.

Admission to trading on a regulated market – prospectus contents

The FCA's current position is that the market “should stick broadly with existing requirements as set out in the UK Prospectus Regulation", to achieve the best balance between investor protection and market effectiveness. However, the engagement paper seeks views on whether certain aspects of the rules could be improved. For example, the FCA considers whether the summary section of a prospectus should still be required and whether its content requirements should be made less prescriptive.  It also looks at what information should be published in the context of a takeover where an exception from the requirement for a prospectus applies.

Financial information

The FCA's starting assumption is that the financial information currently required by the UK Prospectus Regulation is necessary for investors to make an informed assessment of the relevant securities. It acknowledges the interplay with the Listing Regime proposals to remove the three year track record eligibility requirement for new issuers and highlights that there may be arguments for adjusting the prospectus requirements.

ESG information

The FCA is considering whether more specific prospectus disclosure requirements are needed, highlighting the gap between the general prospectus requirements and the more detailed climate and sustainability reporting that issuers are expected to provide on an on-going basis in their annual reports. While issuers have flexibility as to what they consider should be disclosed under the broad “necessary information" test, the FCA suggests that this flexibility may make it difficult for companies to know what they need to disclose and lead to inconsistencies in disclosure by different issuers, especially as ESG reporting standards are evolving. The FCA would also need to apply its judgement on the level of detail required and it therefore might be beneficial to lay down more detailed content requirements or provide more guidance on the information to be disclosed in prospectuses. This could include requiring prospectus disclosures in line with current TCFD frameworks, or the International Sustainability Standards Board standards which the UK is proposing to adopt in due course, as this would be consistent with the annual reporting requirements that issuers will have to comply with once listed.

Further share issues on regulated markets

The FCA's starting assumption is that it should not require prospectuses for further issuances of shares admitted to trading on regulated markets unless this is needed for investor protection. This engagement paper seeks views on where and how to set the threshold when a prospectus would be necessary and what sort of document, if any, should be published where a prospectus is not required.

The FCA references the Secondary Capital Raising Review, which recommends that a prospectus should only be required when an issuer is raising capital at least equal to 75% of its existing share capital, and the current EU Listing Act Proposals which set a threshold of 40% of existing share capital. However, it is noted that scale is not the only driver of whether a prospectus should be required and the purposes of a capital raising, rescue financing, for example, may also give an indication of how much risk investors face.

Protected forward-looking statements

The existing prospectus regime has a negligence liability standard for the information in a prospectus with a reverse burden of proof (i.e. those responsible for misstatements or omissions have to establish a defence of reasonable care to avoid liability). This can deter issuers from including forward-looking statements in prospectuses, due to their inherently uncertain nature. However, as this information is some of the most useful for investors, HMT proposed in its consultation on the public offer and admission to trading regime that certain forward-looking statements should, instead, be subject to a recklessness/dishonesty liability standard with the burden of proof on investors to establish the recklessness or dishonesty of those responsible for the prospectus. Authority will be delegated to the FCA to decide what type of forward-looking information will qualify as protected forward-looking statements (PFLS) and benefit from the new higher liability standard.

The FCA considers it may be beneficial to be permissive as to the types of information that could be PFLS as long as the information is:

• likely to be useful to investors when making investment decisions;
• clearly presented and explained; and
• accompanied by wording making investors aware of the risks and limitations of the disclosures.

The engagement paper seeks views on the different ways these requirements might be satisfied.

As a starting point the FCA notes that the new regime aims to encourage more voluntary disclosure so PFLS should not include most information that issuers are obliged to include in prospectuses under the current regime.

Sustainability information (for example, TCFD aligned information on climate goals and mitigating actions and their impact on the business) is discussed specifically in the engagement paper and the FCA views this category of information as suitable to include within the PFLS regime. It highlights that there are numerous types of forward-looking sustainability-related information that could be helpful to investors and issuers may be more willing to elaborate on their plans and their anticipated impact if they have more protection from liability. However, the FCA considers that information about major risks and business activities in the shorter term should not be subject to the PFLS regime.

Next steps

The deadline for commenting on the engagement papers is 29 September 2023. The FCA intends to provide feedback on the key points raised and plans to consult on proposals for specific rules in 2024.

Links to the engagement papers have been added to the FCA webpage here.