Want to carry out a secondary issue on the Main Market but avoid publishing a full prospectus?

If so, then a simplified prospectus could be the answer if you have been on the market for 18 months or more.

We are increasingly seeing issuers take advantage of the simplified prospectus regime, which enables issuers to carry out equity issues greater than the 20% of their rolling annual limit without the requirement to publish a full prospectus. The simplified prospectus route is quicker and cheaper than publishing a full prospectus, as most information can be incorporated by reference and there is no requirement to produce an operating financial review. The FCA is also able to provide shorter response times to submissions and subsequent submission. Therefore, assuming that the issuer has kept the market up to date through announcement and/or other corporate reporting, the overall process should be straightforward.

1. Introduction

Prior to the UK’s departure from the European Union, the Regulation (EU) 2017/1129 of 14 June 2017 (EU Prospectus Regulation) was directly effective in the UK. Since the end of the transition period at 23:00 on 31 December 2020 (IP completion day), the EU Prospectus Regulation no longer has direct effect in the UK.

The European Union (Withdrawal) Act 2018 (EUWA) provides for EU law and technical standards to be incorporated into UK law to ensure continuity as from the end of the transition period on IP completion day and the UK government is authorised to make changes to established EU law.

The government has ‘on shored’ the EU Prospectus Regulation as well as its related delegated regulations and technical standards subject to certain amendments aimed primarily at removing EU centric content through various statutory instruments (UK Prospectus Regulation). It is also important to note that important delegated EU regulations defining technical standards for the preparation of a prospectus and presentation of financial information have been adopted into UK law as the UK version of Regulation 2019/980 (PR Regulation) and Regulation 2019/979 (Prospectus RTS Regulation).

2. Changes made to the EU Prospectus Regulation

We have discussed some of the key changes in more detail here.

(a) Prospectus trigger and 20% exemption

Despite the UK’s exit from the EU, the triggers for a prospectus are broadly the same save that:

  • The obligations to publish a prospectus only applies to offers to the public in the UK (rather than in the EU) and admissions to trading on a regulated market situated or operating in the UK (rather than within the EU).
  • The 150 persons exemption in Article 1(4) (b) of the UK Prospectus Regulation applies to offers of securities addressed to fewer than 150 person in the UK (rather than per EU member state) other than qualified investors).
  • The passporting provisions for cross-border offers and admissions and the use of languages have been deleted.

(b) 20% exemption

The rolling annual exemption that allows 20% of the number of securities of the same class admitted to trading on the same regulated market still applies although this is now under Article 1(5)(a), UK Prospectus Regulation, reproduced in PRR 1.2.4EU. This means that Main Market issuer can still potentially trigger a prospectus publication requirement through a secondary equity issue of equity. However, for most mature businesses with institutional shareholders, the 20% threshold is not problematic. However, this is not necessarily the case for the fast-growing less-mature businesses, especially capital-hungry technology and early-stage natural resources issuers. Typically, issuers within these sectors may find the costs associated with producing a full prospectus are disproportionate to the capital being raised. Prior to the entry into force of the full provisions of the EU Prospectus Regulation on 21 July 2019 the secondary listing regime was not much less onerous than a full prospectus. However, that has all changed since then, when the provisions related to a simplified prospectus came into force.

(c) Changes to the free float rule

We have not dealt with the topic in detail here, but for most issuers it will be a welcome relief that the 25% free float rule shall now apply to all investors, regardless of their location, and will not be limited to the EEA Area. Please refer to our earlier article on this subject.

3. What is a simplified prospectus?

One of the main objectives of the EU Prospectus Regulation was to reduce the administrative burden for issuers when drawing up a prospectus, particularly for secondary issuances. This was achieved by implementing a regime that allowed issuers who have had securities admitted to trading on a regulated market or an SME growth market continuously for at least 18 months to have the option to draw up a simplified prospectus under Article 14 of the EU Prospectus Regulation. This regime has been retained by the UK Prospectus Regulation.

Issuers who opt to draw up this simplified prospectus which, under article 14 (2) of the UK Prospectus Regulation, needs to include the information which is necessary to enable investors to understand:

  • the prospects of the issuer and the significant changes in the business and the financial position of the issuer and the guarantor that have occurred since the end of the last financial year, if any;
  • the rights attaching to the securities;
  • the reasons for the issuance and its impact on the issuer, including on its overall capital structure, and the use of the proceeds.

To be eligible for simplified prospectus an issuer will have to have already published at least one annual report. This, combined with the continuous disclosure requirements, means investors will already be familiar with the issuer and so the prospectus should focus on what has changed since the last financial year end and what effect any fundraising would have on the issuer’s capital structure.

4. Specific content requirements for a simplified prospectus

In terms of specifics, a simplified prospectus is required to include the content requirements of Article 14 of the UK Prospectus Regulation and the reduced information requirements prescribed by the PR Regulation. This includes:

  • a summary of the information that the issuer has disclosed to the market over the last 12 months under MAR – ie announcements of inside information and details of dealings by PDMRs;
  • the financial information that the issuer has published during the last 12 months;
  • information about the issuer’s business activities; markets; strategy and material contracts (but less than a full prospectus);
  • details of the issuers securities;
  • risk factors; and
  • a working capital statement, a capitalisation and indebtedness statement and responsibility statement.

Article 19 of the UK Prospectus Regulation makes clear that regulated information (which included information announced by RNS), previous prospectuses, the articles, and the published financial results (as well as corporate governance statements and management reports that accompanied those results) can all be incorporated by reference. Furthermore, there is no obligation to include:

  • an operating and financial review (OFR) or a management discussion and analysis (MD&A);
  • information about the issuer’s group structure; funding structure; regulatory environment; directors’ remuneration; corporate governance arrangements; share capital history; or articles of association; and
  • Financial information more than 12 months old.

So overall the document is much shorter than a standard prospectus required to be produced by issuers on IPO.

5. Turnaround times

In respect of equity IPO prospectuses, the FCA commits to return comments on the first submission within 10 clear working days and the second submission five clear working day after submission. Smaller issuers often find that the FCA takes the full period to review the document which can sometime impact timetable. However, for secondary issues the FCA will take up to five clear working days to review the first submission and then three clear working days for subsequent drafts. This means advanced draft prospectuses can be approved in a relatively short period.

6. Specialist issuers – possibly no CPR

Several of the types of fast-growth companies to which a simplified prospectus may be appealing are also classed as ‘specialist issuers’ under Annex 29 of the PR Regulation. These include the following:

  • Property companies
  • Mineral companies
  • Investment companies
  • Scientific research-based companies
  • Start-up companies
  • Shipping companies

The definition of these companies is contained in the CESR Recommendations dated 23 March 2011 (CESR Recommendations). The current ESMA Guidelines on disclosure requirements under the EU Prospectus Regulation dated 15 July 2020 (New ESMA Guidelines), which largely replaced the CESR Recommendations, did not carry over the CESR Recommendations on specialist issuers, as this area was still under review by ESMA. Therefore, the CESR Recommendations relating to specialist issuers remain effective and ESMA recommends issuers continue to apply them.

The CESR Recommendations include significant additional content requirement for specialist issuers. In particular in respect of mineral companies they require reports on the resoruces of the issuer (CPR). In terms of simplified prospectuses there is a procedure whereby mineral companies can apply for a derogation from this obligation where they are able to demonstrate their mineral assets can be adequately understood through already-published CPRs and announcements.

Conclusion

We have already seen a number of issuers take advantage of this new simplified prospectus, including one of our clients, Chesterfield Resources, and we think it is likely to become increasing popular among the early-stage natural resources and technology companies listed on the Standard Segment.

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