The latest proposals for reforming the UK equity capital markets, in response to Lord Hill’s UK Listing Review of March 2021 (the Listing Review), have been announced following the publication of the UK Secondary Capital Raising Review (SCRR) on 19 July 2022. So far, announcements and regulatory changes made by the Financial Conduct Authority (FCA), prompted by the Listing Review, have focused on the UK’s listing regime and how it can become more competitive, particularly from the perspective of growth companies (such as those operating in the technology and life sciences sectors) who have historically favoured listing in the U.S. instead of London. In furtherance of efforts to increase the attractiveness of London’s capital markets, the SCRR focuses on the utility of the markets beyond the IPO—specifically, facilitating a listed company’s ability to raise additional capital following its introduction to the market.
Background: Current drawbacks of the UK listing regime when it comes to secondary capital raising
The Listing Review recommended improving the efficiency of secondary capital raisings by listed companies to help enhance the overall appeal of the UK capital markets for prospective issuers. It highlighted that a London premium listed company (or a UK incorporated company with a standard listing) currently faces the dual impact of:
- having to adhere to statutory pre-emption rights (a feature of English law that applies to UK-incorporated issuers as well as premium listed non-UK issuers by way of the Listing Rules) which, other than in the case of smaller equity raises, require companies to offer new shares to all their existing shareholders pro rata to their existing holdings when raising cash; and
- being required to publish a full prospectus for any offering of 20% or more of its existing share capital.
Secondary capital raises in the UK have, therefore, had to be conducted within these parameters, meaning that larger UK fundraisings have historically taken a significant amount of time to prepare for and execute. Consequently, the majority of secondary equity raises in the UK are conducted on an undocumented basis and subject to the 20% limit set out above. By contrast, the absence of statutory pre-emption rights in the U.S. and the ability to complete many types of offerings without shareholder approval allow U.S. issuers to access capital markets quickly when needed or if market conditions are favourable. Issuers listed on U.S. stock exchanges often file a “shelf” registration statement with the U.S. Securities and Exchange Commission in advance, allowing them to complete multiple offerings, or “shelf take-downs,” on an accelerated basis at a later time. A shelf registration statement can be used for various types of offerings, including follow-on offerings, at-the-market offerings, registered direct offerings and confidentially marketed public offerings, with minimal additional documentation required at the time of an actual offering.
The SCRR picks up on the above considerations and puts forward a number of recommendations for improving the ability of public companies to raise equity capital through secondary fundraises by making the fundraising process more efficient. Whilst its proposals will, if implemented, apply to all UK-listed companies, a number of recommendations will be of specific benefit to growth companies listed in the UK, who often need to raise additional capital more frequently than more mature companies. In some cases, the SCRR specifically recommends that additional flexibility should be afforded to these companies as a result. We have provided an overview of these growth company specific recommendations further below.
Interplay between the secondary capital raising review and the UK Government’s prospectus regime review: How the two are critical for facilitating access to the secondary markets
Given the link between facilitating the ability of listed companies to raise additional equity capital and the need to publish a prospectus, if required, certain recommendations included in the SCRR are reliant on the implementation of the reforms contained in the outcome of the UK Government’s review of the UK prospectus regime (the Prospectus Review Outcome). The Prospectus Review Outcome was published in March 2022 and sets out the policy approach for reforming the UK prospectus regime, now that the UK is no longer a member of the European Union. As recommended by the Listing Review, the central reform put forward by the UK Government is the separation of the regulation of public offers of securities from the regulation of admissions of securities to trading on a regulated stock exchange, such as the London Stock Exchange. Currently, the UK Financial Services and Markets Act 2000 requires the publication of a prospectus in either circumstance. Amongst other reforms aimed at creating a more agile and effective regulatory framework, the Prospectus Review Outcome proposes removing the requirement for publishing a prospectus on public offers and replacing it with a general prohibition which would be subject to exemptions, such as offerings of shares by companies to their existing shareholders on a pro rata basis. This means that large secondary capital raisings, such as rights issues, would no longer automatically trigger the requirement for a prospectus, thereby bringing greater flexibility to the fundraising process as a whole. The SCRR highlights this as part of its recommendations.
The Prospectus Review Outcome also proposes facilitating the inclusion of forward-looking information in prospectuses by raising the liability standard for such information (from a negligence-based to a recklessness standard), another reform recommended by the Listing Review. High-growth companies may, in particular, be able to benefit from this change by having the ability to include greater detail on their expected level of growth in their prospectuses when coming to market, thus allowing for more involved discussions on valuation with potential IPO investors to take place. However, as issuers also face potential liability in the jurisdictions where they offer their shares, it remains to be seen whether this change would lead to a significant impact in current market practice for larger UK offerings, which solicit orders for shares from investors in the U.S.
Key SCRR recommendations that are relevant for growth companies
Increasing a company’s ability to raise funds on a non-pre-emptive basis
The SCRR recommends increasing the proportion of a company’s existing share capital, which it can issue annually on a non-pre-emptive basis, from 10% to 20%. This limit is currently set out in the Pre-Emption Group’s (PEG) Guidelines which, although not legally binding on UK premium listed companies, are widely adhered to when companies request their annual shareholder authorities for the disapplication of pre-emption rights at their annual general meetings. The Guidelines are directed at all premium listed companies but companies with a standard listing and those trading on the London Stock Exchange’s Alternative Investment Market (AIM) are also encouraged to adopt the principles. In response to the COVID-19 pandemic, PEG temporarily increased the limit to 20% during the period between 1 April 2020 and the end of November 2020 to allow companies to be able to raise larger amounts of equity capital within shorter timeframes. As noted in the Listing Review, £11.7 billion and £42.7 billion of capital was raised through IPOs and secondary issuances, respectively, on the London Stock Exchange over a broadly similar period (from March 2020 to December 2020), representing 36.1% of capital raised in Europe during the same period.
Following the noticeable success of increasing the limit and the fact that it was broadly perceived to have been responsibly used by companies, the SCRR has recommended re-introducing it on a permanent basis subject to the following conditions, which are similar to those implemented temporarily in 2020:
- the company must provide an explanation of the background to and reasons for the fundraising and the proposed use of proceeds in an announcement;
- to the extent that it is reasonably practicable and permitted by law, consultation with a representative sample of the company’s key shareholders should be undertaken;
- as far as possible, the issue should be made on a soft pre-emptive basis (i.e. the company should aim to issue shares to its largest shareholders on a pro-rata basis to their existing holdings); and
- company management should be involved in the allocation process.
- due consideration should be given in all placings to the involvement of retail investors and other existing investors; and
- up to 10% of the disapplication of pre-emption right shareholder authority should be available for use for any purpose with up to a further 10% only being used for an acquisition or a specified capital investment, using the existing PEG definitions, with the acquisition or specified capital investment announced contemporaneously with the issue or which has taken place in the preceding 12-month period.
Following a non-pre-emptive equity raise, a company would be required to report publicly on how the raise had been carried out using a template form provided by the PEG and maintained on a public database.
Additional flexibility for capital-hungry companies
The SCRR also recommends that additional flexibility should be afforded to growth companies whose ongoing funding requirements, following their IPOs, are often higher than other companies that come to market at a later stage in their corporate lifecycle or that have less capital-intensive business models. Whilst not making a formal recommendation for the exact percentage, the SCRR suggests that growth companies should be free to obtain authorities for the disapplication of pre-emption rights from their shareholders of up to 75% of their existing share capital under revised guidance from the PEG.
Companies would need to set out their rationale to their shareholders for requesting a higher authority and explain how their specific circumstances mean that the higher authority would be appropriate for them to obtain. At the time of their IPO, they would also need to include in the prospectus (or in the admission document if they are seeking admission to AIM) their proposed approach in respect to pre-emption right disapplication so prospective investors are put on notice prior to proceeding with an investment in the relevant company. Longer disapplication periods have also been raised as a proposal. Currently, the PEG Guidelines require companies to obtain their disapplication authorities on an annual basis, despite the Companies Act 2006 permitting shareholders to disapply pre-emption rights for up to five years where an allotment authority is given for an equivalent period. The SCRR proposes that in certain circumstances it may be appropriate for growth companies to seek a longer period where their growth strategy is also longer term in nature.
The above recommendations recognise the unique capital needs of growth companies and would, in our view, greatly facilitate their ability to raise additional capital following their IPO in a nimbler way. This is critical to enhancing the UK’s reputation as a listing venue for growth stocks, although clearly wider investor sentiment to such changes would need to be assessed.
Reducing regulatory involvement in larger fundraising
As secondary capital raises involve offers of new shares to existing shareholders by companies that are already listed and subject to ongoing reporting requirements, the SCRR recommends that regulatory involvement in larger fundraisings should be removed as a default. The main proposal it puts forward for achieving this recommends that a company should only be required to publish an admission to trading prospectus in relation to a secondary fundraising if it is looking to issue shares representing at least 75% of its existing share capital. The current threshold for requiring an admission to trading prospectus is 20%; this would, therefore, represent a significant increase and would have the effect of streamlining the fundraising process for larger raises by allowing them to be conducted in the majority of cases on an undocumented basis. This would be of particular benefit to growth companies, given their often leaner management structures as compared to those of more mature companies. By removing the need for a prospectus to be produced on the majority of secondary capital raises, less time from a growth company’s management team would be spent on executing the transaction and would free them up to continue implementing the company’s strategy.
The SCRR also suggests that a sponsor firm should no longer need to be appointed by a premium listed company when carrying out a secondary fundraise. As a result, no sponsor declarations (for instance in relation to the company’s working capital position) would have to be provided to the FCA. A sponsor would still need to be appointed if the raise required a sponsor’s declaration in relation to a circular (for instance, if the relevant raise was in relation to a Class 1 acquisition). In addition, working capital due diligence for larger secondary raises should follow the current practice on placings (for example, the giving of a warranty on working capital to the underwriters and stress testing the company’s working capital model) which do not require the preparation of a formal working capital report by an accountancy firm. Whilst these changes would streamline the overall process for larger fundraises, their benefits to listed companies are difficult to quantify at this stage but a reduction in the costs associated with carrying out an equity raise seems a likely expectation, and any such savings would enable growth companies to devote more resources to their business needs as a result.
Other recommendations of the SCRR
The SCRR also sets out additional recommendations designed to facilitate secondary capital raises, including:
- shortening the notice period for shareholder meetings (other than annual general meetings) of UK-incorporated companies from 14 to seven clear days, thereby reducing the overall timetable for larger equity raises should shareholder authorities need to be obtained;
- whilst UK-incorporated companies should continue to obtain annual allotment and disapplication of pre-emption rights authorities from their shareholders of up to two-thirds of their issued share capital, authorities should be extended to include all forms of pre-emptive offer including, for example, open offers, and not just rights issues which is currently the case;
- in addition to open offers, excess application mechanics should be allowed on rights issues so as to allow existing shareholders to apply to take up shares that are not taken up by other shareholders; and
- the Australian "cleansing notice" concept should be adopted in the UK where a secondary issue involving a public offer does not require a prospectus. In a cleansing notice, a company at the time of a fundraising confirms publicly that it is in full compliance with its market disclosure obligations and that it is not delaying the disclosure of any inside information. Such a statement, in combination with the publication of any marketing materials provided to investors who participated in the relevant equity raise, would help streamline disclosure where offers are made without a full prospectus.
When will this come into force?
Some of the SCRR recommendations, such as the suggested amendments to the PEG Guidelines, could be implemented at short notice in light of their non-statutory nature and if the SCRR recommends that they be implemented immediately. The PEG has publicly welcomed the SCRR’s findings so it is expected that changes to its Guidelines will soon be adopted.
Changes involving amendments to the prospectus regime will require parliamentary approval. So far, the UK Government has indicated that it will legislate “when parliamentary timing allows”; so, whilst the timing of their implementation remains uncertain, the hope is that, similar to other implemented changes to the UK listing regime designed to attract growth companies, such changes will come into force on a timely basis.
If you would like to discuss any of the topics raised in this alert or have any queries on the UK listing process and the status of its ongoing reform, please reach out to the Goodwin team members listed below.
 The UK Listing Review.
 The UK Secondary Capital Raising Review.
 See the FCA’s policy statement PS21/22: Primary Market Effectiveness Review: Feedback and final changes to the Listing Rules and discussion paper DP22/2: Primary Markets Effectiveness Review: Feedback to the discussion of the purpose of the listing regime and further discussion.
 The pre-emption right provisions under the UK Companies Act 2006 require UK-incorporated companies when issuing shares for cash to first offer those shares to its existing shareholders pro-rata to their existing shareholdings. The UK Listing Rules require all premium listed companies (whether or not UK incorporated) to adopt pre-emption rights that are least equivalent to those under the Companies Act 2006 (albeit with additional exemptions) even if such rights to do not apply under the law of the jurisdiction of the company’s incorporation. Such a concept does not exist under US company law.
 UK Prospectus Regime Review - Review Outcome
 The Pre-emption Group is an industry body made up of representatives of listed companies, investment institutions and corporate finance practitioners.
 As highlighted by the SCRR, HM Treasury have in their review outcome of the UK prospectus regime proposed removing the requirement for prospectus for public offers (see Interplay between the secondary capital raising review and the UK Government’s prospectus regime review – How the two are critical for facilitating access to the secondary markets above).