The FCA has recently proposed significant changes aimed at simplifying the prospectus regime for equity and bond issuances. These proposals address the long-standing issue of retail investors being excluded from new issues by listed companies and aim to encourage greater participation in both the equity and corporate debt markets. 

Retail investors have frequently been excluded from investing in new issues by listed issuers, whether of shares or bonds. From the perspective of issuers, opening up fundraisings to retail investors has been seen as overly onerous due to the time and cost associated with regulatory compliance, and the process of bringing in what are usually considered to be small numbers of investors for relatively small participations compared to institutional investors. 

The regime under the Prospectus Regulation Rules has long been criticized by issuers as being too cumbersome for companies, whether issuing debt or equity. 

Equity issuances

In equity markets, the criticism from issuers with shares listed on the Main Market is focused on the requirement to publish a prospectus when issuing new shares representing 20% or more of the issuer’s share capital (calculated over a rolling 12-month period). For companies listed on the Main Market or on AIM, a prospectus is also required to be published whenever there is an offer of shares to the public for which an exemption is not available. 

In practice, permitting retail participation in an equity issuance will generally involve an offer to the public and give rise to an obligation to publish a prospectus. Consequently, most issuers prefer to approach institutional investors for equity raises, relying on the qualifying investor exemption, and excluding retail participation. Although platforms and retail brokers have started offering small participations to retail customers, these are not fully open to all retail investors.

Corporate debt market

In the bond market, the London Stock Exchange’s Order Book for Retail Bonds (ORB) was intended to breathe life into the market for retail bond issuance. However, the ORB’s success has been modest and it hasn’t resulted in retail bond markets opening up as they have in some other regions. 

While there have been complaints about retail investors being unable to participate in equity issuances, criticisms from investment managers that their retail clients are unable to participate in corporate debt issuances were historically largely on the backburner. This was because equities typically produced sufficient returns compared with corporate debt when interest rates were close to zero. However, with interest rates now at increased levels such that corporate debt is producing better yields, there is a renewed focus by investors and investment managers on being able to access corporate debt investments. 

Proposed changes

The FCA has already consulted on increasing the thresholds at which a prospectus will need to be published in the context of issuers with shares listed on the Main Market, most notably increasing the current 20% threshold to 75%, as well as introducing a lower requirement for companies whose shares are listed on a multilateral trading facility (such as AIM). 

The regulator is now consulting on the prospectus requirements relating to companies which seek to list their shares on the new ‘public offer platform’ regime (including the proposed Private Intermittent Securities and Capital Exchange System (PISCES)) and for debt issuances by companies generally. 

In relation to debt, the main change is the FCA’s proposal to adopt a single set of disclosure requirements, irrespective of the size or denomination of the issuance, alongside a simplified admission process for existing issuers. This simplified prospectus is intended to encourage more issuers, particularly at the small and mid-cap end of the market, to open up their bond issuances to retail investors as well as institutional. 

In addition, the FCA is consulting on new guidance that defines when certain (non-complex) low denomination corporate bonds issued by listed companies can be deemed to be appropriate for the ‘mass market’, thereby making it easier for issuers and arrangers to offer them, and investment advisers to recommend them, to retail clients. 

Conclusion

The FCA’s proposals represent a significant step towards making the prospectus regime more accessible and less burdensome for issuers, while also opening new opportunities for retail investors to participate in both equity and corporate debt markets, thus fostering a more inclusive and dynamic market environment.

While there will always be those who consider the FCA could go further in simplifying the rules, retail investors will welcome the proposals which will make it easier for them to participate alongside institutional investors in corporate debt issuances. For their part, small and mid-cap issuers are likely to also welcome the moves to make it easier for them to issue bonds more generally, as well as into the retail market, particularly in a world of well-publicized outflows from equity funds and a rise in the availability of corporate debt. 

Alasdair Steele is a partner in the Corporate Team and and head of Equity Capital Markets and Michael Cavers is a finance partner at law firm CMS.