UK initial public offering reforms: Time to take stock

Transaction management firm The Deal Team, together with London-based Slaughter and May lawyers, explain how the IPO process has changed for issuers since the FCA’s reforms last summer

1 minute read

Since mid-2018, UK main market IPO regulations have required banks to give unconnected analysts (UCAs) equal access to an issuer’s management, via either simultaneous or separate analyst meetings. To date, banks and issuers have chosen the latter, in order to reduce leak risk and avoid subjective judgements on which UCAs to invite. This practice, involving publicly inviting and screening bona fide sellside analysts, and then giving identical information to both qualifying UCAs and connected analysts, may be imposing a disproportionate burden on issuers given the limited IPO-related UCA research to date. The authors suggest where the procedures required of both banks and issuers could be simplified, while maintaining UCA access to IPO issuers.

Under the changes to the UK Financial Conduct Authority's (FCA) Conduct of Business Sourcebook (COBS) made on July 1 2018 in relation to main market IPOs, an FCA-approved document (registration document) must be published prior to the publication of any connected research; and unconnected research analysts (UCAs) (i.e. research analysts outside the underwriting syndicate on an IPO) must be given an opportunity to cover the issuer on an equal footing to connected analysts.

More specifically, the banks must ensure that an appropriate range of UCAs will have an opportunity to access the issuer via either:

• Joint access UCAs must be able to participate simultaneously with connected analysts in any communication with the issuer team. If this option is chosen, connected research can be published one day after the issuer's registration document; or

• Split access UCAs must be provided with identical information, but this can be done at a different time and via different channels. If this option is chosen, connected research can be published no earlier than seven days after the issuer's registration document (provided that by then the issuer has provided UCAs with all the information it has provided to connected analysts).

Since the rule changes were introduced there have been 17 completed main market IPOs of commercial companies. Two key trends have emerged:

• As was widely predicted, issuers have consistently published a registration document, rather than a full prospectus, before any connected research is published (see figure 1).

• The split access, rather than joint access, model has been used on most, if not all, of these IPOs where connected research has been published.

Minus-X	Private phase: pilot-fishing; management presentations to investors and connected analysts; preparing company for IPO; bulk of due diligence work; initial draft of prospectus
Day 0	Announcement of potential / expectation of intention to float (Potential ITF or “EITF”), which includes invitation to UCAs to contact issuer if they may be interested in writing research Registration document published
Day 1 or 2	Management presentations to connected analysts
Day 5 or 6	Announcement of intention to float (ITF) Connected research published. This usually includes forward-looking information that the registration document and prospectus do not
Day 7 to 28	Publication of any unconnected research
Day 14 to 21	Investor education and initial price discovery
Day 21	Price-range prospectus published, including principal changes to information in the registration document
Day 21 to 35	Management roadshows to investors Book building
Day 35	Book build completed and price set
Day 37	Final composite prospectus published Admission

In practice, banks face a number of difficulties in discharging their regulatory obligations under the COBS rules regarding UCAs during the private phase (i.e. prior to the issuer announcing that it is planning to float). Where the split access model is used, an open invitation to all sellside analysts who may be interested in writing research on the issuer can be included in the announcement accompanying the publication of the registration document. However, in the private phase, the banks would be required to contact UCAs on a more targeted basis. Absent any clear guidance or objective criteria for the banks to refer to when exercising this discretion, it is difficult for them to judge whether or not they have met the requirement of engaging with a reasonable number and spread of UCAs.

There is no comprehensive list of research analysts in Europe, nor is there is an agreed or regulatory definition of a research analyst. The European Association of Independent Research Providers, which helped develop the financial industry guidance on the new regulations, maintains a list of members who are interested in writing research on companies intending to IPO. However at the time of writing this list has 13 entries, none of which are from mainstream investment banks. For these reasons, banks have tended to favour only reaching out to UCAs as part of an open invitation at the start of the public phase.

Another consideration when favouring the split access approach is the perceived increased leak risk of reaching out to a potentially large number of UCAs prior to publicly announcing the issuer's intention to float. During the private phase of an IPO, the company will take various steps to gauge investor appetite, aid price discovery and identify any issues that it needs to address before IPO, prior to taking a decision whether or not to proceed with a listing.

During this period, maintaining confidentiality around its plans will be a priority. Under the Association for Financial Markets in Europe (AFME)/EuroIRP market standard research guidelines, a UCA must agree to keep the IPO confidential until it is publicly announced. Yet in practice it may be difficult for an issuer to enforce these commitments – and of course any premature disclosure could impact exit plans generally, particularly if a decision is made not to proceed with an IPO.

Although the new rules on equal access for UCAs are clearly well-intentioned, the burden of compliance on issuers and banks can seem disproportionate to the benefit, particularly as the authors understand that only a small number of UCAs have actually published research on IPOs since the new rules came into effect.

Issuers should decide well in advance what mechanism they wish to use to capture expressions of interest from bona fide UCAs, particularly as the issuer may need to change its website and/or set up a new email address. Mechanisms chosen so far have included requiring UCAs to complete a registration form on the issuer's IPO website, or to email a specified individual or dedicated email account at the issuer, the lead bank or the issuer's counsel.

In particular, the practice of publishing a registration document, followed later by a full prospectus, has a number of implications. The issuer is required to draft two documents in tandem (which are submitted to the FCA for review in parallel):

• the registration document, which describes the state of affairs at the date it is published; and

• the composite prospectus, which describes the state of affairs at the date of admission (and which typically includes a summary of the principal changes that have occurred since the registration document was published).

The FCA has indicated that it is possible for some of the information in the registration document to be prepared on a forward-looking basis, for instance, to describe the position that will exist on admission. Yet this will not be possible in respect of various matters, and so much of the information that must be included in the registration document (which will speak as at the date it is published) will have become irrelevant or incorrect by the time of admission; for example, the group structure prior to any pre-IPO reorganisation; the pre-IPO corporate governance arrangements; and material contracts that will have fallen away by the time of admission. There is therefore scope for investors to be confused and/or the press to pick up on issues that are irrelevant or distracting.

Regulatory restrictions and timing constraints could make it difficult for the issuer to correct any errors

Additionally, the FCA interprets strictly the requirement to ensure that UCAs are provided with identical information. This has a number of practical implications which have resulted in a significant increase in the time and cost burden on issuers. By way of example, all Q&A with connected analysts should be recorded and the recording, or a transcript, should be provided to UCAs, as well as copies of any written follow-ups between the company and analysts. It is therefore even more important than before that management rehearse their Q&A and stick to the script, because if any corrections have to be issued subsequently, they will need to be issued to UCAs as well as connected analysts.

There is also a concern that, absent a hard restriction on UCAs publishing during the book-building phase of an IPO (akin to the blackout restrictions typically imposed very strictly on connected analysts), UCAs could create serious problems by publishing during this later period, when companies have limited ability to respond. Whilst the AFME/EuroIRP market standard research guidelines require UCAs to use reasonable efforts to publish all research prior to the publication of the price-range prospectus and not in the seven calendar days prior to pricing, it is recognised that it is very difficult for issuers to enforce this.

Further, syndicate analyst research is carefully checked for factual accuracy by the issuer and its advisers, but UCA research is not: this could result in incorrect or misleading information being communicated to investors. Regulatory restrictions and timing constraints could make it difficult for the issuer to correct any errors, or respond to any adverse opinions, before pricing takes place.

Possible ways in which the burden on issuers could be alleviated include:

• The FCA developing objective measures regarding the process which should be followed by banks in identifying an appropriate range of UCAs and exercising any discretion over which to invite, with the aim of defining the UCA audience more narrowly. The measures would need to recognise that what is appropriate will vary on a case-by-case basis depending on the issuer and the relevant industry sector. However, these could include a series of specific considerations and criteria for selection – e.g. whether a sellside analyst is considered active in the sector (based on whether they have recently published research on any companies in the sector). The banks could then be required only to certify that they have followed those measures when identifying which UCAs to approach during the private phase. This would alleviate the concerns banks have about discharging their regulatory obligations during the private phase, allowing more issuers to adopt the joint access model.

• Strengthening the requirements for UCAs to publish their research only during the permitted window, and requiring them to take reasonable care to ensure that their research is factually accurate.

• The FCA relaxing the requirement for UCAs to be provided with identical information to connected analysts (particularly in light of the fact that all UCAs will, by the time they are writing their research, have access to the published registration document, in which all material information is required to be included). For example, UCAs could instead have to be given all the written information provided during the presentation to connected analysts and associated Q&A, and any other written information provided to connected analysts subsequently; or substantially the same information as that provided to connected analysts (with non-material Q&A being considered out of scope).

In the meantime, issuers, banks and their advisers need to manage the information-sharing process carefully, and at an early stage in the IPO process, management need to be made aware of the importance of providing identical information to UCAs and what this means in practice in relation to presentations, Q&A and the supply of written materials.

	Nilufer von Bismarck Head of equity capital markets Slaughter and May, London			Francesca Parker Associate Slaughter and May, London			Peter Bateman Professional support lawyer Slaughter and May, London
	Julian Macedo Managing director The Deal Team, London