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FCA changes to equity IPO process unlikely to lead to surge in unconnected research, says expert


Changes to the rules governing availability of information about equity initial public offerings (IPOs) will restore the "central role" played by the prospectus in the process, the Financial Conduct Authority (FCA) has said.

However the changes, which bring forward the publication of the prospectus and give analysts at unconnected firms access to the issuer's management, will not necessarily lead to a "raft of unconnected research" being published about deals, according to equity capital markets expert Julian Stanier of Pinsent Masons, the law firm behind Out-Law.com.

"It is difficult to see how this would be commercially viable for the unconnected analysts," he said. "The FCA itself acknowledges this in the context of smaller AIM deals, but we suspect the same may be true except for very large IPOs."

"The requirement for a level playing field for connected and unconnected analysts seems reasonable, but if the management team has to handle multiple follow up requests from unconnected analysts this is likely to cause concern since management will already be under significant pressure from the process generally. Anything that causes timing issues in the context of an IPO is always most unwelcome," he said.

The FCA committed to reviewing the effectiveness of the UK's primary capital markets and related regulation in 2015. In April 2016, following its study of the investment and corporate banking market, it identified practices which it believed could reduce the diversity and independence of information available to investors and published a separate discussion paper on possible improvements to the IPO process relating to these concerns.

The new rules, which come into force on 1 July 2018, will require firms to publish a prospectus or FCA approved registration document before publishing any connected research. Connected research could be published 24 hours later if the company chooses to provide access to its management to unconnected analysts at least seven days before the prospectus is published; or seven days later if the company does not provide this access.

The new requirements would be incorporated into the FCA's Conduct of Business Sourcebook (COBS) as rule 11A. This would be accompanied by new guidance, at rule 12, designed to make it clear that analysts within prospective syndicate banks should not interact with the issuer's management, shareholders and advisers around the time that underwriting or placing mandates and subsequent syndicate positioning are being considered, in order to avoid perceived conflicts of interest.

The changes, however, do not address concerns around the liability issues attaching to the publication of research close in time to the publication of a prospectus, according to Julian Stanier.

"In fact, if the proposals around simultaneous access to the issuer's management team for unconnected and connected analysts are followed, the concerns over liability may be exacerbated since the proposed rules permit publication of the research in those circumstances one day after the publication of the prospectus," he said.

"From the responses received by the FCA it seems unlikely that the banks will go along with this proposal and will instead encourage issuers to provide unconnected analysts with access to management separately from the connected analysts. This approach will trigger the requirement for a gap of at least a week from publication of the prospectus before releasing the connected research," he said.

The FCA does not intend to apply to new rules to IPOs on multi-lateral trading facilities (MTFs), such as the Alternative Investment Market (AIM). However, it is encouraging banks managing MTF IPOs to consider adopting the new rules, "given that there is some overlap between larger companies on MTFs and smaller companies on regulated markets". Regardless, Stanier said this "may only be a stay of execution", as the FCA has stated that it will assess the situation for the AIM a year or so following the rules coming into effect.

In a separate policy statement, the FCA has also made a number of enhancements to the listing regime. These include changing its approach to the suspension of listing for reverse takeovers, updating how premium listed issuers may classify transactions and enabling property companies to better take into account asset values when seeking a premium listing.

The FCA has also signalled its intention to consult on three other areas of the listing rules that it believes "merit further exploration and stakeholder engagement". These are the relative positioning of standard versus premium listing, the provision of patient capital to companies that require long-term investment and retail access to debt markets.

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