The Financial Conduct Authority has published a consultation paper on reforming the availability of information in the UK equity IPO process.
In the FCA’s view, for too long information on companies about to float has been restricted to corporate finance advisory firms and investment bankers. By the time the prospectus is published, trading in the company’s shares has already commenced with the result that independent assessment of the pricing and size of the offer cannot take place.
The current process for an institutional-only IPO in the UK may be summarised as follows:
- Prior to the announcement of an intention to float (ITF), an analyst presentation is arranged at which the issuer’s management presents information on the company to “connected” analysts within the syndicate banks to support the preparation of their connected research (typically around 4 weeks before the ITF announcement).
- At the time of the ITF announcement, connected analysts publish connected research and the syndicate then imposes a 14 day “blackout” period. During this period, connected analysts use their research to provide their views on the issuer to selected institutional investors and determine the initial offer price range. A “pathfinder” prospectus is sent to potential institutional investors to assess demand before then actively marketing the offer at management roadshows (book-building) during a 14 day period. At the end of that period, the final prospectus is published with the agreed offer price and size, followed by the securities being admitted to trading.
The cause for concern with the typical process outlined above is that the pathfinder prospectus is made available late in the process and only to a select group of potential investors, with the final prospectus only becoming available after the offer has effectively closed. Of further concern is the fact that analysts within the prospective syndicate banks tend to meet management and the corporate finance advisers before a placing/underwriting decision is made. The paper notes that advisers typically consider a positive research message by analysts as being one of the main factors when advising the issuer on which banks to appoint to the syndicate. This potential bias further compromises the objectivity of connected research. Unconnected analysts are effectively excluded from the process of determining the price and size of the offer.
The paper sets out two core components to the FCA’s policy proposals.
The first is a series of new Handbook rules designed to ensure that an approved prospectus is published, and unconnected analysts have access to management, before any connected research is released. This should restore the primacy of an approved prospectus, improve the range and quality of information available to investors and make information available sufficiently early to enable investors to form a more balanced view on the issuer and the price of the offer.
The second is new Handbook guidance clarifying the FCA’s expectations on analysts’ interactions with management and their corporate finance advisers when an underwriting/placing mandate and subsequent syndicate position is under consideration. Existing guidance states that an analyst should not become involved in activities which would ordinarily be considered inconsistent with an analyst’s objectivity, for example, participating in pitches for new business. The FCA regards “participating in pitches for new business” to include analysts’ interaction with an issuer until:
- the firm has accepted an instruction to carry out underwriting/placing services for an issuer; and
- the firm’s position in the syndicate has been contractually agreed.
Comments are due by 1 June 2017.