#10494 - Common Principles Of Primary And Secondary Share Issues - Equity Finance

COMMON PRINCIPLES OF PRIMARY AND SECONDARY SHARE ISSUES

Prospectuses

When is a prospectus required?

• Under s.85 FSMA, there are two alternative tests. If either test is satisfied, that means the company will have to publish a prospectus. However, there may be an exemption under either test.

Test 1

• An offer of transferable securities is made to the public in the UK

• Definition of an ‘offer to the public’ is very wide under s.102B FSMA

• Exemptions:

  • Exempt offers (s.86(1)) – i.e. offers made to or directed at qualified investors only or fewer than 150 people per EEA state

  • Exempt securities – i.e. securities contained in parts 1 and 2 of Sched 11A FSMA

Test 2

• Transferable securities are admitted to trading on a regulated market in the UK

• Exemption: Securities set out in Part 1 of Sched 11A FSMA and PR 1.2.3R [i.e. admission of shares representing over a period of 12 months less than 10% of shares of the same class already admitted to trading on the same regulated market]

• A retail offer (whether on the Main Market or AIM) will almost certainly require a prospectus under Test 1, as it is likely to be large and will not fall under any of the exceptions.

• A placing on the Main Market will also require a prospectus under Test 2, even if it falls within the ‘qualified investor’ exemption in Test 1, because the Main Market is a regulated market.

• A placing on AIM however, will not require a prospectus under either Test, because AIM is not a regulated market.

Contents of a prospectus

• The starting point is s.87A FSMA: the general disclosure obligation. This provides that the FCA will not approve a prospectus unless it contains the ‘necessary information to enable investors to make an informed assessment of the company.’

• The specific disclosure requirements will then vary according to the nature of the issuing company and the type of security to be listed. However, remember that it may be necessary to add to the prospectus something which is not a specific content requirement due to the general disclosure requirement.

• Under s.87B(1) FSMA (cf PR 2.5.2R) the FCA can in limited circumstances authorize the omission of certain information from a prospectus if it considers disclosure of the information to be:

  • Of minor importance only;

  • Contrary to the public interest; or

  • Seriously detrimental to the issuer and omission is not likely to mislead the public with regards to facts or circumstances.

• A prospectus will be valid for 12 months after it is approved (PR 5.1.1R) as long as the issuer provides a supplementary prospectus if required under s.87G FSMA.

Specific contents requirements

• PR 2.3.1 [minimum information] – directs you to Art. 3-23 of the PD Reg which provides for the minimum information to be included in a prospectus. The relevant articles to remember for admission of shares are:

  • Art. 3: A prospectus must be drawn up by using one or a combination of the schedules and building blocks in the PD Reg.

  • Art. 21: A prospectus must use the combinations of schedules and building blocks referred to in Annex XVIII of the PD Reg, which refers you to the Commission Regulation which contains the table of combinations.

  • Art. 4/Annex I: The share registration schedule

  • Art. 5/Annex II: The proforma financial information building block

  • Art. 6/Annex III: The securities note schedule

  • Art. 26a: A proportionate schedule for rights issues (allowing a shorter prospectus)

• PR 2.1.4 [contents of summary] – directs you to Art. 24 of the PD Reg and Annex XXII which specifies the contents requirements for the summary.

  • The length of the summary shall not exceed 7% of the length of the prospectus or 15 pages, whichever is longer

  • The summary must be clearly written and present the key information in an easily accessible and understandable way (tabular format)

  • A person may incur civil liability if the summary is misleading, inaccurate or inconsistent when read together with other parts of the prospectus (s.90(12) FSMA) – PR 2.1.7 requires the prospectus to contain a warning to this effect

Format

• A prospectus may be drawn up as a single document or separate documents (registration document, securities note, and a summary), but market practice indicates a preference for single documents.

  • However, a separate registration document may be useful under PR 5.1.4R, which allows it to remain valid for up to 12 months, which can then be reused with a new securities note and summary note.

• Generally, the prospectus will contain:

  • Clear and detailed table of contents (PR 2.2.10)

  • Summary (required by s.87A(5) & (6) FSMA and PR 2.1.2 and PR 2.1.4)

  • Risk factors linked to the issuer (PR App 3.1.1)

  • Financial information (PR App 3.1.1, Annex I and Annex II)

  • Operating and financial review (PR App 3.1.1)

  • All other information required by the schedules and building blocks

Liability for a prospectus

1. Civil liability

Persons responsible

• In order to establish whether your client is caught by s.90 FSMA, you need to check if they are a ‘person responsible’ under PR 5.5.3R(2):

  • The issuer

  • All directors of the issuing company at the time the prospectus is published

  • All future directors who are named in the prospectus

  • The offeror, if this is not the issuer (e.g. existing SH offering shares for sale)

  • Each person who accepts and is stated in the prospectus as accepting responsibility (e.g. accountants)

  • Each person who has authorized the contents of the prospectus

• The prospectus must make it clear that the directors have authorized the statements contained in the document. Such authorization could potentially attract personal liability – but directors will not be responsible for contents published ‘without his knowledge or consent’ (PR 5.5.6R) [unlikely to happen in practice].

• Except for the issuer and directors, any person who accepts responsibility for or authorizes contents of a prospectus may state that they do so only in relation to specified parts of the prospectus (PR 5.5.8R).

  • A solicitor is unlikely to accept responsibility and will not be responsible for advice given in a professional capacity (PR 5.5.9R).

• See PR 5.5.7R for when a person may not be responsible for the prospectus in certain circumstances.

Types of civil liability for directors and issuer

(a) s.90 FSMA

• S.90(11): Compensation for false or misleading statements or omissions – powerful and effective remedy for aggrieved investor as it is available to subsequent purchasers, not just the original investors.

• No need to show reliance or inducement – just need to show a misrepresentation

• Exemptions for directors under Schedule 10 FSMA:

  • Para 1: Reasonable belief that misrepresentation was true and not misleading and one of the conditions in Para 1(3) is satisfied

  • Para 3: Correction was made before acquisition of securities

  • Para 6: Person acquiring the relevant securities knew that the statement was false or misleading

(b) Liability for breach of the Part 6 Rules

• Under ss.91(1), (1ZA), (1A), (1B) and (2), the FCA can impose penalties for breaches of the LPDT rules.

(c) Market abuse

(d) Negligent misstatement

• Duty of care must be owed to reader; duty will be implied where issuer has a special skill or knowledge and knows or ought to know that the reader will rely for a particular purpose on that skill or knowledge

(e) Misrepresentation

• Rescission may be available if the misrepresentation is material and as to fact, subject to the usual limitations on rescission

• Damages may be available but will only include loss flowing directly from the statement (whether foreseeable or not at the time the statement was made)

(f) Breach of contract

• Possible claim for loss of bargain (i.e. value of securities had the statement been correct)

2. Criminal liability

(a) s.21 FSMA

• General prohibition on the promotion and marketing of ‘investment activity’ – failure to comply amounts to a criminal offence

(b) Part 7 of the FSA 2012

• s.89: Criminal offence for any person to make a statement, promise or forecast which he knows to be false or misleading in a material respect or to dishonestly conceal any material facts if he does so for the purpose of inducing another person to enter into a relevant agreement

(c) Fraud Act 2006

• General offence of fraud:

  • False representation; or

  • Failing to disclose information; or

  • Abuse of position

• s.2: False representation

  • Must be made dishonestly (R v Ghosh two-stage test of dishonesty)

• s.3: Failing to disclose information

  • Legal duty to disclose the information (issuer has legal duty to disclose information to prospective issuers by virtue of FSMA, PD Reg and PRs)

Liability for the sponsor - sponsor duties under the LRs

• LR 8 sets out the role and duties of a sponsor:

  • Provide assurance to the FCA that the responsibilities of the applicant under the LRs have been met and guide the applicant in understanding and meeting its responsibilities (LR 8.3.1R)

  • Take all reasonable steps to ensure that any communication or information it provides to the FCA is to the best of its knowledge and belief, accurate and complete in all material respects (LR 8.3.1AR)

• FCA may take enforcement action against a sponsor which breaches certain LRs under s.88A FSMA.

  • Financial penalty

  • Suspend approval to act as sponsor

  • Publish a statement of censure**

  • Impose limitations/restrictions on sponsor’s approval to act as sponsor

• FCA also has broader powers to punish sponsors under s.88E FSMA if it considers this desirable in the context of the FCA’s operational objectives

In summary:

Who has responsibility for the prospectus?