UK regulator proposes more transparency for IPOs

Big reforms to rules for UK initial public offerings have been proposed by the market regulator to give investors better and earlier information, as the watchdog seeks to keep Britain “open for business” after Brexit.

The Financial Conduct Authority said on Wednesday that information about a company planning an IPO should be made available sooner, and to a wider range of analysts and investors.

The FCA warned that some current practices involving the early dissemination of information to a select pool of analysts could breach EU rules against market abuse.

The proposals, part a wider shake-up of the UK equity markets, are designed to address long-held concerns in the City over the uneven playing field within the IPO process and how companies and their advisers control access to information.

The FCA said it wanted to improve the integrity of UK wholesale markets as a way to keep the UK “open for business”.

While the regulator unveiled its thinking on the topic a year ago, before the UK’s vote to leave the EU, that message will be welcomed by politicians who want to attract business in the run-up to Brexit.

Chris Woolard, director of strategy and competition at the FCA, on Wednesday said: “‎In order to retain its pre-eminence worldwide, the UK markets need to be clean, transparent and efficient.

“In periods of uncertainty as we face together now, it is only on this basis, by meeting these tests, that the UK can continue to consider itself a global centre for the issuance of securities.”

The FCA is concerned that what is known as “connected research”, which is produced by parties involved in IPOs, is the “dominant source of information available to investors during a crucial stage of the process”.

Under existing rules an IPO prospectus, which contains a comprehensive account of the history of a company and the people who run it, can be published up to six days after shares first start conditionally trading.

Critics have long argued the delay in publication compares poorly to the US system. They say it fosters conflicts of interest between issuing companies and their lending banks, and locks out the wider investment community from vital research.

The move is part of a wider shake-up of the UK’s equity markets following a year-long review by the FCA and follows separate proposals earlier this month on the listing of foreign-based companies.

A company seeking a public listing will typically appoint investment banks to underwrite and manage the process, which includes arranging meetings with interested investors. 

The regulator said the quality of information available to investors “is of particular concern given the conflicts of interest that arise during the production of connected research, including analysts coming under pressure to produce favourable research on an offering if their bank is to secure a place on the book-running syndicate”.

Currently a company gives an early presentation to analysts connected with investment banks working on its IPO about a month before it informs the market of its intention to float. Connected analysts then publish their research and after a blackout period of 14 days it is shown to select institutional investors alongside a draft prospectus known as a pathfinder, as a way to gauge demand and price.

The FCA warned on Wednesday that this system allows for conflicts of interest and even market abuse. Corporate financiers advising issuing companies often counsel them to go with syndicate banks that offer the most favourable research, the FCA said. It cited a US enforcement case where ten broker dealers were fined $435m after the Toys R Us IPO in 2014 having been found to have used their analysts to win investment banking business.

Two models are being proposed by the FCA. The first would include a presentation by the issuer’s management to both connected and independent analysts at least four weeks before an official announcement of the company’s intention to float. There would then be a ban on the publication of any research until after that announcement.

The second model would allow the issuer to give an earlier presentation to connected analysts, but it would still have to present to independent analysts before the announcement to float and there would still be a blackout on any research being published until after the announcement.

The package also includes new guidance clarifying the FCA’s expectations on analysts’ interactions with the issuer’s management and their corporate finance advisers when considering the IPO mandate and a bank’s syndicate positioning.

Wednesday’s proposals received a warm reception from legal experts, although some cautioned against lengthening an already drawn-out process.

“Many market participants argue that investors receive detailed information about an issuer relatively late in the IPO process and that unconnected analysts are usually effectively prevented from issuing research during the IPO marketing period altogether,” said Tom Vita, capital markets partner at law firm Norton Rose Fulbright. “However, the desire for greater transparency needs to be balanced with the need to avoid further elongating the IPO process and increasing execution risk.”