The writer is head of corporate advisory at Shore Capital
For all the talk of the decline of public markets, they have proved a vital tool over the past year for companies as they dealt with the Covid-19 pandemic.
Since the outbreak of Covid, there has been a significant increase in the amount of equity raised by UK-listed companies. In 2020 alone, more than £40bn was raised by public companies in London to replenish their balance sheets and to support investment and boost growth and employment.
In addition, we have also witnessed a steady increase in the number of issuances that have involved an element for retail investors, enabled to a large extent by new technology platforms that facilitate their participation.
However, much more could be raised if certain rules — derived largely from an EU directive that the UK is no longer bound to — on offerings of shares in listed companies are changed.
As things stand, main market listed companies raising more than 20 per cent of their existing market capitalisation or companies issuing more than €8m of equity capital to the “public” are required to produce a prospectus which must be approved by the regulator.
All too often, this regulatory burden of publishing a prospectus makes the cost of capital for a retail offering prohibitively expensive and too time consuming. And in most cases, this results in the amount offered by companies to retail investors to be effectively capped at less than €8m.
Practically speaking, the rules also regularly lock out existing shareholders from being able to participate in further equity offerings.
A new consultation paper from the Treasury, the UK Prospectus Regime Review, issued in early July following the Lord Hill review announced earlier in the year, addresses these issues head on. Significant changes being proposed include the removal of the limit placed on the amount of new capital that existing listed corporates can offer to the public.
There also is a proposal to remove the disincentive against offering shares to a company’s own shareholder base by changing the definition of the “public” to exclude existing shareholders.
This change should have the effect of taking all rights issues outside of the restrictions imposed by the public offering rules. These proposals are bold and sensible. As the consultation paper itself states, the implementation of these reforms will encourage “broader participation in companies by removing disincentives to offer securities to narrow groups of investors, rather than the wider public”.
When restrictions on company issuance were temporarily relaxed last year, there was a noticeable uplift in the amount raised by existing listed companies. More would certainly have been raised if it was not for the rule that any main market listed company issuing more than 20 per cent of its share capital is required to publish a prospectus.
A partial solution is coming. The UK Prospectus Regime Review suggests that any type of securities offerings, not just those to existing shareholders, by already listed companies could be exempt from the need to publish a prospectus on the basis that they are already freely trading.
However, the government believes that the FCA should have discretion to set the rules on when a prospectus is required. In my view, the 20 per cent rule should be removed.
What material information is disclosed in these prospectus documents that would not already be required to be published to the market by a listed business? And if there is something material, then under existing listing rules surely the company should have already announced it to the market?
These prospectus documents impart very little new or forward-looking information for investors. Instead, they are largely unread doorstops providing little to no real value. The time and cost involved in producing a prospectus is disproportionate compared with the benefits, and even more so for smaller growing companies.
Removing the 20 per cent rule would leave adequate investor protections and safeguards in place. Listed companies would still be required to comply with other regulations including the Companies Act (preventing unlimited share issuance without shareholder consent) and the UK’s financial promotion regime (protecting retail investors).
The suggested changes, if adopted, could have an immediate and tangible positive impact on the UK economy: making raising capital more efficient for listed companies and thereby lowering the overall cost of capital.
Brexit has provided an opportunity for the UK to make pragmatic regulatory changes necessary for London to maintain and enhance its premier financial status and, most critically, to serve the capital needs of listed companies and their stakeholders in a simpler, cheaper and better way.
Now that we no longer need to be tied to the framework of the EU Prospectus Directive, from which so many of our existing restrictions emanate, it’s time to get on with it.