(Bloomberg) -- For some in the investment banking industry, the UK’s latest proposals to deregulate its capital markets may be a step too far.
In what would be one of its boldest moves to attract listings, Britain’s Financial Conduct Authority has proposed lifting the threshold at which London-listed firms raising additional funds must produce a prospectus — a lengthy document detailing financial performance and potential business risks — from 20% of their share capital to 75%.
The move is the latest in a battery of reforms designed to curb defections to other exchanges and encourage initial public offerings. But it has faced a mixed reception in the City, with lobby groups for investment banks and other financial institutions expressing concern that firms could face lawsuits if deals go sour.
“Getting it wrong could increase potential liability,” said Gary Simmons, head of equity capital markets at the Association for Financial Markets in Europe (AFME), a trade body representing Wall Street and European banks.
AFME and UK Finance, an industry group representing lenders and other financial firms, wrote to the FCA last month voicing their concerns and proposing a more conservative threshold of around 30%, which would bring it in line with the European Union’s latest measures to unlock capital.
Part of the debate revolves around the potential risk of marketing a stock to potentially more litigious US investors, advisers say.
In the US, issuers can publish a base prospectus and then issue supplements whenever they want to raise cash. This allows companies to move more swiftly, but still requires heavy due diligence from underwriters to mitigate legal risks.
Currently, London dealmakers manage the risk of taking cash from overseas investors by cramming various disclosures into UK prospectuses.
Absent a requirement from the FCA, some underwriters might ask London-listed firms to produce a voluntary prospectus for larger capital increases that depend on overseas investors, at least until new market practice develops, said Mike Jacobs, a partner at Herbert Smith Freehills specializing in capital markets and M&A.
“It’s an interesting conundrum for the banks in terms of navigating larger undocumented offerings whilst also meeting their disclosure expectations,” said Jacobs. “There could be some differing views among investment banks on how to deal with this.”
A spokesperson for the FCA said its proposals “were informed by a huge amount of market input through bite-size engagement papers.” The regulator is now going over feedback it received to the proposals, with a view to publishing its final rules next year.
Decades ago, UK prospectuses could be as short as 30 pages, including a notice of a general shareholder meeting, advisers say. The documents over time have become lengthier to cover risks arising from marketing offerings into other jurisdictions, bearing more costs for companies.
The new regime would rely more on issuers’ existing disclosures, but critics say removing the prospectus requirement for major capital hikes could deprive investors of the information they need to assess deals.
“We support the aim of reducing duplication with existing disclosures, but equally it’s important that we strike the right balance in terms of when a full prospectus is required,” Julie Shacklady, director of primary markets and corporate finance at UK Finance, said in an emailed statement.
Not all investors agree. The Investment Association, a trade body representing Britain’s asset managers, told the FCA in a letter that its members’ views spanned across the spectrum, with some suggesting the two-thirds level as an alternative solution.
For James Roe, UK equity capital markets co-lead at A&O Shearman, the ongoing debate is ultimately a reflection of how financial regulation should work, with the FCA actively engaging with market participants and generating a discussion.
“This is about designing a market that works for the UK,” Roe said. “If the UK wishes to attract international capital then, when designing the rules, they need to accommodate overseas requirements to further the objectives of the UK market.”
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