The SCRR report: Upcoming changes to the UK’s pre-emption regime and prospectus requirements for secondary capital raises

On 19 July 2022, HM Treasury published a report containing recommendations from its UK Secondary Capital Raising Review (the “SCRR Review”) (the “SCRR Report”). The SCRR Review examined how post-IPO capital raisings by UK-listed companies can be made more efficient, and, in turn, the UK’s listing regime can be modernized and made more competitive.

The SCRR Report recommendations cover a number of broad themes, including: (i) enhancing the pre-emption regime; (ii) reducing regulatory involvement in large funding exercises; (iii) further improving the cost and time-efficiency of fundraising; (iv) facilitating retail offers; and (v) driving digitization.

Enhancing the pre-emption regime

The SCRR Report recommends that the Pre-Emption Group Statement of Principles be amended to:

• Permanently increase the permitted disapplication of pre-emption rights threshold to 20 percent (as per the well-received temporary measures introduced in 2020 due to the COVID-19 pandemic) – comprising of up to 10 percent available for use for any purpose and up to a further 10 percent for use in connection with an acquisition or a specified capital investment – to enable small amounts to be raised more quickly and cheaply. By contrast, the current permitted threshold for disapplication is up to 10 percent (5 percent + 5 percent respectively);
• Allow growth companies to obtain authorities for the disapplication of pre-emption rights from their shareholders of up to 75 percent of their existing share capital, provided that the company sets out the circumstances justifying why the higher authority is required and appropriate to obtain and that the IPO document discloses this higher authority; and
• Enhance shareholder support for the disapplication of pre-emption rights of over 20 percent per year for “capital hungry” issuers, such as those in the technology and life sciences sectors, on a case-by-case basis.

As per the above, the SCRR Report does not recommend removing the pre-emption regime and acknowledges the principal of pre-emption as an important shareholder protection in the UK capital markets. Rather, the SCRR prioritizes changes aimed at retaining investor protection whilst also enhancing the ability of growth companies to efficiently raise capital. It suggests putting the pre-emption regime on a more formal and transparent footing, and specifically, that the Pre-Emption Group:

• Have a more formal and transparent governance structure with revised terms of reference;
• Have a dedicated website with a searchable database of pre-emption regime information;
• Publish an annual report on the operation of the regime; and
• Restrict use of the “cash-box” structures to circumvent pre-emption rights, by ensuring that such undocumented placings should only be used up to the amount of pre-emption disapplication authority that has been granted by the shareholders at the most recent annual general meeting.

Reducing regulatory involvement in large fundings

In addition to broadening and strengthening the pre-emption regime, the SCRR Report recommends reducing the burdensome regulatory scrutiny associated with secondary fundraising processes. This is justified by the SCRR Report since (i) listed companies are required to adhere to extensive ongoing obligations and (ii) offers of new shares are being made to existing investors who have access to the company’s public disclosure. This recommendation aligns with future amendments to the prospectus regime whereby prospectuses are no longer needed if a company is making a public offer to its existing shareholders.

The SCRR recommends that:

• The threshold at which a prospectus is required for offers to existing shareholders be raised from 20 percent to 75 percent of a company’s existing share capital;
• A sponsor should no longer be required for a secondary fundraising, although sponsor confirmations on circulars will continue to be required for significant transactions;
• The FCA’s approach to working capital statements, whereby it is not permitted to accompany a “clean” statement with assumptions, should be reconsidered to allow a more flexible, disclosure-based approach; and
• The overlap between working capital diligence and annual report disclosures should be reduced.

Further improving the cost- and time-efficiency of fundraising

In order to further reduce the cost and increase the speed at which funds can be raised, the SCRR Report also recommends that:

• The offer period for full pre-emptive rights issues and open offers should be reduced such that an offer is open for acceptance for seven business days rather than ten;
• The notice period of shareholder meetings other than AGMs be reduced from 14 clear days to seven clear days;
• The pre-emption provisions in the Companies Act should be amended to reflect the usual practice for rights offers and open offers using a disapplication resolution, including the ability to exclude overseas shareholders to whom offers would be disproportionately costly, providing flexibility to deal with fractional entitlements and treating securities holders with a contractual right to new shares as if they were the holders of ordinary shares;
• The listing regime be amended such that rights issues have excess application mechanics attached so that existing shareholders can apply to take up shares not taken by other shareholders;
• The UK adopt the Australian concept of a “cleansing notice”, a public confirmation of compliance with disclosure obligations, where a prospectus is not required for a secondary issue involving a public offer;
• Standard-form terms and conditions for institutional investors be agreed by the market, which would remove the need to negotiate bespoke terms; and
• Companies should be able to opt in to enhanced disclosure regimes, including by way of more detailed disclosures in their annual reports and periodic updates on their websites, which would enable companies to publish a shorter fundraising document (which would be seen as a complete package when read with the enhanced disclosure) at the time of the secondary offering to give legal comfort for purposes of the offer to international holders (for example in the United States), which would be more cost-efficient than producing a full stand-alone prospectus.

Facilitating retail offers

The SCRR Report recommends that companies give due consideration in all placings to the involvement of retail investors and other existing shareholders. A company should choose any method they find appropriate to do this, although a “follow-on” procedure is suggested in the SCRR Report. In addition, it is also suggested that the requirement for a prospectus to be available to the public on an IPO involving a retail offer for six working days before the end of an offer should be reduced to a maximum of three working days.

The drive to digitization

To improve the overall efficiency of all market processes, the SCRR Report supports the move to a system whereby all shareholders hold their shares in a fully digitized form, which is seen as essential for the benefits of the other recommendations to be fully realized. Following the recommendation from the SCRR Report, the UK Government has launched a taskforce and published terms of reference. The objectives of the taskforce include: (i) identifying immediate and longer-term means of improving the current system of share ownership; and (ii) eliminating the use of paper share certificates for traded companies.

Next steps

All of the recommendations proposed in the SCRR Report have been accepted by the UK Government in full and the SCRR Report has received widespread support from public commentators. Some recommendations, for example, amendments to non-statutory guidelines, are to be implemented immediately, whilst those that require legislative change, such as amendments to the UK’s prospectus regime, are expected to be implemented in the short- to medium-term.

The recommendations of the SCRR Report come at a time when geopolitical events, including the Russian invasion of Ukraine in February 2022, destabilized energy supply chains and rising inflation levels, have led to unpredictable and volatile financing conditions for companies worldwide. It is hoped that the recommendations outlined in the SCRR Report, including the broadening of the pre-emption regime and the narrowing of prospectus, sponsor and other regulatory requirements in the context of secondary offerings, will, when implemented, increase the ability of companies to quickly react to favorable market windows and successfully conduct secondary fundraises through the capital markets.