In July 2023, the FCA published a call for input on their proposals for the new regulated activity of operating a Public Offer Platform (POP), as part of the wider Public Offers and Admission to Trading Regime (POATR) which will replace the existing UK Prospectus Regime. The FCA have outlined the proposed rules framework and rationale for the policy choices being faced in Engagement Paper (EP) 5, welcoming written responses to questions raised in the EP by the end of September 2023.
What is changing?
Under the current regime, an FCA-approved prospectus is required in order to make an offer of securities to the public, unless an exemption applies. Preparing a prospectus is a costly exercise involving specific content requirements and adherence to a statutory liability regime. Many private companies therefore make use of the exemption which states that public offers of transferable securities up to a total of EUR 8 million over a 12-month period do not require a prospectus. This allows companies to make offers of transferable securities via an investment-based crowdfunding (IBCF) platform or directly to retail customers, effectively “capping” these offers at the EUR 8 million mark.
The UK government is seeking to make it easier for private (unlisted) companies to raise capital and grow their businesses, as outlined in the Edinburgh Reforms announced in late 2022. It has therefore proposed that the EUR 8 million “cap” be lifted and for securities to be able to be offered to the public without a prospectus, subject to a number of new exemptions. This includes where an offer is made via a Public Offer Platform, under the proposed new regulated activity of “operating an electronic platform for the public offering of securities”.
A new threshold of £5m will be set whereby under-threshold offers will be exempt from the prospectus requirement, and those above the threshold would need to be made via a Public Offer Platform (or make use of another exemption). This will allow for much larger amounts of capital to be raised via IBCF platforms holding the new permission without requiring a prospectus.
Due diligence
There are already requirements in place for crowdfunding platforms to conduct appropriate levels of due diligence before offering securities on their platforms, however the current rules are not prescriptive. The new POP regime will mandate certain minimum standards for due diligence that POP operators will need to adhere to, effectively serving as a “gateway” to help mitigate scams and fraud and provide important information to prospective investors.
The FCA are considering the following areas as a minimum standard of due diligence for Public Offer Platforms:
- Details of company incorporation and business registration, plus identity and residence of each company director, officer, and controller;
- Fitness checks on senior management and key persons, such as checking director disqualifications;
- Assessment of the financial strength and past performance of the company (including financial projections for early-stage companies); and
- A valuation of the company’s business, its current borrowing levels, and sources of any existing borrowing.
POP firms will also need to demonstrate that they have appropriate systems and controls in place to undertake adequate due diligence, broadly mirroring the requirement for firms to demonstrate their systems and controls when applying to the FCA for permission to approve financial promotions (the s21 gateway). As part of the Engagement Paper, the FCA are also seeking firms’ views on the best way the results of firms’ due diligence can be communicated to prospective investors, such as in a detailed written report summarising the due diligence undertaken, highlighting key findings and using clear, concise language.
Disclosure
The current prospectus regime sets out specific disclosure requirements for companies to allow prospective investors to make an informed decision before they invest. The FCA envisages that the disclosure requirements for Public Offer Platforms will not be as strict as the current prospectus requirements, though more robust than disclosures currently required on crowdfunding platforms.
Firms subject to the Consumer Duty will also need to be mindful of meeting the consumer understanding outcome and other relevant requirements under the Duty, such as meeting the information needs of customers and making sure customers are equipped to make effective, timely, and properly informed decisions.
As part of their engagement with firms, the FCA are considering the following options in relation to disclosures:
- Creating a requirement of ‘information needed to make an informed decision’;
- Outlining minimum requirements of information that should be provided to investors; and
- Creating a bespoke disclosure document with specified information that needs to be provided to investors.
The FCA have provided a non-exhaustive list of potential disclosure requirements in the Engagement Paper:
- Company overview, including objectives and the leadership team;
- Financial information, such as balance sheets, income statements, projections, and cash-flow statements;
- Business model and the company’s place in the market, e.g. target market, competitors, and potential opportunities;
- Management team, including their track record, vision, and strategy;
- Product or services offered, their place in the market, and anticipated revenue generation;
- Market research including details on competitors and growth potential;
- Valuation of the company;
- Terms of the investment, e.g. potential returns, investment type and structure;
- Exit strategy, e.g. acquisition or IPO; and
- Risks, communicated transparently to investors to support them in making their investment decision.
What happens next?
Following the engagement process, the FCA intends to provide feedback to firms on key points. They will then develop specific rule proposals and launch a consultation, which is expected to happen in 2024.