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POSI policies crucial as London Stock Market sees 27 % rise in IPOs

Despite the uncertainty caused by the coronavirus pandemic the London Stock Market (LSE) reported £9.2bn was raised last year through IPO’s – 27 % more than 2019. Significantly, the Tech sector last year accounted for 25% of all capital raised on the LSE. 

With predictions of a strong market going forward it is crucial to have bespoke Public Offering of Securities Insurance (POSI) cover in place for a company and its Directors and Officers relating to risks associated with the public offer or sale of shares in the company.

Increased shareholder litigation is fact of life for companies globally and there is a growing awareness of the responsibilities which fall on directors and officers of companies.

A POSI policy operates to ring-fence the transaction exposure and W Denis provide expert assessment and a range of covers such as:

  • Allegations of misrepresentations about the company in the prospectus or elsewhere.
  • Class actions alleging breach of securities laws.
  • Complaints about diminishment of shareholder value due to adverse events or misplaced comments by directors.
  • Liabilities to investment adviser

During 2019, there were 27 IPOs on the LSE, raising a total of approximately £5.9 billion, with volumes decreasing by 60% on 2018 volumes, according to information released by PricewaterhouseCoopers. While there was a decrease in volumes, the LSE retained its position as Europe’s most active market in 2019 and contributed 30 per cent of total European IPO proceeds.

The UK IPO market attracts issuers from a wide variety of sectors. As of 31 May 2020, there were 1,123 issuers on the LSE Main Market, of which 911 were UK issuers and 212 were international issuers. A UK issuer may choose to list overseas where it has a closer connection with a particular jurisdiction or where it is seeking to attract a specific category of investors.

 

What is the best market for the IPO?

The primary exchange for IPOs in the UK is the London Stock Exchange. The LSE is the principal London exchange for equity trading and is a recognised investment exchange for the purposes of the Financial Services and Markets Act 2000, as amended (FSMA). It has a number of markets, including the Main Market and AIM (Alternative Investment Market)

 The AIM is the LSE’s junior market for smaller and growing companies and is not a regulated market for EU Directive purposes. Securities admitted to AIM are admitted to trading on an exchange regulated market and are subject to a lower level of regulation, both at the time of admission and, in certain areas, on an ongoing basis.

In March 2013, the LSE launched a further Main Market segment: the high growth segment (HGS). The HGS is a regulated market for EU Directive purposes but sits outside the FCA’s listing regime. It is aimed principally at high growth, trading businesses that intend, in due course, to seek admission to the Official List but may not yet meet the eligibility criteria for a premium or standard listing. However, to date, issuers have largely ignored this option.

 

Who regulates IPOs?

The principal statute governing securities offerings in the UK is the Financial Services and Markets Act 2000, as amended (FSMA), pursuant to which power is given to the Financial Conduct Authority (FCA), in its capacity as competent authority, to make rules relating to the admission of securities to the Official List, certain continuing obligations for listed issuers, the enforcement of such obligations and the suspension and cancellation of listing.

The principal regulation currently governing the document to be published in connection with an offer of securities to the public or an application for admission of securities to trading on a regulated market is Regulation (EU) 2017/1129, as amended (the Prospectus Regulation). The Prospectus Regulation is directly applicable in the UK and no implementing measures are required at national level.

Where relevant, the FSMA cross-refers to provisions of the Prospectus Regulation. Following the exit by the UK from the EU on 31 January 2020, the Prospectus Regulation continues to apply in the UK during the transition period, which ended on 31 December 2020. At the end of the transition period, the Prospectus Regulation will be converted into UK domestic law in a process referred to as ‘on-shoring’.

 

Authorisation for a listing

Issuers apply to the FCA for admission to the Official List and to the LSE for admission to trading on the Main Market.

The Listing Rules provide details of the eligibility requirements and the documents to be provided by issuers in connection with an application for listing. Certain eligibility requirements apply to applications for a premium or standard listing of shares, and a further set of more stringent requirements apply solely to applications for a premium listing of shares.

 An issuer will need to submit an eligibility letter and checklist to the FCA, demonstrating how the relevant requirements have been met. Further correspondence with the FCA may be required before the FCA is satisfied that the eligibility criteria have been met.

A provisional application is required to be submitted to the LSE no later than 10 business days before the application is to be considered.

 

Prospectus presentation and legal requirements

An issuer is required to publish a prospectus in connection with an IPO. The prospectus requirement is triggered where an issuer either makes an offer of securities to the public or seeks admission of securities to trading on a UK regulated market, subject to certain exceptions. The prospectus must be approved by the FCA and may be in the form of a single document or a tripartite form comprising a summary, a registration document and a securities note.

The overriding principle under the Prospectus Regulation is that the prospectus must contain the necessary information that is material to an investor for making an informed assessment of the assets and liabilities, profits and losses, financial position and prospects of the issuer, the rights attaching to the securities, and the reasons for the issuance and its impact on the issuer.

A prospectus must explicitly confirm that the people responsible for it have taken reasonable care to make sure the information is true and this includes the company issuing the securities, company directors at the time the prospectus is published, any future directors named in the prospectus, anyone who is stated as accepting responsibility in the prospectus and anyone who authorised the contents of the prospectus.

A POSI policy has limits adapted to the specific transaction, rather than relying on a D&O policy, as actions against those responsible for prospectuses can be brought years after the offering.

Investors may claim the full value of their loss if the material in the prospectus is proved to be wrong and the investment decision was based on that information.

 

 

Publicity and marketing

 Throughout the IPO process, all information disseminated internally and externally by an issuer and other parties to the IPO must be strictly controlled to comply with UK and other legal and regulatory requirements. All IPO-related materials must be vetted to ensure consistency with the prospectus, and information should be limited to factual matters and should not include any projections, estimates or forecasts about the issuer’s performance. Information contained on the issuer’s website and any information released to the press must also be carefully controlled. Non-IPO-related communications, such as typical product advertising and ordinary course communications with customers and employees, are permitted, provided they contain no references to the IPO or the issuer’s prospects and are consistent with past practice.

 

The sanctions if IPO rules are breached

Under the Listing Rules, the FCA may not grant admission unless it is satisfied that the requirements of the Listing Rules are complied with or if it considers that it would be detrimental to investors’ interests.

The FCA may also refuse to grant admission for securities already listed in another EEA state, if it considers that the issuer has failed to comply with any obligations in respect of that listing, and it will not admit shares of a non-EEA company that are not listed in either its country of incorporation or the country in which the majority of its shares are held, unless satisfied that the absence of the listing is not due to the need to protect investors. The LSE has similar powers to refuse an application for admission to trading in specified circumstances.

The FCA has several enforcement powers available to it where an issuer has made an offer of transferable securities to the public in the UK or an application for the admission of transferable securities to trading on the LSE.

These include:

  • requiring the withdrawal or temporary suspension of the offer
  • requiring the temporary suspension of the application for admission or the prohibition of trading in the securities, and private or public censure of the issuer.
  • Imposing unlimited financial penalties on an applicant for breaches of the Listing Rules or if any applicant has contravened a provision of, or made in accordance with, the Prospectus Regulation under section 91 of the FSMA or on a director of the applicant who was knowingly involved in such a breach.

The FCA also has the power to bring charges under the offences of making a false or misleading statement or creating a false or misleading impression pursuant to sections 89 and 90 of the Financial Services Act 2012. Penalties may include a fine or imprisonment (or both).

The FCA also has disciplinary powers in relation to the market abuse civil regime, and sanctions include financial penalties and public censure. Criminal liability may arise pursuant to section 19 of the Theft Act 1968 for directors who make false or misleading statements with intent to deceive shareholders or creditors, or the Fraud Act 2006 for dishonestly making a false representation with the intent to make a gain or cause a loss, resulting in fines or imprisonment (or both) for those found guilty of such an offence.

W Denis can provide the expert POSI assessment and covers you require. Richard Bowdidge is the W Denis Specialist Point of Contact to discuss Public Offering of Securities Insurance. Richard.bowdidge@wdenis.co.uk

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