HM Treasury (“HMT”) is set to reform the law governing UK securities based crowdfunding. The proposed changes will impact both securities offered by UK based companies and foreign companies looking to issue securities to prospective UK investors.
In March 2022, HMT concluded its review into the UK Prospectus Regime. The new proposals, published in HMT’s review outcome document, more generally aim to simplify regulation, facilitate wider participation in the ownership of public companies and improve the quality of information investors receive.
HMT is expected to give the UK's Financial Conduct Authority (“FCA”) greater responsibility and powers to govern the revised regime.
In connection with the FCA’s increased oversight, the operation of electronic platforms for the public offering of securities, such as equity crowdfunding, is expected to become a regulated activity in its own right. Investment-based crowdfunding services (e.g. equity crowdfunding) are already regulated in the UK within the broader scope of FCA rules governing retail investment firms. In addition to obtaining authorisation from the FCA as an investment firm they are required to comply with rules governing investment firms under regulation such as the Markets in Financial Instruments Regulations (“MiFIR”).
The creation of a dedicated regulated activity will allow the FCA to enforce the new regime in a way which reflects the risks specific to the electronic platform service and best serves the needs of consumers without stifling innovation and development of the sector.
In order to offer crowdfunding services, electronic platforms will be required to first obtain authorisation from the FCA. On an ongoing basis, these firms will be expected to comply with conduct of business and systems and controls requirements as stipulated by the FCA. Examples of this may include enhanced data security and anti-money laundering obligations to reflect the digital nature of the business. The FCA will expect to see business wide risk assessments specific to electronic offering of securities and, if relevant, identifying the risks specific to retail customers participating in the service.
Principal among other proposed changes will be:
- The separation of the regulatory regime applicable to public offers of securities, such as crowdfunding, from the regime applicable to admissions of securities to trading on ‘Regulated Markets’ (such as the main market of the London Stock Exchange).
- In contrast to the requirement for a prospectus for admissions to trading on Regulated Markets, there will be no requirement for a prospectus for public offerings.
- A general prohibition on public offerings of securities unless an exemption applies (see further detail on exemptions below).
- Removal of the criminal offence which currently prohibits requesting admission to trading on UK Regulated Markets without first having published an FCA-approved prospectus.
- Removal of the requirement for an FCA-approved prospectus to be published on offers over €8million provided the offer is made via a regulated platform (such as multilateral trading facilities (MTFs)).
- Permission for offers to be made into the UK, on the basis of offering documents prepared according to the rules of relevant overseas jurisdictions and stock markets, without FCA review and approval (though there will be appropriate powers for the FCA to intervene to protect UK investors in exceptional circumstances).
The existing Prospectus Regulation regime already provides exemptions to the prohibition on offering securities to the public without an FCA approved prospectus. For example, crowdfundings may currently benefit from some of these exemptions, such as the exemption from the need to provide a prospectus for offers of securities to non-professional investors, where the offer is made to fewer than 150 natural or legal persons in the UK.
In addition to the existing exemptions, the new Prospectus Regulation regime will expand the list of exemptions to also include exemptions for:
- offerings of securities to those who already hold equity securities in the offering company, subject to certain conditions, including that the offer is made pro-rata to a person's existing holding; and
- offerings of securities which are or will be admitted to trading on certain MTFs.
It will be for the FCA to determine the levels of due diligence and disclosure with which issuers will need to comply. In legislating for these changes it will be for the government to determine the threshold below which offers of securities from private companies will be exempt from the prohibition on public offers. In its Review Outcome document, HMT states that ‘as it takes forward this reform, the government is committed to ensuring that the UK securities-based crowdfunding industry continues to thrive, by promoting competition, protecting consumers, minimising costs for issuers raising funding, and ensuring any regulation is proportionate.’
A Parliamentary slot for agreeing the revised regime is still to be determined. The full suite of reforms will only take full effect after the FCA has consulted on, and is ready to implement, new rules under its expanded responsibilities. It may take a year or more before the proposed changes come into effect and firms caught by the new regime should use the time effectively to assess the regulatory impact on how they operate their business. Firms should be asking:
- Will they need to obtain a dedicated licence or vary their existing permission(s) to offer securities over an electronic platform?
- Does their business risk assessment accurately account for risks inherent in an electronic platform business, such as increased data security and AML threats?
- Can the firm benefit from the new list of exemptions to avoid regulatory burden and cost?
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