Home Listing method Investment Capital Markets – October 2022, Issue 7: The SCRR Report: Upcoming Changes to UK Pre-emption Regime and Prospectus Requirements for Secondary Capital Raises | Dechert LLP

Investment Capital Markets – October 2022, Issue 7: The SCRR Report: Upcoming Changes to UK Pre-emption Regime and Prospectus Requirements for Secondary Capital Raises | Dechert LLP


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

The recommendations of the SCRR report cover a number of broad themes, including: (i) improving the pre-emption regime; (ii) reduce regulatory involvement in major funding exercises; (iii) further improve the cost and speed of fundraising; (iv) facilitate retail offers; and (v) foster digitization.

Improving the pre-emption regime

The SCRR report recommends that the preemption group Statement of principles be changed to:

  • Permanently increase the threshold for permitted non-enforcement of pre-emptive rights to 20% (in line with the welcomed temporary measures introduced in 2020 due to the COVID-19 pandemic) – including up to 10% available for use at for all purposes and up to an additional 10 percent to be used in connection with a specified acquisition or capital investment – ​​to help raise small amounts faster and more cost-effectively. On the other hand, the threshold currently authorized for non-application is a maximum of 10% (5% + 5% respectively);
  • Allow growth companies to obtain authorizations to remove their shareholders’ right of first refusal of up to 75% of their existing share capital, provided that the company explains the circumstances justifying why the higher authorization is required and appropriate to obtain and that the IPO document discloses such higher authority; and
  • Build shareholder support for waiving pre-emption rights by more than 20% per year for “capital-hungry” issuers, such as those in the technology and life sciences sectors, on a case-by-case basis.

In line with the above, the SCRR report does not recommend removing the pre-emption regime and recognizes the pre-emption principle as an important shareholder protection in the UK capital markets. Rather, the SCRR prioritizes changes aimed at maintaining investor protection while improving the ability of growing companies to raise capital effectively. He suggests placing the preemptive regime on a more formal and transparent basis, and more specifically, than the preemptive group:

  • Have a more formal and transparent governance structure with revised terms of reference;
  • Have a dedicated website with a searchable database of information on the pre-emption regime;
  • Publish an annual report on the operation of the scheme; and
  • Restrict the use of “cash” structures to circumvent pre-emption rights, ensuring that these undocumented investments are only used up to the amount of the pre-emption removal authorization that has been granted by shareholders at the last annual general meeting. Meet.

Reduce regulatory involvement in major financings

In addition to expanding and strengthening the preemption regime, the SCRR report recommends reducing the cumbersome regulatory review associated with secondary fundraising processes. This is justified by the SCRR report since (i) listed companies are required to meet many ongoing obligations and (ii) offers of new shares are made to existing investors who have access to the public disclosure of the company. This recommendation aligns with future changes to the prospectus regime whereby prospectuses are no longer required if a company makes a public offering 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% to 75% of a company’s existing share capital;
  • A sponsor should no longer be required for secondary fundraising, although sponsor confirmations on flyers will continue to be required for large transactions;
  • The FCA’s approach to working capital statements, that it is not permissible to accompany a “clean” statement with assumptions, should be reconsidered to allow for a more flexible, disclosure-based approach. ; and
  • The overlap between the working capital audit and the information to be provided in the annual reports should be reduced.

Continue to improve the profitability and speed of fundraising

To further reduce costs and increase the speed at which funds can be raised, the SCRR report also recommends that:

  • The offer period for full pre-emption rights issues and open offers should be reduced so that an offer is open for acceptance for seven business days instead of ten;
  • The notice period for convening general meetings other than general meetings is reduced from 14 clear days to 7 clear days;
  • The pre-emption provisions of the Companies Act should be amended to reflect the usual practice of rights offerings and open offers using a non-enforcement resolution, including the possibility of excluding foreign shareholders for whom the offers would be disproportionately expensive, offering flexibility to deal with split rights. and treat holders of securities with a contractual right to new shares as if they were holders of ordinary shares;
  • The listing regime be amended so that rights issues have an over-enforcement mechanism so that existing shareholders can request the purchase of shares not taken by other shareholders;
  • The UK adopts the Australian concept of a ‘clean-up notice’, a public confirmation of compliance with disclosure obligations, where a prospectus is not required for a secondary issue involving a public offering;
  • Standard terms and conditions for institutional investors are accepted by the market, eliminating the need to negotiate bespoke terms; and
  • Companies should be able to opt for enhanced disclosure regimes, including through more detailed disclosures in their annual reports and periodic updates on their websites, which would allow companies to publish a shorter fundraising document (which would be considered a complete package when read together with the enhanced information) at the time of the secondary offer in order to provide legal comfort for the purposes of the offer to international holders (e.g. in the United States), this which would be more cost effective than producing a full stand-alone prospectus.

Facilitate commercial offers

The SCRR report recommends that companies give due consideration in all investments to the participation of retail investors and other existing shareholders. A company should choose the method it deems appropriate to do this, although a “follow-up” procedure is suggested in the SCRR report. In addition, it is also suggested that the requirement to make a prospectus available to the public at an IPO involving a retail offering for six business days before the end of an offering be reduced to a maximum of three working days.

The push towards digitization

To improve the overall efficiency of all market processes, the SCRR report supports the move to a system in which all shareholders hold their shares in a fully digitized form, which is considered essential for the benefits of the other recommendations to be realized. fully realised. Following the recommendation of the SCRR report, the UK government launched a task force and published terms of reference. The objectives of the working group include: (i) identifying immediate and longer-term ways to improve the current shareholding system; and (ii) eliminate the use of paper stock certificates for publicly 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 broad support from public commentators. Some recommendations, for example changes to non-statutory guidelines, should be implemented immediately, while those that require legislative changes, such as changes to the UK prospectus regime, should be implemented in the short or short term. middle term.

The recommendations of the SCRR report come at a time when geopolitical events, including the Russian invasion of Ukraine in February 2022, the destabilization of energy supply chains and rising levels of inflation, have led to financing conditions unpredictable and volatile for businesses around the world. It is hoped that the recommendations presented in the SCRR report, including broadening the pre-emption regime and tightening prospectus, sponsorship and other regulatory requirements in the context of secondary offerings, will, once implemented, increase the ability of companies to react quickly to favorable market windows and successfully conduct secondary fundraising on the capital markets.