To open the door for growth companies, don't throw governance out the window
UK government plans to remove prospectus obligations for capital increases cause raised eyebrows
Mark Austin’s Secondary Capital Raise Review has sparked an unusual level of excitement for a 266-page document on capital markets regulation.
One banker is having it printed and bound to make for a better evening read, he told GlobalCapital. But even those who haven’t made it beyond the summary are enamoured, mainly because it suggests permanently allowing companies to raise 20% of their share capital without pre-emption rights.
That is a perfectly sensible measure — issuers proved their ability to behave themselves and use this freedom responsibly during the pandemic, and there is little reason to suggest why they should not continue to do so in the aftermath.
But a little further down in the document, another suggestions raises eyebrows. A less restrained investor may even have called it “ridiculous”.
Given shareholder approval, Austin wants to allow “capital-hungry” issuers, a fun term for high-growth companies, to raise up to 75% of their share capital without pre-emptive rights and, alarmingly, without a prospectus.
The review argues against listed companies constantly disclosing a lot of uncessary, duplicated information in a prospectus, suggesting they do not need it at all.
Instead, annual reporting duties could be extended, it argues. But this fails to convince bankers, investors and lawyers alike, especially since the review also wants to boost retail investor participation.
“If you basically want to re-IPO the company, there should be a prospectus,” said one investor, while a banker shook his head in disbelief.
A prospectus is meant to protect investors. Pushing the threshold back in such a dramatic way means that crucial information is easier to hide somewhere in the reporting documents and harder to find.
As one lawyer pointed out, the moment something goes seriously wrong (think: poor grandma in Sussex loses her life savings), the first question will be: “Why did the government remove governance scrutiny?”
Thankfully it might all still turn out to be a moot point. The moment a company wants to raise serious cash it will probably need US investors in the book. To attract them it will need to comply with US regulation, which would of course signal the swift return of the prospectus.