The public offer of securities in the United Kingdom.

Author:Gleeson, Simon
 
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  1. INTRODUCTION

    The use of a statutory prospectus in connection with the public offering of securities in the United Kingdom long preceded the adoption of the Securities Act in the United States. The prospectus provisions of the English Companies Act with antecedents that go back to 1844(1) were the model on which the Securities Act of 1933 prospectus was based.(2) A new prospectus regimen became effective in the United Kingdom in July of 1995, applicable to all securities being publicly offered for the first time in the United Kingdom.(3) The new regimen completes the process of introducing the European Community's securities legislation program, and is best understood in the context of that program. The offering of securities, however, has two aspects: the legal and institutional framework within which a distribution of securities is completed, and the regulatory framework governing the firms engaged in the distribution of securities.

    The Financial Services Act of 1986 provides the regulatory framework that governs those engaged in the investment business.(4) The FSA was the product of a compromise reached in the late 1980s between a government committed to statutory regulation of the securities industry and an industry determined to maximize its own influence over its own government, whose aim was, as far as possible, to retain the concept of self regulation within the statutory system. The result of this compromise was the creation of a single statutory regulator, known as the Securities and Investments Board ("SIB").(5) Although the SIB is a statutory body, it was given the ability to delegate many of its powers (including those involving authorization, supervision, surveillance and enforcement), and it did so to a group of industry self-regulators that were, at least initially, heavily practitioner based. The cumbersome arrangement of multiple self-regulatory organizations (SROs) the FSA produced is to undergo a radical revision, the initial stages of which were underway in mid-1998, but are dependent upon the enactment of a new statutory regime. All of the SROs are to be merged into the SIB, which on October 28, 1997 became the Financial Services Authority (the Authority). At the request of Chancellor of the Exchequer appointed by the then recently elected Labor Government, the then Chairman of the SIB on July 29, 1997 transmitted an outline of the new regulatory structure. The precise framework, however, is the subject of much discussion and speculation and will not be known until enabling legislation is proposed and adopted.(6) This Chapter therefore focuses on the public offering of securities, which, although it will be impacted by the new structure, is not likely to be drastically changed.(7)

    The regulation of securities business in the UK is affected by the fact that London is both the center of the UK domestic equity and bond markets (for historical reasons there is no substantial domestic corporate bond market in the UK, so the latter is confined to UK sovereign issues, known as "gilts") and the center of the global bond market known as the "Euromarket [PLM1]." The Euromarket developed in the era of exchange controls and the U.S. Interest Rate Equalization Tax, which effectively prevented non-U.S. entities borrowing dollars in the U.S. domestic markets and international U.S. entities from using capital raised in the United States for their multinational operations. There therefore developed an offshore market in dollar balances held by non-U.S. institutions (known initially as the Euro-dollar market), and this market, through a series of historical accidents, came to be based in London. The market remained small until the early 1970s, when, as a result of the oil price increases of those years, the oil exporting countries found themselves holders of massive dollar balances that needed to be reinvested. These balances were recycled through the Euromarket, which became almost overnight one of the largest and most liquid debt markets in the world. This boost seems to have given the Euromarket "critical mass," and it subsequently developed into a capital market that for size, depth, flexibility and product innovation compares favorably in a number of respects with the U.S. domestic market. The classical Euromarket instrument is still a fixed-term, fixed-interest US$-denominated debenture, but the market has expanded to embrace a variety of different currencies (notably Euro-Yen, although there are now Euro- markets in most major currencies) and products, extending to convertible bonds and, to an increasing extent, to equities.

    The Euromarket is in principle offshore everywhere. It has no central organization, trading floor or even rules. The fact that most of the major players in the market are located in London is the result of a congeries of accidents. Indeed, during the negotiation of the implementation of the Financial Services Act 1986, the threat that the Euromarkets might emigrate from London to Zurich was taken sufficiently seriously by the UK government that several concessions to the Euromarkets themselves were added to the Act. UK regulation is, therefore, to some extent bifurcated. To some degree, it must address both the ordinary issues that arise out of domestic securities issuance and the very different issues that arise out of the regulation, or absence thereof, of the Euromarkets.

  2. DISTRIBUTION OF SECURITIES IN THE UNITED KINGDOM

    1. Offers of Sale, Placings, and Other Offerings

      The distribution of securities in the United Kingdom has its own distinctive characteristics. The institutional framework for distributing securities in the United Kingdom is similar in some respects to that in the United States. The major distinction between the two systems is to be found in the use of the word "underwriter." In the U.S., an "underwriter" is an investment bank that agrees to purchase an issue at a discount from the price it offers the securities through an underwriting syndicate to the public. The objective of the underwriting syndicate is to distribute the securities to public investors, not to purchase the unsold portion of a public offering, although in rare instances it may be required to do so. In the UK, by contrast, an "underwriter" is an investing institution that agrees to purchase the offered shares at a discount price if placees cannot be found at the full price. In exchange for taking on this obligation, the underwriter receives a "commission" (classically equal to 2.5 percent of the amount of securities that he has undertaken to accept). Distributions in the UK therefore differ in many respects from the underwriting syndicates that have been an indispensable part of the arrangement for the distribution of most publicly offered securities in the United States for over a century.

      The rules of the London Stock Exchange (the "Stock Exchange") largely dictate in broad outline the manner of distributing securities in the United Kingdom. This in part is a reflection of the fact that most initial offerings by companies are undertaken concurrently with (and subject to) either a listing on the Stock Exchange or admission to dealings on the Alternative Investment Market ("AIM"). AIM is a second tier trading system that is under the supervision of the Stock Exchange. The principal types of offerings contemplated by the Stock Exchange Rules are as follows:(8)

      An offer for sale. This is an offer to the public by an issuing house or broker of securities that has agreed to purchase the issue from the issuing company. This is the most common form of offer. The primary distinction between a UK-style offer for sale and a U.S.-style underwritten offer is that in an offer for sale the issuing house does not depend upon other dealers to sell to the public. The issuing house will make the offer directly to the general public, having arranged sub-underwriting (in the English sense) from institutions for its own benefit. There are prescribed procedures for such offers, as described below. The Stock Exchange Listing Rules describe such offers as follows: "An offer for sale is an invitation to the public by, or on behalf, a third party to purchase securities of the issuer already in issue or allotted."(9) The third party refers to the issuing house. The reference to "already in issue" is not as one might conclude to securities that have entered the trading market, but to the fact that at the time of the offer (or before completion of the offer) the securities will have been issued to the third party underwriter.

      An offer for subscription is a variation of the offer of sale that differs in that the issuer is offering the securities directly to the public.(10) In an offer for subscription, the issuer arranges underwriting (in the English sense) directly for its own benefit. The underwriter agrees to purchase any securities not purchased by the public.

      An intermediaries offer is an offer by an issuer to intermediaries (brokers or underwriters) who in turn offer the shares to their clients.(11) This type of offering permits a public offering to be made without affording the general public an opportunity to subscribe to or purchase the shares. Such an offering, accordingly, is somewhat comparable to the manner in which securities are publicly offered in the United States.

      A placing, which is an offering of securities by a single issuing house (or a small group of them acting together) primarily to their own clients that does not involve an offer to the public.(12) A placing of already listed securities cannot be made at a price that is more than ten percent below the market price absent exceptional circumstances.(13)

      An invitation to tender is an offer for sale or subscription that is not made at a fixed price, but rather where prospective subscribers indicate the number of shares they want to subscribe to and the price range they are willing to pay for the shares. Based on the subscriptions...

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