Prospectus Reform: Trust share issues must involve retail too

Too many fundraisings by existing investment trusts bypass individual shareholders, and that's wrong.

In January, the UK regained full responsibility for its financial services rulebook, permitting it to tailor requirements more precisely to the needs of UK companies, investors and markets. The government commissioned an independent review, chaired by Lord Hill, which gathered evidence and published its recommendations in March on how to encourage more UK equity listings and public offers.

Although the report does not directly refer to investment trusts, I believe they can benefit from its recommendations. Retail investors, arguably the most important source of capital to investment trusts, are mentioned throughout the document. 

The review was asked to consider several points. One was whether the requirements for when a prospectus must be produced, which are currently harmonised at the EU level, are appropriate for the UK. This includes whether companies that are already listed could raise new capital more easily and whether other documentation required for offers to the public are best for the UK market. 

This is very relevant for investment trusts and private investors. Several parties recently wrote an open letter to the Treasury, arguing the case for allowing retail access to investment company launches through initial public offers (IPOs).

I agree wholeheartedly but also think the Treasury should look at levelling the playing field for retail investors when it comes to secondary share issues or placings. 

Several established investment companies have announced capital raises in recent weeks. These include BBGI Global Infrastructure (BBGI ), Gresham House Energy Storage (GRID ) and International Public Partnerships (INPP ). All these companies decided to raise money via a placing rather than a public offer or offer for subscription. This excluded retail investors. It also left out professional investors wishing to invest via their individual savings accounts, as ISAs are restricted from investing in placings.

One of the unintended consequences of the existing prospectus requirements is that retail investors, while not being permitted to buy stock via the placing, are permitted to buy the same piece of paper (ie, the same transferable security conferring identical economic entitlements) in the open market. 

Buying newly issued stock (eg, via a placing) does not normally incur stamp duty whereas buying in the open market normally does. Buying stock via a placing is also generally at a preferential price to the open market price. 

In the case of BBGI, shares were available via the placing at 166p but retail investors that wished to buy the stock had to pay the market price of 170p.

GRID shares were available via the placing at 112p, but retail investors had to pay the market price of 115p.  

With INPP, while shares were available via the placing at 165p retail investors had to pay the market price of 167p. There is clearly something wrong here. 

The last time INPP carried out a capital raise involving individual investors was back in 2017. This enabled the company to raise up to £750m. However, the prospectus required to facilitate this ran to 248 pages. The last time BBGI carried out fundraising with retail participation was in 2013. This allowed the company to raise up to £235m. However, the prospectus ran to 266 pages. 

One argument in favour of a full prospectus is it helps provide greater safeguards and risk warnings for retail investors. But let’s be honest – how many people are going to take the time and trouble to wade through 248-266 pages of legalese?

As the years have rolled by more and more private investors have taken advantage of their annual ISA allowance and many private investors now have almost all their investible equity capital in ISAs. The latest government figures show that there was £314bn in Stocks & Shares ISAs and £269bn in Cash ISAs in 2019, a number that is likely much higher today. This vast pool of capital is currently out of the reach of investment trusts seeking to raise additional capital. Streamlined, prospectus-lite public offers would help to access it. 

Lord Hill’s report makes 14 recommendations. One of these (number seven) is particularly relevant to investment trusts seeking ongoing capital and retail investors looking to provide it. It states ‘consideration should be given… to…changing how the prospectus exemption thresholds function so that documentation is only required where it is appropriate for the type of transaction being undertaken and suits the circumstances of capital.’  

I would argue that raising plain vanilla equity, which is entirely fungible with existing market listed stock, does not require several hundred pages of documentation and the associated costs. 

The report adds: ‘The consequence of a fundamental review should be that further issuances by companies that are listed or quoted, should either be completely exempt from requiring a prospectus or be subject to much slimmed down requirements, for example, confirmation of no significant change. The existing corporate reporting requirements and market abuse rules mean companies are required to ensure information is disclosed to investors on an ongoing basis and in many cases, a prospectus adds very little for an investor. In many cases, it could be argued that the only “new” information is what the proceeds of the capital raise are to be used for.’  

I look forward to hearing the feedback from the Financial Conduct Authority and HM Treasury. 

Mick Gilligan is a partner and head of managed portfolio services at Killik & Co.  


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