Regulations for equity Pre-IPO research distribution
Why is pre-IPO research distribution regulated?
In order to improve the quality and timeliness of key information available to investors in the days leading up to an equity initial public offering ("IPO"), a series of regulatory standards were released between 2008-2017 across EMEA and APAC regions, among others.
These regulations set requirements and provide guidance for the production and dissemination of pre-IPO research in order to ensure market integrity is not compromised and consumer protections remain effective.
Regulations will vary across countries and regions, but we’ve included an overview of regulations in leading IPO markets.
To download original documentation, see Additional Resources below.
What regulations apply to pre-IPO research?
There are considerable similarities in the rules surrounding pre-IPO research across APAC and EMEA. These regulations, by region, include:
- United Kingdom (2017)
Financial Conduct Authority (FCA) Code of Business Sourcebook (COBS) Chapter 11A & Chapter 12.2 - European Union (2008-2017)
Delegated Regulation 2017/565 Article 36(1) ("MiFID II Org Regulation") - Hong Kong (2013)
Securities and Futures Commission (SFC) Code of Conduct & Corporate Finance Adviser Code of Conduct ("CFA Code") - Singapore (2012)
The Monetary Authority of Singapore (MAS) Securities and Futures Act Section 251(9)
What are the basic requirements of pre-IPO research regulations?
COBS 11A (United Kingdom) rules are some of the strictest pre-IPO research distribution requirements across regions. At a high level, they cover:
- Fair presentation: Research must present a fair and balanced view without omitting material facts or misleading information about the issuer and securities.
- Disclosure of interests: Any financial interests or conflicts of interest related to the issuer that could impair the impartiality of the research must be clearly disclosed.
- Research identification: The research document must be clearly identified as investment research, and any substantive research recommendations must be presented fairly and clearly distinguished from other content.
- Distribution restrictions: Pre-IPO research can only be distributed to certain categories of recipients, such as professional clients, eligible counterparties, or investors meeting certain criteria related to knowledge, experience, and financial situation.
- Record keeping: Firms must maintain records of the recipients of pre-IPO research and the steps taken to ensure compliance with distribution restrictions.
- Internal systems and controls:
- Implement policies, procedures, systems and controls to ensure FCA research rule compliance.
- Physical separation of research and investment banking/other functions that could create conflicts ("not presented under the same cover").
- Compensation policies that eliminate improper influences on analysts' views.
- Supervision, review, and disciplinary processes for analysts.
How do these regulations impact the timing of IPO research publication?
In the United Kingdom and the European Union, there is no mandatory blackout period.
The FCA opted to exclude a blackout period from regulations when the majority of buy-side firms expressed opposition to an "unnecessary lengthening of the IPO timetable". However, the FCA requires that if unconnected analysts get equal access to management, connected research can be published 1 day after the prospectus. Otherwise, a 7-day minimum gap is expected.
In Singapore and Hong Kong, regulations require a 14-day blackout period before the IPO prices.
This is to ensure that investors have sufficient time to review and analyze the final prospectus without being influenced by research reports.
After the 14 day period, research coverage can resume with analysts publishing their initiation reports on the newly listed company.
What types of transactions are covered?
In the United Kingdom, COBS 11A rules apply to all IPOs where shares are traded on a regulated market in the UK.
COBS 11A rules do not apply to IPOs on the Alternative Investment Market (AIM) or other multilateral trading facilities (MTFs). However, the FCA encourages banks working on MTF IPOs to consider following them.
In the European Union, MiFID regulations apply to equities, commodities, debt instruments, futures and options, exchange-traded funds, and currencies.
In Hong Kong, the CFA Code applies to activities where a Corporate Finance Adviser is part of a professional firm or group of companies undertaking other activities, e.g. auditing, banking, research, stock broking and fund management.
In Singapore, Securities and Futures Act Section 251(9) applies to all securities and securities-based derivative contracts.
Additional Resources
European Union
EUR-Lex’s Commission Delegated Regulation
United Kingdom
FCA’s policy statement & final rules for COBS 11A
FCA’s discussion paper regarding the availability of information in the UK IPO process
AFME’s UK IPO reform Q&A in relation to COBS 11A
FCA’s handbook for COBS 11A rules
Hong Kong
SFC’s consultation paper on the regulatory framework for pre-deal research
ASIFMA’s pre-deal research addenda for the Hong Kong IPO process
Singapore
MAS’ Securities and Futures Act
MAS’ good practices and key findings information paper for IPOs
Please note that this article is provided by Finsight Group Inc. for educational and informational purposes only and is not intended to be construed as legal advice. Please seek the advice of counsel where appropriate.
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