London Investment Banking Association expected to publish guidelines soon on the publication of research notes in relation to domestic initial public offerings (IPOs) by brokers connected with the issuer

United Kingdom
Flotations: brokers' research reports

In advance of the publication by the London Investment Banking Association of its guidelines on the publication of connected broker research notes in advance of IPOs, we set out the issues which are relevant to companies and sponsors on the subject

"...potential liability... could be incurred...if a research note is published prior to the company's flotation and if it contains inaccurate information."

It is expected that the London Investment Banking Association will shortly be publishing guidelines on the publication of research notes in relation to domestic initial public offerings ("IPOs") by brokers connected with the issuer. The guidelines are expected to comprise a list of suggestions which practitioners might wish to consider prior to circulating connected brokers' research material. Although the guidelines have yet to be published, they are not expected to result in any change to the current market practice.

The issues which are relevant to companies and sponsors on the subject of connected broker's research are as follows:-

Potential liability


  • Potential liability, pursuant to section 146 of the Financial Services Act 1986 ("FSA"), could be incurred by an issuing company, its directors, and its broker if a research note is published by the brokers prior to the company's IPO, and if the research note contains inaccurate information. Section 146 requires listing particulars (and prospectuses) to contain all such information as investors and their advisers would "....... reasonably require and reasonably expect to find there ......" for the purpose of making an informed assessment about the company concerned. The risk with a research report is that it puts information concerning the company into the public domain which, if it is inaccurate or misleading, the company would need to address in its listing particulars/prospectus or risk potential liability. This concern applies to any information concerning the company which is in the public domain and not merely information contained in the research note.

    Blackout period


    • There is no absolute answer to whether there is a period of time before the publication of the listing particulars/prospectus which is sufficiently long to enable a research note to be published safely. If information contained in the research report is incorrect, then it is incorrect, and, if it is not corrected in the listing particulars/prospectus, it could lead to an investor bringing a claim if any loss is suffered (relying on a breach of section 146). The research report and the listing particulars/prospectus could be read together at any time by an investor who was researching the company concerned. The one month blackout period currently used on many IPOs might be a pragmatic answer.

    "...a company should correct in its listing particulars/ prospectus any misconceptions about the company...in the public domain."

    Disclaimers


    • Disclaimers are a useful method of preventing an investor from alleging that the company concerned had made any representations or statements which appeared in the report. If, as a matter of fact, the note is prepared by the brokers rather than by the company, and, if the company does not have a hand in its drafting, then the company is making no representations, and therefore, should not be liable in respect of any misrepresentation in any event.

    Co-operation of the company


    • From a company's perspective there is a strong argument that any research note is produced by the broker and that the company itself has only minimal input. Consistent with this, a company should only provide factual data for the broker, should not help draft the report (save to the extent of confirming or correcting factual information), and should not undertake any verification of its contents. If the company participates further in the preparation of the report, then it could impliedly be accepting responsibility for the report, and could potentially be liable if it proved inaccurate.

    • A company should correct in its listing particulars/ prospectus any misconceptions about the company which are in the public domain. This applies to financial projections as well as to any other information. If a research note contains financial projections, then the company has the following options:-

      -if the company cannot conclude whether the projections are correct or incorrect, then there is no need for such financial projections to be dealt with in the listing particulars/prospectus;

      -if the company considers that the financial projections are wrong in any respect which is likely to be of significance to investors, then it needs to deal with this in its listing particulars/prospectus to clarify the misconception. Any such clarification may be done in narrative form and the company would not have to include its own financial projections; and

      -if the company thinks that the financial projections are correct, then it does not need to discuss such projections in its listing particulars/prospectus because there is no misconception in the public domain to be corrected. If the financial projections subsequently turn out to be incorrect, then no liability should attach to the company or its directors, provided they can demonstrate that they believed, on reasonable grounds, that the projections were not wrong at the time they were made.