Chapter 7 - Companies, Capital Markets and Market Abuse

Question 1

In which two key situations must a company publish a prospectus?

Answer 1

Before:

• making an offer of securities to the public
• applying for admission to trading on a regulated market

Question 2

Where do the rules about prospectuses originate from?

Answer 2

FSMA 2000 and the Prospectus Rules

Question 3

Does the requirement to publish a prospectus apply if a company seeks to have its shares admitted to trading on AIM?

Answer 3

Prospectuses are not required solely for admission of securities to trading on AIM.

Question 4

What are the six main exemptions from the requirement to publish a prospectus triggered by an offer of securities to the public?

Answer 4

• offers to qualified investors only
• offers to fewer than 150 people
• offers where the minium consideration which must be paid is at least 100,000 euros
• offers where the total consideration is less than 5 million euros
• offers of transferable securities
• dividends paid to existing shareholders as shares

Question 5

Can a company making an IPO rely on the offer exemptions to avoid the obligation to make a prospectus available?

Answer 5

No, as even if an exemption applies, they will be making an admission to trading, which also requires a prospectus.

Question 6

What must the information in a prospectus enable an investor to do?

Answer 6

To make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the company.

Question 7

What are the three component parts of a prospectus?

Answer 7

1 A summary in the prescribed format
2 A registration document (info on the company)
3 A securities note (info on the shares)

Question 8

What are the three stages of the process for an IPO of securities to be traded on the London Stock Exchange Main Market?

Answer 8

1 A prospectus must be submitted for approval by the FCA
2 An application must be made to the FCA for admission of the securities to the Official List
3 An application must be made for admission to trading on the London Stock Exchange Main Market

Question 9

Which criminal offences may be committed by a person who fails to make a prospectus available to the public in contravention of the FSMA 2000 s 85?

Answer 9

Non issue of a prospectus - imprisonment up to 2 years and an unlimited fine.

Question 10

Does civil liability attach to a failure to make a prospectus available to the public in contravention of the s 85 and what is the basis for any such liability?

Answer 10

Yes, as a person may suffer loss due to the non-issue of a prospectus, and can make legal claim.

Question 11

In what circumstances does s 90 impose liability?

Answer 11

Where untrue or misleading statements have been made in the prospectus - a person suffering a loss can seek compensation.

Question 12

When are listing particulars, rather than a prospectus, needed?

Answer 12

• specialist securities for which a prospectus is not required under the Listing Rules.
• securities specified in FSMA 2000 SCH. 11A.

Question 13

What principal obligation is undertaken by an underwriter of a share issue?

Answer 13

An underwriter (a bank) contractually agrees to take any shares not taken up by public.

Question 14

What restrictions can be placed on underwriting commission by the CA 2006?

Answer 14

The amount must not exceed:

• 10% of the price of the shares or
• the amount authorised by the articles.

Question 15

Can underwriting commission be paid out of a share premium account?

Answer 15

Yes, underwriting commissions is recognised by s 610 CA as a proper use of share premium money.

Question 16

What are the three insider dealing offences found in the CJA 1993?

Answer 16

CJA 1993 S 52: while having information as an insider

• dealing in securities that are price affected securities
• encouraging another person to deal in securities that are price affected securities
• disclosing information otherwise than in the proper performance of the functions of his employment, office or profession.

Question 17

What are the three key concepts to prove in order to evidence insider dealing?

Answer 17

1 Having information as an insider
2 Inside information
3 Made public

Question 18

What is an “insider”?

Answer 18

A person who has inside information through being a director, employee or shareholder of the company, or through having it from someone who is, and that they know it is inside information.

Question 19

What is inside information? (4 aspects)

Answer 19

1 Relates to particular securities or issuer of securities
2 Specific or precise
3 Has not been made public
4 Is such that making it public would be likely to significantly affect share price.

Question 20

What must a person know to have information as an insider?

Answer 20

1 Knowledge that the information is insider information

2 Knowledge that the person he or she received it from is an inside source.

Question 21

What must a person know to have information as an insider?

Answer 21

1 Knowledge that the information is insider information

2 Knowledge that the person he or she received it from is an inside source.

Question 22

What are the defences to the dealing offence?

Answer 22

S 53 CJA:
An individual is not guilty if he shows:
- he did not expect at the time for the dealing to result in profit
- he believed that the information had been disclosed widely enough to ensure that none of those taking part in the dealing would be prejudiced.
- he would have dealt even without the information

Question 23

What are the defences to the encouraging dealing offence?

Answer 23

S 53 CJA:
An individual is not guilty if he shows:
- he did not expect at the time for the dealing to result in profit
- he believed that the information had been disclosed widely enough to ensure that none of those taking part in the dealing would be prejudiced.
- he would have dealt even without the information

Question 24

What are the defences to the disclosure offence?

Answer 24

• he did not expect at the time for the dealing to result in profit
• he did not expect the person, because of the disclosure, to deal in securities.

Question 25

What are the penalties for insider dealing?

Answer 25

S 61 CJA:

• on summary conviction = fine not exceeding the statutory maximum or imprisonment up to 6 months
• on conviction on indictment = unlimited fine and 7 years prison.

Question 26

When was market manipulation first criminalised in the UK?

Answer 26

Financial Services Act 1986 (Now FSA 2012)

Question 27

Which two types of behaviour are criminalised under the FSA 2012?

Answer 27

1 The misleading statement offence

2 The misleading impression offence

Question 28

What are the criminal penalties for the offences under the FSA 2012?

Answer 28

S 89-91 FSA 2012:

• on summary conviction = fine not exceeding the statutory maximum or imprisonment up to 12 months
• on conviction on indictment = unlimited fine and 7 years prison.

Question 29

What is the governing law in relation to market abuse?

Answer 29

EU Market Abuse Regulation 2014

Question 30

What 2 types of market abuse are covered by MAR?

Answer 30

1 Insider dealing

2 Market manipulation

Question 31

Which 7 types of behaviour constitute market manipulation under MAR?

Answer 31

• giving misleading signals as to the supply, demand or price of financial instruments
• employing a fictitious device or other form of deception
• disseminating information through the media, which gives false or misleading signals
• transmitting false or misleading information relating to a benchmark
• conduct by a person to secure a dominant position over the supply or demand of a financial instrument
• buying or selling instruments which has the effect of misleading investors

Question 32

What “key information” must be included in the prospectus?

Answer 32

1) essential characteristics and risks associated with the issuer
2) essential characteristics and risks associated with investment in the securities, including any rights attached to them
3) the general terms of the offer, including an estimate of the expenses charged to the investor
4) details of the admission to trading
5) the reasons for the offer and proposed use of proceeds