Treasury has published its response to the consultation on the regulation of mini-bonds (or NTDS – non-transferable debt securities). Most respondents agreed the instruments should be brought into regulation, but also wanted a joined-up approach to the regulation of various types of securities.
The Government has, on that basis, decided to include mini-bonds within the overall new public offerings regime. This way, it will fulfil the recommendations of the Gloster report following the LCF collapse. The recommendations were to:
- make issuing non-transferable securities a regulated activity; or
- extend the scope of s25 FSMA to cover non-transferable securities, which would have the effect of making public offers of these types of security offers that would require an FCA-approved prospectus.
For the first option, the Government had considered it necessary to bring only “direct to market” issues within the scope of dealing as principal (because any intermediary used, whether a traditional intermediary or crowdfunding platform, would itself be regulated), wherever the proceeds were to be used to on-lend or invest. Alternatively, it could have extended the scope of the MiFID investment service of “execution of orders on behalf of clients” to cover NTDS.
For the second option, brining non-transferable securities within the scope of s85 would mean that any offer of over €8m would need a prospectus unless otherwise exempt. The potential problem would be that prospectuses are long and complex, and research had shown that mini-bond investors were struggling to digest the information they currently get.
A third option, of not changing the law, but relying on FCA’s measures to control the marketing of SIS and to create the financial promotions gateway was also mooted.
Ultimately, Treasury has concluded that bringing offerings within the scope of the public offering regime would create the possibility of capturing more firms than the regulated activities route, would implement the Gloster recommendation of giving FCA more powers over distribution, and would not involve the risk of issuers involving intermediaries to avoid authorisation.
So, in principle, this is the planned route. However, the Government has warned that if it does not work, it may reconsider the regulated activities option.