The UK’s financial watchdog has proposed to overhaul the IPO (initial public offering) process, saying investors should get information earlier on companies seeking to join the stock market. Unfortunately retail investors - namely the general public - have so far been ignored in the reform review and are unlikely to benefit from any of the mooted changes.

The bulk of the FCA’s review focuses on anti-competitive practices in investment banking. One concern in particular is the lack of independent research on a company seeking to join the stock market.

Analysts from banks working on an IPO get favoured access to the issuing company’s management, implies the FCA. The watchdog suggests that analysts unconnected with the parties running the IPO should be invited to meet management in order to produce independent research.

Of the 169 IPO transactions examined by the watchdog, only one flotation featured ‘unconnected’ research published during the IPO process.

‘The only source of information on the company provided to investors during the investor education period, beyond possible coverage in the media, is connected research,’ says the watchdog. ‘Arguably, this research has the potential to be at heightened risk of bias due to potential pressure on connected analysts to produce favourable research.

‘Inadequate or biased analysis could lead to inefficiency in the price formation process or inappropriate investment decisions.’

While the FCA is right to encourage greater levels of independent research, it doesn’t mean that the general public will suddenly be able to access this information. Research documents are off limits to retail investors at the best of times, as we wrote in this column last week (14 April).

Fighting for the little guys

We’ve long campaigned at SHARES for retail investors to be given access to admission documents and prospectuses before a company’s shares begin trading on the London stock market.

These are the best ways for someone to learn about a company, its financial history, and its risks and potential rewards. You need to study them in order to make an informed investment decision.

AIM companies are meant to publish their admission document at midnight before the trading day begins, giving eight hours to research the stock before the market opens. That is inadequate, in my opinion.

Firstly, who stays up all night to research a stock? Secondly, common practice is for the admission document to be published after the market opens for trading.

I spoke to a corporate financier who, on the grounds of anonymity, said the system could easily change in the favour of retail investors. Advisers must submit an AIM admission document to the London Stock Exchange three days before the flotation date, providing ample time to distribute the information publicly.

‘It would be easy to let the public see this document 24 hours before flotation; if not then the flotation date should be extended by a day,’ says the financier. ‘Companies will have spent up to six months preparing for the float, what’s another day if it lets retail investors have time to study the documents?’

A prospectus for a Main Market listing will be completed well before the float date, yet very few companies make that document public in advance of the flotation unless they are offering shares in the IPO offer to retail investors.

Blue in the face

A rare exception earlier this month was Main Market-listed miner Bluebird Merchant Ventures (BMV) which published its prospectus six days before its shares began trading on 13 April.

Interestingly it has been one of the few IPOs in the past year not to see a spike in demand on day one. In fact, its share price fell more than 20% on the first day as it appears pre-IPO investors took the first opportunity to get out.

It is too early to tell if the early publication of its prospectus had anything to do with the limp investor demand, but it only takes two minutes’ review of the document to realise the company looks suspect.

The group was set up in 2014 but has generated no revenue to date. It is buying copper ore from local miners to be processed by a partner and then sold to a smelter in concentrate form. It also has a stake in a small gold exploration prospect.

The prospectus reveals the company’s metals trading arm ceased to have a supply deal with a copper smelter as of December 2015 and hasn’t actually completed a commercial transaction, only a test shipment.

A quick chat with the company reveals that it expects a high profit margin from metals trading. This is an immediate red flag - trading is a low margin activity which implies something in the supply chain is unsustainable. If it looks too good to be true, it probably is.