Understanding market sounding in the UK: a guide to wall-crossing

Introduction

Market sounding is an essential process in the UK financial markets, particularly for capital raising and corporate finance transactions. It involves engaging with potential investors to gauge their interest in a specific investment opportunity before a formal offering. It matters especially in the context of wall-crossing: selectively disclosing material non-public information (MNPI) to certain parties while complying with the regulations. This article explains how market sounding works in the UK and how it relates to wall-crossing.

What is market sounding?

Market sounding is a technique companies and financial institutions use to assess market conditions and investor appetite for a potential transaction. It involves informal discussions with selected investors or analysts to gather feedback on pricing, structure and overall interest in a proposed offering, such as an initial public offering (IPO), a bond issue or an M&A transaction.

Benefits of market sounding

• Investor insights: market sounding provides valuable insight into investor preferences and concerns, helping issuers tailor their offerings to what the market wants.
• Pricing guidance: engaging with investors helps issuers understand where pricing is likely to land, so they can set more attractive terms.
• Risk mitigation: by gauging interest before launching a transaction, issuers can identify potential roadblocks and adjust their plans accordingly.
• Relationship building: market sounding builds relationships between issuers and investors, improving communication and collaboration.

Wall-crossing explained

Wall-crossing is a critical concept in the UK’s regulatory framework, particularly under the Market Abuse Regulation (MAR). It refers to selectively disclosing MNPI to certain parties, such as investors or analysts, under specific conditions. It is necessary for conducting market soundings, because it lets issuers share relevant information without breaching insider dealing laws.

Key aspects of wall-crossing

• Material non-public information (MNPI): information that could significantly affect a company’s share price if made public. Examples include earnings reports, merger discussions and product launches.
• Legal framework: under MAR, issuers must make sure any wall-crossing is carried out in line with regulatory requirements. That includes documenting the process and ensuring everyone involved understands their obligations.
• Confidentiality agreements: issuers will often require investors to sign confidentiality agreements before any discussion involving MNPI. This protects sensitive information and helps prevent leaks.

The market sounding process

1. Planning and preparation

Before starting a market sounding, issuers should develop a clear strategy. That means identifying the target audience, deciding the key messages and preparing the necessary materials. It’s crucial to have a well-defined rationale for the transaction and to anticipate investors’ questions.

2. Conducting the sounding

Issuers approach a select group of investors to gauge their interest, through one-to-one meetings, conference calls or informal discussions. During this phase issuers may share MNPI, so they must take care that every party understands the confidentiality and regulatory implications.

3. Analysing feedback

After the soundings, issuers should analyse the feedback received. It can help refine the offering, adjust pricing and address concerns raised by potential investors.

4. Making decisions

Based on what the sounding revealed, issuers can decide whether to proceed with the transaction, modify its terms, or postpone it until market conditions improve.

Regulatory considerations

Market sounding and wall-crossing in the UK are subject to strict regulatory oversight. Issuers must follow the guidelines set by the Financial Conduct Authority (FCA) and the provisions of MAR. Key considerations include:

• Documentation: keep thorough records of the market sounding process, including the identity of participants and the information shared.
• Investor selection: make sure the choice of investors for a market sounding is appropriate and justified.
• Timing and disclosure: be mindful of the timing of disclosures and make sure they do not conflict with any ongoing trading restrictions.

How DealBridge can help

Handling the complexities of market sounding and wall-crossing can be challenging, and DealBridge offers a solution that simplifies the process. With our platform, issuers and their advisers can manage investor engagement and compliance efficiently, with every communication securely documented in line with regulatory requirements. Our tools help identify potential investors, carry out market soundings and track feedback, so decisions can be made quickly and on good information.

Learn about DealBridge