Overhaul of London's stock market listing regime set to significantly boost capital raising opportunities for high-growth and founder-led technology companies
In November 2020 the Government kicked off a review of the UK’s listing regime. The review was triggered by Brexit and the opportunity for London’s capital markets to move away from EU rules and regulations and boost its reputation as the IPO destination of choice for ambitious high growth private companies, including founder-led businesses in the all important technology sector.
This review process led to a set of recommendations published by Lord Hill – who led the review for the Government - in March 2021, swiftly followed in July by a consultation paper from the Financial Conduct Authority (FCA) which closed on 14 September 2021. Subject to consultation feedback and FCA Board approval, the FCA is seeking to make relevant rule changes by late 2021. The review and consultation process, which is the most significant review of the UK's listing regime in at least 20 years, could be a watershed moment for UK based technology companies and entrepreneurs.
What are the key changes?
Lord Hill proposed a package of 15 recommendations (one of which, relating to “SPACs” - special purpose acquisition companies which have enjoyed a boom on the US markets over the past 3-5 years – was implemented in August 2021) including, in particular, the three described below which are specifically aimed at enabling founder-led businesses, particularly fast growing technology companies, to come to the UK capital markets at an earlier stage of their development.
Permitting dual class share structures
Dual class share structures allow a shareholder, for example the founder, to retain voting control over a company. They are not currently permitted in the case of companies admitted to the “premium” segment of the Official List of the FCA (or to the AIM market) but are permissible within the “standard” segment. Lord Hill, in his UK Listing Review report, has recommended that the listing rules applicable to the premium segment be amended to permit dual class share structures. Historically, the premium segment is London’s “gold standard”, the market which seeks to attract the largest and best companies and provide them with the widest and deepest pool of liquidity.
As Lord Hill explains, two key risks for a founder bringing his/her company to market is their vision being derailed by being removed as a director/CEO and/or an opportunistic takeover bid at a conventional bid premium to the market price. With this in mind, Lord Hill recommended that the FCA make rulebook revisions to enable a “transition period” of up to a maximum of 5 years during which period a limited number of dual class restrictions should be permitted to alleviate these risks and encourage listings of founder-led companies. At the end of this transition period, companies would either need to “sunset” the restrictions or move segment at which point they could even expand the scope of their share restrictions, subject to shareholder approval.
The proposals enable creation of an unlisted class of shares with weighted voting rights, up to a maximum voting ratio of 20:1. This class of shares, which may only be held by directors of the company, or, following the death of a director, a beneficiary of a director’s estate, can have weighted voting rights in two circumstances:
- a vote on the removal of the holder as a director at any time; and
- following a change of control, on any matter (to operate as a strong deterrent to a takeover).
To help strike the right balance in terms of corporate governance / shareholder protection, the rules on controlling shareholder agreements will remain in place, as will the rules requiring the company to show that it is carrying on an independent business as its main activity.
Reducing the minimum free float percentage
Free float refers to the portion of a company’s issued share capital that is in the hands of public investors, as opposed to company officers, directors, or shareholders that hold 5% or more of the company (on the basis these are assumed to be strategic holdings which do not provide liquidity). These are the shares that are deemed to be freely available for trading, i.e., creating liquidity.
The listing rules currently set free float for both the premium and standard segments at 25% although the FCA can waive this requirement down to 20% on a case by case basis. Interestingly, the “High Growth Segment” (which is a segment of standard listing) has a 10% free float level but only two companies have used the High Growth Segment since it was established in 2013, so has not proved to be a successful initiative.
The FCA’s proposal is to reduce the required free float level to 10%. Having looked at available liquidity data, they are not convinced there is a direct correlation between free float and liquidity and given the purpose of the rule is to ensure liquidity the rule cannot be justified on this measure alone. On the flip side, they note that there is compelling evidence to suggest that the 25% figure can be a barrier to listing in the UK more especially as many global IPOs have a free float below this level and that other exchanges have much lower thresholds. Accordingly, the FCA are grasping the nettle and proposing to significantly alter this requirement, which will enable founders to time their capital raising and dilution of share ownership in a way that suits them best.
More flexible 3 year track record regime
Lord Hill’s review raised concerns that the current listing rules requirement for applicants to have a 3 year financial track record covering at least 75% of the business is unduly burdensome and a barrier to entry for growth companies that have been on a buy and build strategy or made disposals in the 3 years prior to listing. The rule requirement can mean, for example, that the company has to spend time and cost generating historical financial information on an asset/business that was disposed of 2 years ago, or on a business that makes up only a very small percentage of the company’s group, in order to meet the 75% requirement.
The FCA are unconvinced by the concerns raised by Lord Hill; they consider that only relatively few companies find the 75% requirement burdensome. Moreover, they make the very good point that the prospectus regime also requires companies to include additional information covering complex financial history, thus unless and until the prospectus rules are changed the benefit from changing the 3 year track record requirement will be of little benefit. Given this, they are not proposing to take forward his recommendation that the 75% requirement should only apply to the most recent financial period in the 3 year track record period unless respondents can provide further examples and evidence of the disincentive impacts this rule has on prospective listing applicants. If they can, then the FCA would be open to publishing further guidance on the scenarios in which waivers may be granted from the existing track record rules.
Notably, the FCA is proposing to increase the minimum market capitalisation (MMC) threshold for both the premium and standard segment for commercial companies from £700,000 to £50 million. The £700,000 is an historical legacy figure which has not been increased in decades. The FCA explain that raising MMC will not only give investors greater trust and clarity about the types of company with securities admitted to different markets, it will work well alongside the reduction in free float to set a minimum float for new IPOs of £5m. This will provide an additional safeguard to liquidity at IPO.
The message from the FCA is that smaller companies should consider alternative listing venues such as AIM or AQSE Growth Market. Both of these markets include mandatory nominated advisor (NOMAD) or corporate advisor appointments on a continuing basis who can provide guidance and advice to directors of smaller growth companies on their responsibilities and obligations, the premise being that because they are small they are immature and will likely need additional guidance and support.
The proposals are ambitious, as they need to be, given that between 2015 and 2020 London accounted for only 5% of IPOs globally. If the UK wants to grow giant technology companies like Amazon, Facebook and Netflix, it needs a rule book which will encourage them to list here, rather than overseas. Let's hope the FCA seizes the opportunity in front of them.
 In his report entitled UK Listing Review dated 3 March 2021.