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FCA examines UK listings rule change

Author: ICAEW Insights

Published: 07 Jul 2021

The Financial Conduct Authority has launched a consultation into reforms designed to increase the attractiveness of London as a place for high-growth tech companies to raise equity capital via an Initial Public Offering.

The move follows concerns that the London Stock Exchange, itself a business, may be losing out to the US particularly when it comes to the listing of high tech companies.

Proposals to allow companies with dual classes of share to have a premium listing to encourage innovative, often founder-led, companies onto public markets sooner, and so broaden the listed investment landscape for investors in the UK, are among the changes being touted.

The consultation will also seek feedback on reducing the amount of shares an issuer is required to have in public hands, the so-called ‘free float’ rule - from 25% to 10% and increasing the minimum market capitalisation threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £50m. 

Clare Cole, Director of Market Oversight at the FCA, said the regulator was acting assertively to meet the needs of an evolving marketplace. “Effective public markets are critical in enabling companies to finance their businesses, which in turn creates growth and jobs for the UK economy,” commented Cole. “These proposals are essential if we intend for the UK to continue to be a modern and dynamic market.

“Our proposals should result in a wider range of listings in the UK, and increased choice for investors while we continue to ensure appropriate levels of investor protection. They are intended to encourage high quality companies to list earlier, and so increase the possibility of a wider investor base being able to access growth in these companies.”

Two reviews - the Kalifa Review of UK FinTech in February and the UK Listing Review published in March, chaired by Lord Jonathan Hill, made specific recommendations for improvements to the regime. The FCA said its suggested reforms seek to address and build on their proposals to ensure that the UK remains an attractive place to grow and list successful companies.

More companies raising capital on public markets at an earlier stage in their life cycle means more opportunities for investors to share in the returns of those companies as they grow.

However, according to the UK Listing Review, the number of listed companies in the UK has fallen by about 40% from a recent peak in 2008. Between 2015 and 2020, the UK accounted for only 5% of Initial Public Offerings (IPOs) globally.

The changes aim to reduce barriers to listing for companies and increase the range of investment opportunities for consumers on UK public markets. The FCA is also proposing measures to ensure the listing regime continues to have high standards of market integrity and to simplify its rulebook.

David Petrie, ICAEW’s Head of Corporate Finance, told ICAEW Daily: “ICAEW’s Corporate Finance Faculty looked at the issue very carefully when we responded to Lord Hill’s review; we hosted two round tables and carried out analysis of dual class companies listed in the US and we found that dual class shares companies had in fact significantly outperformed companies with more traditional share structures. 

“However, the reason for this outperformance has little to do with the structure of shareholdings, rather it is directly related to their business model. Those dual stock companies that have outperformed their traditional rivals over the past 18 months or so have tended to be tech businesses that have done particularly well during the pandemic. And the technologies they are developing have proven to be highly profitable and therefore the shares were particularly attractive to institutional investors. But of course recently, there has been a bit of a sell off of tech stocks, whilst traditional businesses that suffered in lockdown still look under-valued”. 

Petrie said that while changing the rules could make it more attractive for certain tech companies to list in London, the fundamental principles of valuation remain and it would not necessarily result in tech companies abandoning the US in favour of a UK listing. 

“Listed companies attract the highest valuations on the market that understands their technologies best,” commented Petrie. “The fact remains that tech companies with potentially global products typically attract higher valuations in the US, where analysts tend to understand them better, or are prepared to take a more aggressive view on the potential long-term future value of those businesses.”

Investor protections are necessary at IPO stage to ensure that ordinary class shareholders are not disadvantaged and are unable to sell their shares as and when they choose, Petrie added. 

ICAEW’s Corporate Finance Faculty will be responding to the consultation, which closes on 14 September 2021, and the faculty is keen to hear from members with interest and views on the subject. Subject to feedback and FCA Board approval, the FCA will seek to make relevant rule changes before the end of the year. 

Read the full FCA consultation - CP21/21: Primary Markets Effectiveness Review

ICAEW Know-How from the Corporate Finance Faculty

This guidance is created by the Corporate Finance Faculty – recognised internationally as a centre of professional excellence in corporate finance. The Faculty is the largest network of professionals involved in corporate finance and represents the interests of its members with policymakers and facilitates a highly effective business development network.

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