FCA Listing Rules Changes

Introduction

The Context

Regardless of the challenges or opportunities presented by Brexit, London’s position as a global capital markets hub has been threatened for several years. The stats also paint a concerning picture. Between 2015 and 2020, London accounted for only 5% of IPOs globally. The number of listed companies in the UK has also fallen by about 40% from a peak in 2008.[1]

Furthermore, the types of companies listed in London are often traditional, ‘old economy’ companies rather than the younger and more dynamic companies a market like the NASDAQ attracts. The UK has the third most tech ‘unicorns’ in the world (after the USA and China), so the lack of tech listings is not because the UK lacks ‘new economy’ companies.[2] Evidently, London has been missing out on attracting young and exciting tech and life sciences companies for other reasons.

The purpose of the Effectiveness Review was not about making radical proposals to make a UK listing more attractive, but was about ‘closing a gap which has opened up’ and removing elements that ‘act as barriers’ to listing.[3] Indeed, one can see parallels with other markets in the major proposals.

The Changes

The Effectiveness Review made four key proposals, with a host of other smaller changes. The New Rules confirm the following key changes.

Dual Class Share Structures – now permitted on Premium Segment

Previously, the Listing Rules only allowed for a ‘one share, one vote’ structure. This change will bring the UK Listing Rules more in line with the markets in Hong Kong and Singapore, which already allow a dual class share structure.

A company with a dual class share structure is eligible for a premium listing, provided that the weighted voting shares meet the following conditions:

1. there is a maximum weighted voting ratio of 20:1;
2. the shares may only be held by directors of the company at the time of IPO or beneficiaries of such a director’s estate;
3. the weighted voting rights must only be available in two circumstances: a vote on the removal of the holder as a director of the company at any time, or, following a change of control, on any matter (to operate as a strong deterrent to a takeover);
4. the weighted voting rights shares must convert to ordinary shares on transfer to anyone other than a beneficiary of the director’s estate; and
5. there is a five-year limit on this share structure, after which the articles must provide for a way to convert these preference shares into ordinary shares or the company must de-list or move to a standard listing.

The aim of this change is to encourage founder-led companies to list and ensure that the founder still retains some element of control over the company.

However, with ordinary shareholders giving up some control of the company because of this share structure, it is likely the ordinary shares will trade at something of a discount leading to a lower market capitalisation overall.

Minimum Market Capitalisation – now £30m on both Segments of Main Market

The previous minimum market capitalisation for a Main Market applicant was £700,000 – this was introduced in 1984 but it had remained unchanged due to it being enshrined in EU legislation. Given economic growth since then, this was considered to be very much out of date. The Effectiveness Review proposed to raise this minimum to £50m, but following consultation feedback the New Rules include a reduced level of £30m. This change will apply to new listings only (allowing existing listings below £30m to remain unchanged).

The New Rules include some transitional provisions. For example:

• if a company has an existing listing, it may list an additional class of shares based on the previous market capitalisation;
• any completed application for an eligibility review submitted before 4pm on 2 December 2021 will have the old market capitalisation threshold applied, provided the company applies to list before 2 June 2023 and there is no material change to the business proposition during the transition period.[4]; and
• existing listed shell companies/SPACs can apply to re-list following a reverse takeover on the old market capitalisation threshold if they complete submissions for an eligibility review before 1 December 2023.

The idea in raising the minimum market capitalisation is to give investors more confidence in the quality of companies which have been admitted on each segment of the Main Market. Consequently, they are hoping the market volatility often associated with small-cap and micro-cap companies can be restricted to AIM and AQSE.

On paper, this change adds an additional barrier to listing and has been criticised by some. Standard listings have previously been popular amongst smaller and overseas companies, including so-called “cash shells” (see below). Smaller companies wanting to list in London would now have no choice but to list on AIM or AQSE, subject to the requirements of those two exchanges. The cost of switching a listing from AIM/AQSE to the Main Market at a later date could actually put investors off and undermine the appeal of a London listing. Or companies could choose to remain on the market on which they originally list for longer, as many (much larger) AIM companies have been content to do.

It is also possible that AIM/AQSE may consider offering a two-tier market, with segments for larger and smaller market cap companies.

AQSE has also just announced a rule change which requires ‘enterprise companies’ (an issuer whose predominant purpose or objective is acquisitions or mergers, or to finance and/or invest in securities or businesses) to raise at least £2 million in cash on the issue of shares on admission. The AIM Rules for Companies include an equivalent requirement for investment companies of £6 million. The effect of these rule changes is that the route to market in London for micro-cap shell companies (unable to meet these fundraising requirements, or, in the case of the Standard list, the new minimum market capitalisation threshold) is now effectively closed, at least across the principal London markets.

Free Float Requirements – now 10% on both Segments of Main Market

Previously, when listing on the Main Market, there was a minimum of 25% of a company’s shares in issue needing to be in public hands. The New Rules make this 10% at listing and as an ongoing obligation. The previous requirement was higher than many other international markets, including those within the EU.

Therefore, it is hoped that reducing the minimum free float requirement will encourage more companies to list in London.

The reason for the minimum 25% was to ensure liquidity in the market, however, analysis suggests that liquidity will not be dramatically affected with the lower obligation. International markets with a lower free float threshold have not suffered from an obvious reduction in liquidity. Many IPOs in the UK list with a much higher free float than 25%. This rule change will not affect this.

Track Record Requirements – No change

The current requirements are that a company must have at least three years of audited financial information covering at least 75% of the business. The FCA conceded that this can be a meaningless requirement for investors, particularly in high growth technology sectors. However, their analysis indicates that in most cases, a rule change would be costly and not have any real benefit for investors.

In an attempt to make London more attractive, the FCA considered expanding this exemption to more ‘specialist’ companies. These high-growth, innovative companies would have to show they are mature enough via means other than revenue. The consultation considered which types of companies may struggle to meet this threshold and what a suitable alternative might be.

The Effectiveness Review consulted on these requirements, but the New Rules do not make any changes. Instead, the FCA has indicated that it will consider this area further.

Conclusion

The New Rules have already taken effect and it will be interesting to see whether the rule changes have the desired impact in attracting more companies to the Main Market in London and increasing investor confidence in the market.

[1] P1 UK Listing Review

[2] 2.10 Effectiveness Review

[3] P9 UK Listing Review; 1.3 Effectiveness Review

[4] What constitutes a ‘material change’ has not yet been defined by the FCA.