A balancing act - removing barriers to listing whilst maintaining reputation: The FCA's primary markets effectiveness review
Hot on the heels of HM Treasury's consultation on the prospectus regime, on 5 July the FCA published a consultation on the effectiveness of the primary markets. The consultation firstly looks at ways of improving the efficiency of the listing regime and secondly proposes targeted changes to remove barriers to listing.
The FCA seeks to address, and build upon, the proposals of the Kalifa Review of UK FinTech and Lord Hill's UK Listing Review.More broadly, this review is driven by a goal of increasing the UK's share of global IPOs and, in particular, boosting the attractiveness of London markets for technology companies.
Given that the Kalifa Review of UK Fintech noted that a third of fintech firms surveyed expected to undertake an IPO in the next five years, a review seems timely. As is evident from HM Treasury's prospectus review, Brexit has prompted a fresh examination of the regime and in particular a drive to tailor it to meet the needs of the UK market, with the FCA stating that the main objective is to "ensure that the UK remains an attractive place to grow and list successful companies".
1. Making the listing regime more effective
Four possible listing models
- Model 1: a single segment for UK listed companies and minimum possible requirements for eligibility for listing – Under this model, eligibility would be pared back to minimum requirements, such as publishing a prospectus; requiring systems and controls for complying with MAR; and publishing relevant documents on decision-making. This is a radical proposal which would remove some of the key elements of the current premium listing regime, such as provisions on track record; shareholder protection; governance and the requirement for a sponsor. The FCA says that disclosure could be used to ensure the maintenance of investor protection and market integrity, but it would not expect to set its own minimum standards and levels for the outcomes of these disclosures. Trading venues and indices would be likely to set their own admission criteria and possible continuing obligations. Although such lowering of the regulatory burden may be attractive to certain issuers, and it is imperative that the UK's markets remain competitive with other trading venues, the FCA will need to be mindful of the risk of undermining the reputation for quality expected from a London premium listing which could negatively impact investor confidence.
- Model 2: a single segment for UK listed companies with both eligibility and continuing obligations raised to that in the premium segment – This would move the listing regime back towards that which was in place for UK companies before the introduction of EU minimum requirements for listing, and would remove the standard listing segment. The need for a sponsor would be maintained and FCA approval and shareholder approval would still be required in prescribed circumstances. The FCA would also continue to encourage best practice in areas such as corporate governance and climate-related financial disclosures. Although this model involves a higher standard of protection for shareholders, it may have an impact on the number of companies listing due to the lack of choice and the higher-standard-fits-all approach. In particular, the standard listing regime currently preserves flexibility for international companies operating in jurisdictions with different corporate governance norms which are not compatible with the Premium Listing Principles. Under this model, growth companies and overseas companies which are unable or unwilling to comply with these requirements would have to apply to an "unlisted market".
- Model 3: two broad segments for UK listed companies (enhanced version of the status quo) – This would comprise: (i) a "senior" segment aimed at companies with an established track record, which would contain additional requirements on shareholder protection and governance; and (ii) an "alternative" segment with minimum eligibility requirements. The FCA says that the latter could be primarily aimed at companies with particular strategies, for example those that are acquisitive in nature or start-ups. Indices could continue to use admission to the "senior" segment as one of their inclusion criteria.
- Model 4: two segments for UK listed companies but allowing the market to set minimum standards for the "alternative" segment – This is based on the UK Listing Review proposal. It is broadly similar to Model 3, but the FCA would allow market discipline to set the minimum requirements for the alternative segment. The FCA's role would be limited to verifying basic eligibility information for securities, approving prospectuses and setting certain ongoing disclosures. Issuers may need to agree features such as free float requirements with potential investors on a case by case basis or they could be set by the trading venue. As, under this model, companies in the "alternative" segment may include additional corporate governance measures and may therefore be similar to the "senior" segment, admission to the "senior" segment may no longer be a prerequisite for index inclusion.
Removing duplication between admission to Official List and admission to a trading venue
The FCA is not proposing any changes to the IPO process but questions whether, in fundraisings where further securities are being admitted to the Official List, there is still any value in both the FCA and the London Stock Exchange conducting parallel processes. It is considering an alternative process where it would admit a class of securities, rather than individual securities, to the Official List, which would mean that issuers would no longer need to apply to the FCA for the admission of further issues to the Official List. The FCA asks whether this would lead to an increase in legal uncertainty. This question overlaps with the proposal in the Treasury's consultation on the prospectus regime as, under the two sets of proposals, further issues would no longer be dealt with under the public offer rules or any rules on admission to trading. However, the FCA would have power to set disclosure requirements for further issues.
2. Proposed changes to the listing rules
The key changes can be grouped into four categories:
- Allowing dual class share structures within the premium listing segment in certain limited circumstances – Having a dual class share structure is currently incompatible with the Listing Rules applying to premium listed companies. It is proposed that there would be an exception to the rule that currently restricts votes on matters relevant to premium listing to holders of premium listed shares only, so that holders of unlisted weighted voting rights shares could also participate in these votes on a "one share one vote" basis. The matters in which holders of such shares would be able to participate include (amongst others): approving the cancellation of a listing; approving a class 1 transaction; and approving related party transactions. The exception would only be available for shares meeting the conditions for specified weighted voting rights shares. These conditions are that:
- they entitle the holder to more than one vote per share on votes to remove the holder as a director of the company;
- in the event of a successful change of control, they allow the holder to exercise weighted voting rights in all circumstances;
- they set a cap on weighted voting rights relative to ordinary shares of 20:1;
- they require holders to be limited to directors of the company at the time of IPO, or following the death of a director, a beneficiary of the director’s estate; and
- they include a mechanism for the end of the five-year period, for example the conversion of the weighted voting shares to ordinary shares or their expiration.
The exception would only be available for new issuers and it is proposed that, for each issuer, it is only available for up to five years from the date on which the company first had a class of ordinary shares admitted to premium listing. The FCA believes the change would encourage "innovative, often founder-led companies" onto public markets sooner. A dual-class structure was used by Deliveroo PLC and partly blamed for the company's poor debut.
- Increasing the minimum market capitalisation threshold to £50 million – The FCA considers the current minimum market capitalisation requirements (which apply to both premium and standard listings) to be out of date given the market value growth since the requirements first came into being – this pre-dated the EU requirements and has not changed in the UK since 1984. The FCA believes raising the market capitalisation will give investors greater trust and clarify about the types of company with securities admitted to different markets, which will in turn improve confidence in public markets. This change also works alongside the proposal on reduced free float requirements (see below). This requirement would apply only for new listings and would not be a continuing obligation for currently listed companies. There should therefore be no disruption to existing issuers, but the FCA points out that SPACs may need to consider how these new rules may affect future acquisitions.
- Reducing the free float threshold from 25% to 10% – The FCA notes that the current requirements appear to impose more burdens on issuers compared to those of other jurisdictions. Its analysis suggests that its proposal on lower free float at IPO does not create significant risks of unintended consequences for liquidity. The proposal to reduce the free float applies to both IPO and as a continuing obligation and the ability to apply for a modification would be removed.
- Making minor rules changes for simplicity and to reflect market practice – The FCA is proposing changes to the Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules to ensure they are simplified where appropriate and reflect current business practices.
In relation to track record requirements – another issue that has been hotly debated for some time and is often seen as an impediment to listing – the FCA states that whilst it is not putting forward specific proposals at this stage, it seeks to provide clarity on its willingness to provide flexibility around existing requirements. It seeks views on specialist companies that are struggling to meet the existing requirement.
The consultation remains open until 14 September 2021. The FCA hopes to make final rules by late 2021 to give certainty for listed companies considering funding rounds in Q1 2022. As stated above, the measures that are being consulted on in this publication are forward-looking and are intended to apply to new applicants, rather than affecting issuers with existing listings.