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FCA Consultation: Improving the effectiveness of the UK primary markets?

21/07/2021

At a glance

Earlier this month, the FCA published its latest consultation paper  on a series of proposed reforms to improve the effectiveness of UK primary markets following both the recent UK Listing Review and the Kalifa Review of UK FinTech.

Corporate partner Kieran Stone provides a summary of some of the points raised in the consultation, together with his thoughts, particularly in the context of the proposed changes resulting from the UK Listing Review which he has previously commented on here.

“What is clear, is that whilst the majority of proposed changes are to be strongly welcomed, others less so, particularly in light of one of the stated purposes of the consultation – to remove barriers to listing.”

 

In brief the consultation covers a number of areas:

  • allowing a targeted form of dual class share structures within the premium listing segment;
  • increasing the minimum market capitalisation threshold for premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £50 million;
  • reducing the free float requirement for premium and standard listed companies from 25% to 10%, both at listing and as a continuing obligation;
  • showing more willingness to provide flexibility around existing requirements for the financial track record of premium listed companies; and
  • making minor amendments to the Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules to simplify the FCA’s rulebooks and to reflect changes in technology and market practice.

In addition, the FCA is seeking views on the overall structure of the listing regime and whether wider-reaching reforms could improve its longer-term effectiveness.

Saving AIM?

The FCA clearly has the standard segment of the Main Market in its sights, believing that many view the segment as inferior to a premium listing, with no defined purpose.

To a certain extent, this was to be expected. In recent years there has been a boom of companies seeking listings on standard, driven in part by a perceived ‘tightening up’ of AIM’s regulatory regime and increased barriers to listing, but also a realisation that the market offers an excellent route to market – in particular for overseas companies – without the need to engage banks on the transaction.

AIM’s one clear advantage to date has been the ease of raising capital on the market when compared to standard. In brief, unless making an offer to the public, a company is not required to issue a prospectus and will often undertake the fundraise with minimal documentation and as many times as is needed. The Listings Review threatened this advantage by removing the restriction on Main Market companies issuing more than 20% of their share capital in a 12 month period without a prospectus, and bringing it in line with AIM – effectively removing AIM’s USP and threatening its future when compared to standard.

The FCA’s proposals clearly look to counterbalance the proposals set out in the Listings Review and shift the focus back on to AIM by limiting accessibility to standard, through the increase in market capitalisation requirement and potential elimination of the segment altogether.

Increase in market capitalisation

At Memery Crystal, whilst we understand the FCA we have been incredibly active in listing companies on the standard segment. Dual-listing a number of high quality overseas companies (Yamana, Pure Gold, Taseko) who have benefited from access to London’s deep investor pool, liquidity and enthusiasm for their business. We have also advised smaller cap companies on IPOs on the standard segment, with experienced boards with minimal capital requirements benefiting from the reduced costs of not having to engage a nominated adviser/sponsor and providing a relatively inexpensive route to market.

However there is undoubtedly a view that there are a large number of small-cap companies who see an opportunity to avoid not just the cost, but also the regulatory oversight of a nominated adviser and are seeking a listing on a market that is not ‘designed’ to support their needs in the way that the AIM or AQSE markets are.

In the consultation, the FCA attributes this in large to the low market capital requirements (£700,000) for a standard listing. In the FCA’s eyes this low threshold encourages smaller cap companies which have a lower liquidity (and hence more volatility), but interestingly, also its belief that this leads then to expend considerable resources on engaging with applicants with lower market capitalisation that ultimately prove unable to meet eligibility requirements, leading to costs for both the prospective issuer and FCA.

Consequently the FCA has proposed increasing the minimum market capital of companies seeking a standard listing to £50 million. The clear implication that without the key differentiator of not requiring a prospectus to raise significant amounts of capital, this will ‘force’ smaller companies back to AIM/AQSE. There are a number of points that flow from this:

  • £50 million is a high threshold – particularly when ‘jumping’ from £700,000. Would an established £30-40 million company really not be capable of meeting the eligibility requirements?
  • Conversely there is no rationale for £50 million representing a threshold that will ‘guarantee’ that these proposed issuers are suitable for listing – particularly given the vagaries of calculating market cap for new issuers who are simply joining the market and not undertaking an IPO.
  • At MC we have seen that market cap is no indicator of a company’s quality or it suitability for market. We have seen a number of ‘small cap’ <£50 million companies join the market who, with the benefit of experienced boards and shareholder support, have flourished and grown to far exceed the £50 million threshold.
  • AIM is not always the best market for some issuers and the market itself, undeniably, can be less open than the main market – for example the recent listings of cannabis companies were all on standard for this precise reason. Further not all companies will be able to list on a ‘junior’ market.
  • This would potentially ‘squeeze’ a lot of existing cash shells that may not be in a position to undertake a £50 million transaction.

Whilst I, and my fellow Corporate partners, support the FCA addressing the large number of issuers seeking a listing on a market which may not be appropriate for them, and there is merit in increasing the minimum market capitalisation threshold, we feel that £50 million is too high and the stated goals could be better achieved through the evolution of the eligibility process with a greater emphasis on confirming the board’s experience and implementation of suitable controls, procedures and corporate governance.

One market for all

A point made by the FCA is a common complaint – the incomprehensibility of the listing regime, resulting from various jurisdictional / regulatory changes over the years. It is often remarked on that there is no ‘one’ listing, an issuer must seek admission to the FCA’s Official

List (also referred to as ‘listing’ on standard or premium) and admission to a trading venue (i.e. a regulated market or a MTF) as a means of publicly trading them. Further as noted above, there is, in the FCA’s eyes, some confusion over the role of the various segments. Consequently, the FCA has set out four models of how the listing regime could be structured with two ‘extreme’ options and two ‘iterative’ variations of the existing regime:

Model 1 – create a single segment for UK listed companies and set the minimum possible requirements for eligibility for listing;

Model 2 – create a single segment for UK listed companies and raise both eligibility and continuing obligations for all UK listed companies to that in the premium segment;

Model 3 – maintain two segments for UK listed companies (enhancing the existing rules); or

Model 4 – maintain two segments for UK listed companies but allow the market to set minimum standards for the ‘alternative’ segment.

Whilst we certainly agree that there is a degree of confusion over the listing process, we have some concerns over a proposal to remove the distinction between standard and premium and create ‘one’ main market (with either full or minimal regulation; or two ‘senior’ and ‘alternative’ segments with corresponding regulatory requirements. In particular, we have seen one of London’s strengths in the last few years has been attracted overseas companies who use the standard segment for dual listing, attracted by the prestige of being listed on London’s main market and its access to liquidity and capital and the fact that they do not have to double-up their regulatory burden. The rationale is obvious, for established companies operating on markets that are similar to London (i.e. ASX/TSX/JSE) a standard listing is attractive as essentially they already qualify for the market. Their existing regulatory obligations largely ‘fits’ with London.

If one market were created that either required a sponsor for all issuers, or a senior segment, this would force companies seeking a dual listing to subscribe to a level of regulation and supervision that may not be necessary. Similarly established overseas companies are likely to be put off or ineligible for listing on a lower regulation, junior or alternative segment. Further, it is hard to see the purpose of an ‘alternative’ segment given the presence of AIM and the FCA’s other proposed reforms or the benefits of a proposal that effectively mirrors the status quo (albeit in line with the proposal of the Listing Review to rebranding and remarketing the standard listing segment, noting that ‘the key feature of the newly branded segment should be emphasised as being its flexibility’ .

Of the four suggestions, we would support the creation of one market with simplified requirements equivalent to the standard model. This would simplify the markets, provide the FCA with a clearly defined role and provide ease of access to the market. Whilst there would be no obligation to appoint a sponsor, we have seen on recent standard listings that companies are happy to continue to appoint financial advisers to guide them and add credibility to their listing.

For a consultation with a stated purpose of improving access to London’s markets, it is critical that the FCA preserves the ease of access overseas listed companies have enjoyed to date.

Disclaimer: We at Memery Crystal (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors of articles published on our website(s) do not necessarily reflect the opinions, views, practices and policies of either Memery Crystal or RBG Holdings plc.

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