Destination London – Evolving In The Face Of Global Competition For IPOs

Well-functioning equity markets play a vital role in modern economies. They propel growth for companies by giving access to capital, and in turn create jobs and improve living standards. Investors are then encouraged to provide the capital companies need, so they can generate the returns their own customers demand, such as those saving for retirement. However, the rule setters for equity markets face an important challenge. Robust rules are needed to protect investors from low-quality or potentially fraudulent issuers. These rules will govern, for example, which companies can list, how their share classes are structured and the information they need to provide.

At the same time, the rules need to be flexible enough to attract companies in different stages of their life cycles. Requiring several years of audited accounts can make sense but may also prevent start-ups from accessing the capital they need to grow. Equity markets also need the flexibility to embrace innovation, as seen with the emergence of special purpose acquisition companies (SPACS) in the last couple of years. London, long seen as a bastion for its high standards of regulation and corporate governance is facing up to ever-increasing competition from international jurisdictions. These standards however, have limited the flexibility of the Listing Rules. This is important when stock markets are competing globally to attract new listings, and companies have the freedom to choose which regulatory regime suits them best. The companies of the future, often tech-driven and looking to scale rapidly are those that tend to most value this flexibility.

There is evidence that London has missed out on listings as a result, despite its standing as a global financial centre. The Kalifa Review of UK Fintech (published in February 2021) estimated that between 2015 and 2020, the UK accounted for only 4.5% of listings globally, versus 39% for the US. One of the review’s recommendations was to “improve the listing environment through free float reduction, dual share classes and relaxation of pre-emption rights”. The Government is aware of the issue and keen to ensure the UK is as competitive as possible. The Treasury-commissioned UK Listing Review, led by Lord Hill, was published in March 2021. It noted that the largest companies listed in London were “either financial or more representative of the ‘old economy’ than the companies of the future.” The review recommended reforms to the listing regime, to persuade fast-growth companies, including from the tech sector, to float in London.

The Financial Conduct Authority (FCA) has moved quickly in response to the Hill review, with meaningful changes already made to the Listing Rules and more due to follow. In August 2021, revisions to the Listing Rules came into effect to facilitate the listing of SPACs in London, with its first launching in November of the same year. This brought London’s rules closer to those in other jurisdictions, such as Wall Street, while maintaining a number of investor protections. These include the requirement for shareholder approval of any acquisition and the ability for investors to exit a SPAC before it completes a transaction.

In December 2021, the FCA introduced new rules governing dual class share structures, minimum free floats and minimum market capitalisations. Dual share classes are often popular with company founders, since they allow them to maintain control of the business while tapping public markets for capital. However, other investors are at a potential disadvantage, since they have fewer voting rights than if there was only a single share class. Many of the major stock exchanges allow dual share classes, including key US, European and Asian exchanges. However, companies seeking a premium listing in London were previously allowed only one share class. The new rules allow dual classes for London listings, again with investor protections in place, such as a five-year time limit on the dual classes and restrictions on the weighting of votes.

At the same time, the minimum free float has reduced from 25% to 10%. While the FCA noted that the reduction would not affect most IPOs, since free floats are typically well above 25%, the new minimum brings London into line with other leading exchanges and adds flexibility. Finally, the minimum market capitalisation has increased from £0.7m to £30m. This increases investor protection, since the majority of companies where the FCA identifies issues, such as high share price volatility or suspicious trading activity, are below the £30m threshold.

“It’s crucial that markets are open to change and evolution in order to remain attractive for listings. Companies looking to float do have options around the globe, they can list in any market of their choosing. Dual class share structures for example allow London to compete with other exchanges – if London doesn’t allow them, companies may choose to IPO elsewhere.” Robin Walker, EQ’s IPO Specialist

In May 2022, the FCA published a discussion paper on the UK Listing Rules. This proposes some significant changes to the regime, including a single segment for new listings, rather than the current primary and standard segments. All companies will need to meet the same eligibility criteria, removing the current requirement for a three-year financial track record. Instead, investors will decide whether to invest based on the contents of the prospectus. The proposal of a single segment for new listings is in essence a ‘levelling-up’ in London, bringing it in line with other exchanges. It means there are no intrinsic steps of additional hurdles for firms in London, making it a more balanced playing field. 

Under the proposals, there will be a core set of ongoing obligations, aimed at ensuring transparency and protecting investor interests. Companies will also be able to opt in to a further set of obligations, which give shareholders a greater role in holding the company to account (for example, by approving major transactions). This choice will depend on each company’s circumstances and the views of its current and potential investors.

The discussion period for the FCA’s paper closes at the end of July 2022, so the final shape of these proposals is yet to be determined. However, they indicate the FCA’s desire to build on its progress to date, ensuring that the Listing Rules are sufficiently flexible to be globally competitive, while maintaining the UK’s reputation for high standards and investor protection.

Whatever the final outcome, it is likely companies will find it increasingly easy in the coming years to structure an IPO in London in the way that suits their specific requirements. This should help the London market to secure more technology stocks, which in turn will give investors greater choice and attract a deeper pool of capital for companies to tap into. Our hope is that these reforms will contribute to a robust pipeline of UK IPOs, benefiting companies and investors alike.