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In response to both the UK Listing Review and the Kalifa Review of UK Fintech, published in March and February this year, respectively, the Financial Conduct Authority (FCA) has now published a consultation paper (CP21/21) on the further proposed changes it intends to make to the UK Listing Regime.
The reviews called for changes to the UK equity capital markets to make London a more attractive venue for public listings.
This included changes to the Listing Rules to better cater for special purpose acquisition companies (SPACs) – amendments that came into force on 10 August 2021.
Part 1 of CP21/21
The FCA is seeking views on four "models", each of which propose a different structure for the Listing Regime.
In summary, these models are as follows:
Model 1: Single segment for UK-listed companies and set minimum possible requirements for listing eligibility
This would remove the dual primary/secondary regime currently in operation for UK-listed companies.
Model 1 focuses on the concept of listing on "minimum eligibility", with listing requirements including:
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Ensuring investors have sufficient information to make an informed assessment (i.e. through the publication of an admission document);
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Requiring systems of controls for complying with market abuse regulations and maintaining ongoing disclosure responsibilities (i.e. those included in the DTRs); and
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Requiring publication of relevant documents on decision-making.
Model 1 seeks to maintain investor protection via disclosures made by the issuer (e.g. disclosures relating to the level of adherence to the UK Corporate Governance Code).
Model 2: Single segment and raise both eligibility and continuing obligations for the premium segment
Unlike Model 1, this would involve a single segment that mirrors the current premium listing requirements.
The secondary segment would be removed entirely, and overseas companies seeking a UK listing would need to comply with the same listing rules as UK companies, or seek admission to an unlisted market.
Model 3: Maintain two segments for UK listed companies (enhancement of the status quo)
This would retain the current dual regime, with a "senior" segment aimed at companies with an established track record, requiring enhanced shareholder protection and governance measures.
The eligibility requirements for the junior "alternative" segment would mirror the minimum eligibility requirements set by the FCA as described in Model 1.
Model 4: Maintain two segments for UK listed companies but allow the "alternative" segment's minimum standard to be set by the market
Unlike under Model 3, Model 4 proposes a structure based on the Listing Review's proposal, whereby the "alternative" segment's minimum eligibility requirements are set by market discipline, and not the FCA.
Under this approach, the FCA would adopt a limited role, restricted to verifying basic eligibility information and approving prospectuses to ensure market integrity.
For example, under Model 4, issuers may choose to agree certain features of their float with their potential investors, who may be more tolerant to lower free float percentages for larger, more established companies.
Removing the duplication between admission to the Official List and admission to a trading venue
CP21/21 also discusses the potential value of removing the duplication between both the FCA and the relevant trading venue conducting parallel processes in the admission of further issues of securities to the Official List.
Instead, it proposes that a class of securities be admitted to the Official List, rather than individual securities, which would result in issuers no longer having to apply to the FCA for admission of further issues of shares.
Consequently, CP21/21 is inviting responses as to whether legal uncertainty would arise as a result of the FCA no longer performing the role of admitting further issues to the Official List, and whether there would be any resultant regulatory or tax implications.
Part 2 of CP21/21
Dual class share structures
The reviews recommended amending the Listing Regime to enable companies listed on the premium segment to adopt dual class share structures (DCSS), subject to certain conditions.
DCSS allow shareholders to obtain voting control over a company that is disproportionate to their financial interest.
They have historically been strictly regulated by the FCA under the premium segment's principle of "one share, one vote", and are currently only permitted on the standard segment, pursuant to Listing Rule (LR) 9.2.21R.
Minimum market capitalisation
CP21/21 also proposes increasing the minimum market capitalisation (MMC) for both the premium and standard segments from £700,000 to £50 million (excluding close-ended investment funds and open-ended investment companies).
This measure is underpinned by the FCA's belief that companies that do not meet this threshold are more suited for admission to AIM or the AQSE Growth Market, where they can benefit from the ongoing support of a nominated adviser (Nomad) and an investor base more attuned to the risks associated with investing in smaller companies.
Free-float reduction
Raising the MMC of the premium and standard segments will work in tandem with the FCA's proposal to reduce the proportion of shares required to be held in public hands to 10% (from 25% currently).
Together, these measures together will ensure a minimum float value of £5 million at IPO, putting the UK on a par with markets such as Euronext.
While this proposal is lower than the Listing Review's suggestion of a 15% free float, CP21/21 does not propose to amend the definition of "free float" in line with the Listing Review, which called for this definition to be broadened to include institutional investors, so that these parties would count towards the public hands threshold.
The FCA states there is a general expectation that a company should have a minimum amount of public shares to be considered "public".
The FCA rejected fears that this reduction in free float size might undermine market liquidity, and points to evidence provided by the London Stock Exchange showing no significant decrease in liquidity at free floats below 25%.
Using data from PwC, CP21/21 highlights that many of the main global IPOs take place at a free float between 25% and 10%, and that the current requirements of the UK regime exceed its competitor jurisdictions.
For example, the NSYE and the NASDAQ have no free float requirement at all and recently hosted the listings of ride hailing companies Uber and Lyft respectively, which each had free floats below 13%.
Track record requirements
Pursuant to LR 6.2, companies seeking admission to the Main Market must have a three-year financial track record covering at least 75% of its business to be admitted.
This is designed to ensure investors can view the performance of the business they are potentially investing in over a sufficient period of time, as well as acting as a pricing safeguard for the market.
However, the Listing Review saw this requirement as a potential barrier to listing, especially for companies that are highly acquisitive in the run-up to floatation, and so would struggle to comply with this rule.
CP21 notes that track record requirements are also part of the prospectus regime, and would require primary legislation to amend (the Treasury recently launched a consultation on this, which may result in the FCA being given greater authority).
Following the outcome of this consultation, the FCA will consider track record requirements as part of a wider review of the current prospectus regime.
However, the FCA does not believe the current track record requirements are a burden for most issuers, and that removing this criterion would result in less information for public markets to base investment decisions on.
Minor changes to the Listing Rules: Disclosure Guidance; Transparency Rules; and the Prospectus Regulation Rules
CP21/21 is also consulting on making minor amendments to the Listing Rules (LRs), Disclosure Guidance and Transparency Rules (DTRs) and Prospectus Regulation Rules (PRRs) to accommodate changes to modern business practices and technological advances.
These proposals are set out in Chapter 9 of CP21/21, and are not expected to significantly shift market practice.
The mooted changes involve removing conflicting requirements that have arisen as a result of changes made to the Prospectus Regulation before the UK's withdrawal, and modernising administrative requirements, such as removing the need to produce multiple copies of certain documents.
The amendments will also see the implementation of gender-neutral terminology.
Next steps
CP21/21 is open for responses until 14 September 2021. Subject to FCA board approval and the feedback received, the FCA will seek to implement changes to the Listing Regime in late 2021.
It will also provide a further consultation should this be appropriate. Responses can be submitted on the FCA's website, or by email to: cp21-21@fca.org.uk.
This article was authored by Jack Mason-Jebb, corporate solicitor at Fieldfisher.
