The review of the UK Listing Rules was launched by HM Treasury (the Treasury) late last year and has made a number of wide-ranging recommendations of relevance for our tech and life sciences clients who have ambitions to go public by way of an IPO or Special Purpose Acquisition Company (SPAC). Some of the key recommendations involve changes to:
- Allow dual class share structures in the London Stock Exchange’s (LSE) premium listing segment;
- Liberalise the rules regarding SPACs that will level the playing field for LSE SPACs in relation to the U.S. and European competitors;
- Reduce free float requirements;
- Make it easier for companies to provide forward-looking financial information, both at the time of listing and afterwards;
- Increase the appeal of the LSE’s standard listing segment to companies of all sizes and types;
- Tailor financial statements to fit the business models of innovative growth companies; and
- Undertake a fundamental review of the prospectus regime.
These proposals make London listings a more attractive option for technology and life sciences companies and, in our view, come at an opportune time given the trajectory of fast growing companies considering a London listing. The stated purpose of the recommendations are intended to encourage fast growing companies to list in London at an earlier stage of their growth cycle, in line with developments in other jurisdictions and to increase the attractiveness of listing in the UK for issuers when set against the choice of global markets that they have at IPO, as well as the wider choice as to whether to go public or stay private. Lord Hill’s commission (the Commission) cited a main driver to be the possibilities offered by the strong potential pipeline of tech IPOs if those issuers can be persuaded to list in London. The Commission recognised that despite the UK’s strengths in technology and life sciences, too few of the innovations we have seen have led ultimately to UK companies coming to the public markets in London. In certain sectors, an IPO on the Nasdaq will continue to be the most likely path (this has been the most popular option for the vast majority of our UK and European biotech clients; we have advised on more than 30 life sciences foreign private issuer offerings on Nasdaq in the past two years,but Lord Hill’s recommendations may cause some issuers to look at a London listing that might not have considered it before. The UK capital markets have arguably been underperforming for some years now, and global competition, in particular to listing venues for the most ambitious tech and life sciences companies, is fierce. The figures paint a stark picture: between 2015 and 2020, London accounted for only 5% of IPOs globally. The number of listed companies in the UK has fallen by about 40% from a recent peak in 2008 and the composition of the FTSE index makes clear another challenge: the most significant companies listed in London are either financial or more representative of the ‘old economy’ than the companies of the future.
Key changes for ambitious technology and life sciences companies contemplating a UK listing:
- Dual class share structures. With features like sunset provisions and enhanced disclosure, dual class structures have been a common feature for some time in U.S. IPOs of the most ambitious tech companies and founders. The Commission, recognising the need to attract companies in vital innovative growth sectors such as tech and life sciences have recommended to change the rules, and also recommend certain safeguards, that will allow dual class share structures in the premium listing segment. Investors will be able to evaluate these structures and factor these into the price of the stock, and founders will have a transition period during which they are able to ensure that control is retained and execute their vision for how the company should evolve and grow, while still allowing others to share in that growth – be it employees or new shareholders and the general public.
- Rules to facilitate listing of SPACs. The Commission also recommend changes to the Listing Rules to remove a barrier which currently deters listing SPACs in the UK, a potentially important source of equity financing and route to market for UK tech and life science companies. We believe these recommendations are critical for London to remain competitive as a home for SPACs and to increase choice for issuers. Until now, the perception that the UK is not a viable location to list a SPAC has led some UK companies, notably fast-growing tech companies, to seek a U.S. – or indeed EU – de-SPAC route for financing, rather than a transaction resulting in a London listing. These recommendations and their implementation will be of particular relevance for those fast-growing UK and European companies who may not want to become a U.S. public company upon consummation of business combination and de-SPAC with one of the many U.S.-listed SPACs currently in the market for an appropriate target.
The recommendations exhibited the Commission’s willingness to listen to the City to improve London’s competitiveness, and the recommendations relating to SPACs are particularly impressive in that SPACs weren’t set out on the menu of items that the Treasury laid out for reform. Importantly, subsequent comments by market participants, including the FCA and LSE, are in agreement about the need to implement these recommendations swiftly.
To address the biggest barrier in our view in the market – namely, where a reverse takeover is announced or leaked, typically shares are suspended due to a presumption that there will be insufficient publicly available information – the Commission recommended the FCA remove the rebuttable presumption of suspension and replace it with appropriate rules and guidance. Specifically, it was recommended that the FCA should consider developing, as appropriate, rules and guidance on the following points:
- The information which SPACs must disclose to the market upon the announcement of a transaction in relation to a target company;
- The rights investors in SPACs must have to vote on acquisitions prior to their completion;
- The rights investors in SPACs must have to redeem their initial investment prior to the completion of a transaction;
- If necessary, to safeguard market integrity, the size of SPAC below which the suspension presumption may continue to apply.
- Free float requirements. The Commission recommends that the free float requirements should be made more flexible for all listings. The existing FCA rules on free float levels have been a strong deterrent for the most ambitious high growth companies, despite accommodations being made in this regard on the AIM and High Growth Segment. We believe that this is a welcome development, which should allow for flexibility to go to market with appropriate structures and still ensure liquidity.
- Facilitating forward-looking statements. The Commission made recommendations to make it easier for companies to provide forward-looking financial information, both at the time of listing and afterwards. This would apply to SPACs at the time of their first and any subsequent acquisitions. We think this will benefit all issuers and investors, with a particular relevance for companies with high-growth potential for example in the areas of technology and life sciences. The U.S. has a safe harbor to encourage forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. It will be interesting to see the resulting forms of adjustment to the level of liability associated with prospectuses under FSMA to allow directors of companies to publish and stand behind their forward-looking models.
- Increasing the appeal of the LSE’s standard listing segment to companies of all sizes and types. The Commission contemplates repositioning the current standard listing segment and promoting it more effectively. The standard listing segment was not established as a place designed to be attractive to companies of any particular size or type – whether they be technology companies, scientific companies or any other type of high- or low-growth companies. AIM serves a different purpose from the LSE’s Main Market and the High-Growth Segment, launched by the LSE in 2013, has yet to achieve a critical mass of companies to be a true alternative for those thinking of going public. The hope is that longer term, the flexibility of the standard listing segment would serve to attract an increasingly large cluster of like-minded companies that would generate its own momentum and also attract others to join, leading to greater research coverage, additional liquidity, and improved pricing, as well as to make the segment attractive to foreign companies for secondary listings as much as for UK companies.
- Tailoring financial statements to fit the business models of innovative growth companies. The Commission recommended the maintenance of the three-year track record requirement for the premium listing segment, but we suggest that the FCA widens and adapts the provisions currently limited to scientific research companies to include more high-growth innovative companies. We would welcome this development to tailor financial statement requirements to the needs of our tech and life sciences clients, for whom the current rules can be unduly burdensome.
- A complete rethink of the prospectus. The Commission’s recommended that the Treasury should conduct a fundamental review of the prospectus regime, so it fits the evolution in the types of businesses coming to market, as well as those that are already listed.
The recommendations contemplate that further issuances by public companies could either be completely exempt from requiring a prospectus, or be subject to much slimmed down requirements, for example, confirmation of no significant material changes. Taken together with other provisions that look to improve the efficiency of further capital raising by listed companies and suitably recognise pre-emption rights, we see this as a step in the right direction to promote the speed and efficiency of capital raising for the most ambitious fast-growing companies who have voracious financing needs.
In another recommendation as part of this rethink of the prospectus, the Commission has also recommended that prospectuses approved in other jurisdictions could be recognised in the UK, allowing companies to rely upon the prospectus they had produced for their own market, rather than having to produce a new one, removing a significant burden in the process. This could extend to further issues, including at IPO. Increased harmony of regulation could be important for certain life science companies given the increase in cross-border listings between the UK and US in recent years. From an issuer’s standpoint, several benefits are associated with dual and secondary listings, including ease of access to investors and greater public profile. There is also a case that dual and secondary listings may bring wider benefits to the UK as a listing centre, such as increasing UK investors’ ease of access to U.S. tech stocks could support the development of expertise and analyst coverage of these companies in the UK, complementing wider efforts to address the “valuations gap” which certain issuers perceive between the U.S. and London.
These proposals, taken together and if sensibly implemented, come at an inflection point for UK capital markets both in terms of the opportunity of significant cohort of innovative tech and life sciences companies potentially coming to market in coming years, and a significant opportunity to “send a broader message that London is getting on the front foot” vis-à-vis its global and European competitors. It strikes us as a similar inflection point to the one that the U.S. capital markets addressed after the last recession when faced with the task of how to improve capital formation for growth companies in the U.S., and make the IPO process more attractive to most U.S. and non-U.S. issuers. The U.S. responded with the Jumpstart Our Business Startups Act (JOBS Act) in 2012, which offered significant and popular accommodations to U.S. and non-U.S. issuers to help transition innovative companies into the U.S. public company regulatory regime, helping to usher in a period that saw increased number of domestic issuers and foreign private issuers choosing to list on US stock exchanges, in particular life sciences companies. Lord Hill’s Commission made a point of noting that the task of improving London’s competitiveness and of strengthening the UK capital markets requires long-term attention and focus, and should be seen as a task that is never complete, and should be thought of as a rolling programme, not as a one-off. We see these proposals as a sensible initial step in that journey, at a time when a significant number of our ambitious tech and life sciences clients are considering a transition to the public markets.