The FCA fights back in the competition for listings

We have recently discussed how the US remains the preferred listing destination for many European companies, particularly those in the life sciences sector. The UK Government has made reforms to this area a key aspect of its Science and Technology Framework as it looks to end the UK IPO drought (in 2022 there were just 45 new issuers (a 62% decline on 2021) and Q1 2023 had just five issuers raising £81m).

As part of this trend, the FCA (the UK’s financial regulator) has just released a consultation on potential regulatory changes to make UK markets a more desirable place to list. The consultation closes on 28 June 2023, but given the Government’s focus on the sector and market pressures it is likely that we will see at least some reform in this area.

Many UK-based biotechs and other companies are likely to keep a close eye on the changes, as some delay accessing public markets while share prices remain under pressure. For some British start-ups there will be a natural preference to list in their home market, meaning some may now be more likely to consider listing in the UK.

The key potential change outlined in the consultation is reverting to a single listing classification, removing the existing premium and standard listing classifications. This may create the perception of greater equality and status between different listed companies. It removes the additional obligations required to achieve a premium listing (and for companies that could not satisfy those obligations does not see them having to settle for what was often seen as a lesser status of listing). Removing the premium listing classification would mean:

• Control & dual class shares: all newly-listed companies having the flexibility to structure enhanced control for certain directors through arrangements of different classes of shares (there are currently restrictions for companies with premium listings). There has been a perception that the UK has been successful at early stage biotechs, but that British founders have sought to exit earlier than their US peers. These changes may encourage founder directors to maintain sizeable stakes post-listing alongside control over some key issues facilitated through the dual class structure. Any proposed enhanced control will need to be balanced against the need to attract investors and not artificially prejudice the valuation. However permissive the regime, the investor market may not find dual class structures attractive.
• Historic financial records: Companies looking for a premium listing currently need to have three years of financial records.
• Shareholder approval for significant transactions: Premium-listed companies currently need to seek shareholder approval for acquisitions worth more than 25% of their market value.

Whilst the FCA’s focus on maintaining the UK’s attractiveness is welcome, any likely changes will be tempered by concerns as to continuing to maintain an orderly market and providing appropriate investor protections. And this isn’t a revolution – a company could already avail itself of the flexibility flagged above by choosing a standard listing, it is really just a re-labelling of that classification by removal of the more stringent premium listing.

The key issue for companies considering a UK listing at present is the perceived valuation gap between the UK and the US and the reduction in the flow of UK institutional money (particularly UK pension funds and insures) into UK equities. We will need a stronger overall UK market (as well as reforms to tax or regulation) to come anywhere near to usurping the US as the destination of choice.