Changes to the Listing Rules affect Small-Cap listings

Following a period of consultation, on 3 December 2021 the FCA amended the Listing Rules to change the eligibility criteria for Main Market listings and to allow a limited version of the popular US-style dual class share structures. The changes are clearly aimed at making the Main Market more attractive for larger, higher-quality growth companies.

• Minimum market capitalisation for Premium and Standard Listing segments increased from £700,000 to £30,000,000, aimed at giving investors greater trust and clarity about the types of company with shares admitted to different markets. Transitional provisions apply for companies already within eligibility review process.
• Minimum free float for Standard and Premium Listing segments reduced from 25% to 10%, removing potential barriers to entry for companies.
• A targeted form of dual class share structures will be allowed within the Premium Listing segment to encourage innovative, often founder-led companies to list on London’s markets.

The FCA had also considered changes to the financial track record requirements for Premium Listing segment companies, but these will not be changed at this stage and will be reviewed again in the future.

Increase of Minimum Market Capitalisation

In the consultation leading to these rules’ changes, a minimum £50m market capitalisation had been proposed, which was clearly felt to be too high. £30m represents a sensible cut-off, aimed at encouraging smaller companies to look to AIM or AQUIS instead of the Main Market. The Standard Listing segment has suffered from a reputational issue over the past few years, drawing criticism that it is a ‘softer touch’ than AIM, and attracting several smaller ‘cash shell’ companies unable to raise the minimum £6m required by AIM. The £30m minimum applies to new entrants only and is not a continuing obligation; so, companies whose market capitalisations are already below, or subsequently fall below, £30m are not required to delist.

The FCA makes the point that 75% of cases where they observed high share price volatility and received alerts of suspected suspicious trading, and a majority of the smaller number of cases where they are investigating serious misconduct, were for companies with a market capitalisation of below £30m. Although it’s a rudimentary quantitative method, rather than analysing the quality of the applicant, we appreciate that on balance smaller companies would benefit more from having the nominated adviser structure of AIM rather than being left largely unmonitored on the Main Market.

There are some important transitional provisions. First, applicants who have already made a complete submission for a listing eligibility review can continue to apply for listing based on the minimum market capitalisation of £700,000, provided they do so within 18 months and provided there isn’t a material change to their overall business proposition during the transitional period. “Material change” isn’t defined, but the FCA gives the examples of a founder’s exit or a change in the nature of the proposed business, especially for start‑up companies. Secondly, shell companies (including SPACs) that are already listed at the date of commencement may make a listing application following an acquisition based on a minimum market capitalisation of £700,000, provided that they apply for an eligibility and prospectus review within two years of the rule changes. This means that smaller existing cash shells and SPACs will not have a disproportionate barrier to re-listing once they have made an acquisition.

Reduction of Minimum Free Float

The reduction of the minimum free float – i.e., the percentage of a company’s shares that must be in ‘public hands’, rather than by directors or major shareholders – from 25% to 10% is substantial. The FCA’s analysis was that the previous rules may create barriers to listing due to uncertainty about whether companies will be able to list at a free float level of below 25% in the UK (with the FCA sometimes granting minor derogations) compared with other jurisdictions with a more flexible approach. The new rule is both a requirement on listing and a continuing obligation – if an existing listed company breaches the 10% level, the FCA would no longer allow them to show they had liquidity via other means and instead would ask them to present a plan for coming back into compliance with the rule as soon as possible.

It remains to be seen how this will affect liquidity, although the FCA found that typical free float levels are over 25% in any event. The new rules are clearly aimed at removing a barrier to listing that isn’t present in many overseas markets.

Dual Class Share Structures

This amendment is also aimed at removing a barrier to listing for overseas companies that might prefer NASDAQ, or another overseas exchange. Dual class share structures are typically used by companies with a large founder shareholding and are common amongst US-based technology companies. A dual class share structure enables a shareholder (or group of shareholders) to retain voting control over a company that is disproportionate to their economic interest in the company. It was possible (although not common) for such companies to list on the Standard Listing segment, but not the Premium Listing segment.

The new rules will permit a company on the Premium Listing segment to have a dual class share structure, subject to the following conditions:

• a maximum weighted voting ratio of 20:1
• the weighted class of shares may only be held by directors of the company
• the weighted voted rights are only available in two limited circumstances:
  • a vote on the removal of the holder as a director, and
  • following a change of control, in relation to a vote on any matter – this is intended to operate as a strong deterrent to a takeover.

The dual class structure can only be in place for a maximum of five years from listing. Essentially, the provisions allow for a founder to entrench themselves for a period of time following the listing of the company. The FCA’s stated objective is to facilitate innovative growth companies listing on public markets at an earlier stage in their development, providing the opportunities to investors to participate as these companies grow, but within the additional corporate governance and shareholder protections in the Premium Listing segment.

For further information or advice on listing on the London markets, please contact Michael Dawes.

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