FCA confirms listing rule changes in bid to sharpen London’s edge for start-up IPOs

Digital text on a screen displaying stock prices and the words 'GOING PUBLIC'.

At the start of December 2021, the UK’s finance watchdog announced an overhaul of the ways in which companies are able to list themselves on the public stock exchange. We explain how these changes are expected to make staging an IPO far more accessible for innovative start-ups – while also improving investor confidence in the market more widely.

The Financial Conduct Authority (FCA) has unveiled a handful of changes designed to encourage founder-led start-ups to publicly list their companies on the London Stock Exchange.

At the start of 2021, a number of recommendations were published in the UK Listing Review and the Kalifa Review of UK FinTech outlining how the FCA should update its listing rules. This was the result of a growing number of complaints from investors and stakeholders that the London Stock Exchange and its UK-based indices weren’t nearly diverse enough in terms of their corporate population.

Unfortunately, this lack of diversity has impacted the overall health of the stock market.

Since 2008, the number of UK-listed companies has fallen by around two-fifths.

In many cases, that’s because the basic requirements for listing publicly in the UK have been totally unattainable for even the most promising of start-ups. But this has had a negative impact on UK equity markets — shrinking equity as more and more companies are forced to remain private or end up getting taken private by large buyout firms.

Now, this long and steady trend that favours long-term privatisation over staging an initial public offering (IPO) could finally be reversed.

Three key changes to listing rules

At the start of December, the FCA confirmed it would be acting on last year’s recommendations with immediate effect. As part of this overhaul of the listing rules, there are three key changes that UK limited company owners and shareholders absolutely need to be aware of moving forward.

First and foremost, the FCA has announced that it is now allowing a targeted form of dual-class share structures within the premium listing segment. In its statement in December which outlined the rule changes, the FCA said this dual share class would prove to be an effective way in which to encourage innovative, often founder-led companies onto public markets sooner.

As a result, the watchdog is now hoping that levelling the playing field with this dual-class structure will ultimately broaden the listed investment landscape for investors in the UK — or, simply put, diversify the stock market to create a broader range of companies on each index.

The second big change that UK company owners need to understand which has come into force is that the FCA has now reduced the number of shares that an issuer is required to have in public hands. This is often referred to as a “free float”.

Prior to December 2021, the FCA required a free float of 25%. Now, that figure has been reduced to just 10%, which the FCA claims should lift a significant barrier for start-ups wanting to join the stock exchange.

Finally, the FCA has announced that it is increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies.

This threshold was previously just £700,000. Moving forward, the market’s MMC is now going to be £30 million.

While this market capitalisation hike doesn’t necessarily make life easier for small start-ups hoping to go public, the FCA has said it will succeed in providing investors with much greater trust and clarity about the types of companies with shares admitted to different markets.

“We need to act to meet the needs of an evolving marketplace. These changes ensure the UK’s markets maintain their reputation for dynamism, helping support the new types of companies seeking the investment that drives economic growth and by giving investors more choice with appropriate protection,” explained Clare Cole, Director of Market Oversight at the FCA.

“Over the last few months, we have moved quickly to address areas where our rules could be improved to encourage innovation in primary markets. By taking this agile approach, we are pleased that new IPOs in 2022 will be able to benefit from the revised rules.”

Wider reforms possible in 2022

That being said, it’s important to note that December’s announcement on IPO rules for 2022 isn’t the only big change to expect out of the FCA throughout the course of the next 12 months.

As part of the previous consultation that ultimately led to December’s announcement, the FCA also asked a range of company owners for their views on the overall structure of the UK listing regime. More specifically, the regulator wanted opinions on whether wider reforms could improve its longer-term effectiveness.

The FCA said there was “strong engagement” with this part of the paper.

As a result, the FCA announced that it is intending to provide further feedback on these responses. Company owners can expect this in the first half of 2022 — alongside any proposed “next steps” meant to answer those recommendations.

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About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

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