Equity capital markets reform: where are we now?

It’s no secret that the UK equity capital markets are undergoing a swathe of regulatory reforms impacting, to a degree, all UK-listed companies and all companies seeking to list and/ or raise capital on the UK public markets. It is hoped that the reforms will encourage more high-growth, founder-led companies to list in the UK, make capital raising easier, and remove barriers to retail participation.

There’s plenty going on, and we thought now was a good time to take stock (no pun intended) of what has happened to date and flag the next steps in each of the key areas of reform.

New UK listing regime

The FCA’s new UK Listing Rules (UKLR) took effect on 29 July 2024, ushering in the most significant overhaul of the UK listing regime in more than 30 years. The new simplified regime, with its increased flexibility and more disclosure-based approach, is intended to make the UK markets more competitive internationally, and to encourage a greater range of companies to list in the UK.

Key features of the new listing regime include the following:

• New ESCC listing category: The previous premium and standard listing segments for commercial companies have been replaced with a single category for equity shares of commercial companies – known as “equity shares (commercial companies)” (ESCC). The rules of the new ESCC category are based on the former premium segment rules but with significant relaxations to eligibility criteria and continuing obligations.
• Eligibility: Key changes to eligibility requirements include that companies no longer need to have a three-year revenue track record, and the former independence and control of business requirements no longer apply (except for companies with a controlling shareholder). Eligibility requirements for companies with a dual-class share structure have also been relaxed. We expect these changes in particular will make the ESCC category more attractive for founder-led, high-growth companies than under the previous listing regime.
• ESCC continuing obligations: Significant transactions (formerly class 1 transactions) and related party transactions by ESCC companies no longer require shareholder approval. However, more detailed disclosures are required in transaction announcements.

What’s next?

The FCA plans to carry out a formal post-implementation review of the listing regime in 2029 to assess the impact of the new UKLR.

Comment

It is still too early to assess whether the listing reforms will have the desired impact of revitalising the UK capital markets and encouraging more diverse and innovative companies to list in the UK. Market sentiment is, however, largely positive and the reforms have been welcomed by the wider adviser community. Ultimately, rule changes are one thing, but there are many factors that contribute to thriving domestic capital markets, not least investor appetite for risk and striking a balance between an attractive, high valuation on IPO and a realistic, considered valuation on IPO, particularly for capital-intensive issuers who are likely to return to market to raise funds c.18 months after IPO.

It will be interesting to see whether the relaxation in eligibility requirements will lead to companies choosing to list on the Main Market (i.e. the ESCC category) rather than on AIM. This may be particularly relevant for high-growth companies and franchises that would previously have been ineligible to list on a regulated market.

There has been much discussion in the market on how the new rules pertaining to the Main Market and the broader UK listing regime will affect AIM. Only time will tell, and AIM Regulation will need to ensure that AIM continues to be “match-fit” as a listing venue, but in our view the associated tax benefits of an AIM listing (i.e. no SDRT on transfers of AIM shares) and the eligibility for EIS/ VCT relief will continue to be a significant pull-factor towards an AIM listing for many high-growth companies.

Nevertheless, we expect that the discussion around “which market to list on?” will be more fulsome as between the Main Market and AIM in pre-IPO discussions going forward.

For more information on the new listing regime, see our insight here.

Prospectus regime reform

In conjunction with the listing rules reforms, an overhaul of the UK’s prospectus regime is also underway. The new regime is intended to simplify and modernise prospectus regulation without lowering regulatory standards, whilst also improving the quality of information investors receive.

The framework for the new prospectus regime is set out in the Public Offers and Admissions to Trading Regulations 2024 (adopted in January 2024). Detailed rule-making powers for the new regime have been delegated to the FCA and these new rules must be implemented to bring the reforms into effect.

On 26 July 2024, the FCA published a consultation paper (CP 24/12) on the detailed rules covering when a prospectus will be required and prospectus content requirements. The FCA is intending to broadly replicate the existing regime for prospectuses on admission to a regulated market, but with some additional relaxations. However, in a significant change for secondary capital raises on regulated markets, the threshold below which a prospectus will not be required will increase from 20% of the issuer’s existing share capital to 75%.

In another significant change, the FCA is proposing that primary multilateral trading facilities (MTFs) that allow retail participation – such as AIM – must require the publication of an “MTF admission prospectus” on all initial admissions and reverse takeovers (with exceptions for existing simplified routes to admission). Although these MTF admission prospectuses will not need to be approved by the FCA, they will be subject to the same statutory responsibility and compensation provisions that apply to regulated market prospectuses. Operators of primary MTFs will determine the relevant prospectus approval and content requirements and will also have discretion as to whether a prospectus will be required for secondary issuances.

What’s next?

The FCA’s consultation closes on 18 October 2024. Subject to consultation responses, the FCA aims to finalise the new prospectus rules by the end of H1 2025, with full implementation shortly thereafter.

Comment

The proposed changes to the prospectus regime are arguably less radical than the listing regime changes, though some significant relaxations are being proposed. In relation to regulated markets, raising the threshold to 75% of existing share capital should make it significantly easier and cheaper to raise capital in a secondary fundraising. Notwithstanding the higher threshold, an issuer may still need shareholder approval under English law to issue the relevant shares.

The FCA is proposing that there will be a prospectus requirement for all initial admissions to trading on AIM (other than if the issuer qualifies for the AIM Designated Market Route or the AQSE fast-track). This proposal is not likely to change a significant amount in practice – AIM admission documents already contain much of the disclosure required in an FCA-approved prospectus and, in any event, there will be no requirement for an MTF admission prospectus to be approved by the FCA. The introduction of an MTF admission prospectus is likely to be welcomed by companies wanting to make a retail offer on AIM. The ability to include retail investors without the need for an FCA approved prospectus will be an attractive option and should increase retail participation in AIM IPOs.

We will be posting more detailed information on the FCA’s consultation in the future.

PISCES – intermittent trading for “private” companies

In March 2024, the Government consulted on proposals for a new regulatory framework that will allow private and unquoted public companies to trade their securities on an intermittent basis.

The proposed regulatory framework, to be known as the Private Intermittent Securities and Capital Exchange System (PISCES), is not a trading venue, but trading platforms will be able to operate within the PISCES framework. The new regulatory requirements will be trialled within a financial services “sandbox,” before becoming permanent.

PISCES will allow the trading of existing shares in any company whose shares are not already admitted to trading on a public market. PISCES platforms will operate as secondary markets and so will not be used to raise capital by companies issuing new shares.

To be eligible for trading within PISCES, shares must be freely transferrable and cannot be admitted to trading elsewhere. All shareholders of eligible companies will be able to sell their shares via PISCES, but there will be restrictions on who can buy shares (and during the trial sandbox phase, this will be limited to institutional and professional investors). Trading on PISCES will occur during trading windows set by the participating companies, but subject to operator rules and market conditions.

What’s next?

The PISCES consultation ended on 17 April 2024 with the then-Government committed to having the PISCES sandbox up and running by the end of 2024. However, it is currently unclear whether the new Labour Government is committed to maintaining or modifying this initiative. If it does decide to proceed with the original proposals, a further FCA consultation on the PISCES sandbox will be required.

Comment

It’s clear that the aim of the PISCES regime is to cultivate a pre-IPO ecosystem where companies can test the waters of public company life and operate as a pseudo public company by association. To this end, PISCES should help to bridge the gap between private and public markets by providing a standardised, but lightly regulated, mechanism for the shareholders of unquoted companies to sell their shares.

In turn, private, pre-IPO companies can get a feel for the liquidity of their stock and gain experience in making disclosures to the market. The Government is not currently intending to impose any admission requirements (such as minimum or maximum market capitalisation) on companies wishing to use PISCES.

However, the individual operators of PISCES platforms may choose to impose their own requirements as a condition of admission. These could include, for example, minimum corporate governance requirements. Whilst likely to be light touch, any such corporate governance requirements might see private companies think more strategically about board composition, constituting board committees, and dedicating resources to improve their internal systems and controls ahead of any future IPO.

It is hoped that participation in PISCES will help companies to scale up and grow, help shareholders (including employee shareholders) to realise their gains, and provide better access for investors to companies that are not yet operating on public markets.

For more information on PISCES, see PISCES: A new share trading platform for “private” companies.