On July 5, 2021, the Financial Conduct Authority (FCA) launched a public consultation on reforms to the effectiveness of the primary market, proposing reforms in four areas, including the adoption of a targeted dual shareholding structure for the Premium Segment, a reduction in the proportion of listed companies with outstanding shares, an increase in the minimum market capitalization requirement for listed companies, and minor changes to and simplification of the listing rules, disclosure guidelines, transparency rules and prospectus regulations. The FCA seeks to understand the views of market participants on reforms to the UK listing regime, increase investor choice and meet changing market needs in order to improve the competitiveness of the UK financial markets. The FCA public consultation will close on September 14, 2021, and plans to implement the reforms by the end of 2021. The main points of concern are as follows.
First, the number of initial public offerings (Initial Public Offering, IPO) in the UK has declined, and the reform aims to enhance the vitality of the UK financial market. 2015-2020, the number of IPOs on the London Stock Exchange accounted for only 5% of the world, and the number of UK listed companies fell by about 40% compared to the peak in 2008. According to the London Stock Exchange, in the first half of 2021, there were 76 new issues of shares and listed companies in the UK, with a total market capitalization of £81.3 billion, raising a total of £3.6 billion, down 5%, 23.16% and 68.14% respectively year-on-year from a decade ago (Figure 1). the FCA says that in 2020, global funds raised through IPOs are up 42% from the previous year, mainly from from the U.S. and elsewhere. Therefore, the reform of the IPO review system will promote more high-quality companies to speed up the pace of listing, so that the UK financial market can continue to maintain competitiveness.
Second, the FCA intends to raise the minimum market capitalization requirement for listed companies to lower the threshold for listing while increasing investor trust. Under current regulations, companies listed on the London Stock Exchange should have at least 25% of their outstanding shares, i.e., held by persons not connected with the business. The FCA’s public consultation proposes to lower the threshold for issuers to list by reducing the number of outstanding shares from 25% to 10%, but increasing the minimum market capitalisation requirement for listing to £50 million, with the aim of enabling investors to more trust and clarity for companies listed on the London Stock Exchange.
Third, the FCA proposes to allow dual shareholding structures in the Premium Market to encourage innovative and founder-led companies to list more quickly. A dual shareholding structure would allow some founding shareholders or company insiders to have “different shares”, and increasing the voting rights of these shareholders would allow the founding shareholders to maintain some control over the company. First, the increased weight of voting rights under a dual shareholding structure would be at the expense of some ordinary shareholders and could pose problems for corporate governance. Dual shareholding structures are already permitted on the standard market of the London Stock Exchange, but shareholders who support “one share per vote” have opposed dual shareholding structures on the Premium Market. Second, dual shareholding structures have been adopted in places like New York and Amsterdam, and their adoption in London on the Premium Market would attract more high-quality, innovative technology companies to the UK financial markets post-Brexit and during the epidemic. On the one hand, founders are concerned about the long-term interests of the company and should maintain a stronger control of the company. On the other hand, investors will be concerned about the corporate governance issues arising from a dual shareholding structure. Against the backdrop of a highly competitive global IPO market, the UK needs to weigh the pros and cons of both to encourage quality companies to actively list and lower the threshold, while maximizing investor protection.