After months of speculation and anticipation, July saw the Financial Conduct Authority green light its highly anticipated listings reforms, billing these changes as their largest overhaul in three decades.
The reforms were implemented as part of a planned overhaul to better align the UK’s own rules with international market standards, with key areas of focus including: providing investors with greater access to information; increased flexibility around voting rights for listed businesses; and allowing for a "wider range of companies to issue their shares on a UK exchange" with the removal of ‘premium’ and ‘standard’ listings in favour of a single category.
In short, the FCA view these reforms as critical to bringing the fight to New York on the IPO battlefield, and enabling London to rebuild some of the international capital market standing it has lost since Brexit.
But do they really make London a more compelling home for issuers thinking about a listing? I would argue to the contrary.
Quality over quantity
Firstly, it is wrong to assume that looser regulatory standards are what draws companies to list in the US, where in fact regulation and costs are significantly more burdensome.
The extensive regulatory, legal and compliance risks and requirements the process of listings entails, and the time it takes, are significant barriers for most companies of all sizes.
For example, having to secure an Securities and Exchange Commission registration and adhere to Sarbanes-Oxley frameworks are both expensive and onerous requirements for companies looking to list on US exchanges.
The UK already had a significant advantage over the US in terms of cost and its relative regulatory and legal burdens, so reducing them further will only deliver marginal gains at best.
Putting the investor first
Secondly, and building on this point, reducing investor protections are a slippery slope and chasing listings at the expense of investor protection is never a good thing.
We looked at the 213 companies that were removed from US exchanges in 2023, with most of these companies removed for no longer complying with the ongoing standards of their respective exchanges. Many of these securities would be considered penny stocks were it not for the exemption granted to companies listed on an exchange.
Often, it is retail investors who get most harmed by these stocks being listed on an exchange.
This fact should be concerning to regulators and investors who believe an exchange listing is some sort of quality stamp on the investability of a company. To protect investors, the focus should be on quality over quantity. FCA take note.
Furthermore, aligned to this, companies need to take a hard look at whether they are at the right size and stage of development to meet both the initial and ongoing requirements so investors do not get burnt.
To illustrate this, we looked at the 99 transactions that took place for companies with a sub $500mn market cap on the NYSE and Nasdaq in 2023; 82 per cent of those IPOs demonstrated a negative rate of return from their offer price. If a company is not right for listing, it does not matter where it lists.
