The FCA is the body that determines eligibility for listing of equity securities on the Main Market and oversees the regulation and interpretation of the Main Market’s Listing Rules. The FCA has retained the title of “UK Listing Authority” (“UKLA”) and whilst the Listing Rules continue to evolve, their general framework and content remain much as they were before the passing of the Financial Services Act 2012. The content of an IPO prospectus is driven largely by the EU Prospectus Directive of 2003, which was implemented in the UK in 2005. However, the Prospectus Directive does not purport to regulate the requirements for obtaining and maintaining a listing on any particular regulated market. As a result, the FCA is able to impose additional requirements for issuers seeking a listing on the Main Market.
On 30 November 2015, the European Commission proposed a new Prospectus Regulation (the "Proposed Prospectus Regulation") to repeal and replace the existing Prospectus Directive. In its Explanatory Memorandum to the draft Proposed Prospectus Regulation, the European Commission states that the proposed measures should:
The revision of the existing Prospectus Directive pursues a simple goal: to provide all types of issuers with disclosure rules which are tailored to their specific needs while making the prospectus a more relevant tool of informing potential investors.
As at January 2016, the Proposed Prospectus Regulation is with the European Parliament and the Council of the EU for discussion and adoption. If adopted, it is expected that the Proposed Prospectus Regulation will enter into force later in 2016. Where applicable, key changes to the current prospectus regime envisioned by the Proposed Prospectus Regulation will be discussed throughout the course of this guide.
This chapter summarises the eligibility criteria for all equity securities seeking a listing on the Main Market and the additional criteria that may apply depending on which type of listing is being sought. There have been a number of changes in recent years to different types of listings available to companies on the Main Market. Since 2010, any company may apply for either a “premium” listing or a “standard” listing of its shares. A standard listing offers a company the opportunity to elect to list its securities on the Main Market, but on the basis of the minimum requirements of the Prospectus Directive rather than the obligation to meet the additional, or “super-equivalent”, criteria for companies seeking a premium listing. However, a standard listing does mean that a company is ineligible for inclusion in the prestigious FTSE UK Index Series, and that is a factor that a company would need to take into account when considering which listing to seek.
More recently, the London Stock Exchange introduced the high-growth segment of the Main Market on 27 March 2013, which is a response to the introduction of the JOBS Act in the United States. The high-growth segment is not a premium listing, but is designed for companies that may not currently satisfy all the criteria to obtain a premium listing but have the ambition to do so in the future. 2 The current eligibility criteria are contained in Chapters 2 and 6 of the Listing Rules. The requirements in Chapter 2 apply in respect of the listing of all securities, with those in Chapter 6 applying only to premium listings of equity securities.
When this Guide refers to the rules relating to issuers with a listing on the Main Market, unless otherwise stated, it is referencing the rules relating to issuers seeking, or having, a premium listing rather than the lighter regulations imposed upon those seeking a standard listing.
In addition, the securities to be listed must conform to the laws of the applicant’s place of incorporation, be duly authorised in accordance with the applicant’s constitution and have any necessary statutory or other consents.
There is a distinction between admission to listing on the Main Market and admission to trading, and in order to be eligible for listing, securities must also be admitted to trading on a Recognised Investment Exchange’s market for listed securities. Officially listed equity securities will typically be admitted to trading on the London Stock Exchange’s Main Market
Unlike the equivalent requirement under the AIM Rules (see Chapter 5 for further details), the Listing Rules’ requirement for securities to be freely transferable is not subject to a carve-out to cater for overseas laws or regulations (e.g., where the laws of any jurisdiction, such as the US, place restrictions upon transferability of securities or where the issuer wishes to restrict transferability to limit the number of shareholders domiciled in a particular country to ensure that it does not become subject to statute or regulation). The UKLA has indicated2 that it would, in very limited circumstances, be willing to agree to certain restrictions on transferability. For example, the UKLA has on various occasions in the past few years permitted investment entities to include transfer restrictions in their articles to avoid falling within the ambit of onerous overseas legislative requirements. (However, it has required these restrictions to be carefully drafted and to specify the relevant legislative provisions in question—broad discretionary powers have not been permitted.) The other notable transfer restrictions permitted relate to protecting the public interest, such as in the context of defence-related assets. The UKLA’s guidance states that any such restrictions need to be considered carefully to ensure they do not offend the principle of equality of treatment of all shareholders if they do not generally treat shareholders equally. However, a power initiating a compulsory sell-down of shareholders is not likely to offend the principle of equality of treatment if shareholders are selected according to a fully disclosed pre-set formula and not by a power that allows management to individually choose shareholders.
Under the Prospectus Rules, an issuer seeking to admit “securities” to a regulated market (such as the Main Market) is required to publish a prospectus approved by the competent authority in its “home member state”.
As explained in further detail in Chapter 2 of this Guide, Chapter 4 of the Listing Rules requires listing particulars to be published for the listing of most specialist securities that fall outside the scope of the Prospectus Directive. The content requirements for listing particulars are broadly the same as those applicable to a prospectus.
Further details of the relevant approval and content requirements for a prospectus are set out in Chapters 3 and 4.
The historical financial information required must represent at least 75 percent of the new applicant’s business for the full period required and put prospective investors in a position to make an informed assessment of the business for which admission is sought. In determining what amounts to 75 percent of an issuer’s business, the FCA will consider the size, in aggregate, of all of the acquisitions that the relevant issuer has entered into during the period covered by the financial information.
Where the new applicant has made an acquisition or series of acquisitions such that its own consolidated financial information is insufficient to meet the 75 percent requirement, there must be historical financial information relating to the acquired entity or entities which has been published or filed and that:
The FCA states that the purpose of these rules is to ensure that the issuer has representative financial information throughout the three-year track record period and to help prospective investors make a reasonable assessment of what the future prospects of the new applicant’s business might be. Investors are then able to consider the new applicant’s historical revenue-earning record in light of its particular competitive advantages, the outlook for the sector in which it operates and the general macroeconomic climate. The FCA may consider that a new applicant does not have representative historical financial information and that its equity shares are not eligible for a premium listing if a significant part or all of the new applicant’s business has one or more of the following characteristics:
Under LR 6.1.13, the FCA has the discretion to modify or dispense with the requirement for three years of historical financial information if it is satisfied that it is desirable in the interests of investors and that investors have the necessary information available to arrive at an informed judgment about the applicant and the equity shares for which a premium listing is sought.
Before modifying or dispensing with LR 6.1.3BR (this requires that the applicant's accounts be dated not more than six months before the date of the prospectus), the FCA must also be satisfied that there is an overriding reason for the applicant to be seeking a premium listing (rather than seeking admission to a market more suited to a company without sufficient historical financial information to be eligible for a premium listing). For these purposes, the FCA will take into account factors such as whether the applicant:
LR 6.1.4 reflects the FCA’s desire to ensure that the protections afforded to shareholders of premium listed companies are meaningful, and it has been widely interpreted as a response to a number of high-profile governance issues between controlling shareholders and particular companies. Where a new applicant will have a controlling shareholder upon admission, LR 6.1.4B requires there to be in place an agreement with the controlling shareholder to ensure that:
In addition, the constitution of the applicant must allow for a prescribed dual voting structure in relation to the election and re-election of independent directors, further details of which are summarised on page 90.
A “controlling shareholder” is defined as any person who exercises or controls on his own or together with any person with whom he is acting in concert, 30 percent or more of the votes able to be cast on all or substantially all matters at general meetings of the company.
The Prospectus Rules require the inclusion of a working capital statement in all prospectuses for equity issues, including those issued by PRA or FCA-regulated entities, such as banks. Because much of a bank’s working capital funding (such as deposits) is not committed financing, such entities may have difficulty in providing the standard working capital statement. Whilst the FCA has not been able to alter the requirements of the Prospectus Directive, it has, for the purposes of determining eligibility for listing, set out an alternative for regulated issuers that is based on solvency and capital adequacy rather than traditional “working capital”. In line with the approach taken under the Prospectus Rules, the Listing Rules require regulated entities not only to meet their capital adequacy and solvency requirements, but to do so for the next 12 months without needing to raise further capital.
The FCA may accept an amount lower than 25 percent if it considers that the market will operate properly with a lower percentage in view of the large number of shares of the same class and the extent of their distribution to the public. LR 6.1.20AG sets out the factors that the FCA will take into account when determining whether the market will operate properly where less than 25 percent of the shares are in public hands in EEA States. These include: (i) shares held in non-EEA States, even where they are not listed; (ii) the number and nature of the public shareholders; and (iii) the expected market value of shares in public hands at admission being in excess of £100 million.
Issuers should note that eligibility criteria for the attractive FTSE UK Index Series include a firm 25 percent free-float requirement for companies incorporated in the UK and greater than 50 percent for non-UK companies.
The specific eligibility criteria applicable to specialist issuers are as follows:
The definition of “mineral company” in the Listing Rules is wide and includes any company or group whose principal activity is, or is planned to be, the extraction (which can include exploration) of mineral resources (which include metallic and nonmetallic ores, mineral oils, natural gases, hydrocarbons and solid fuel).
A mineral company does not need audited accounts covering at least three years, but it must have published or filed historical financial information since the inception of its business. Such accounts must comply with the general criteria set out in LR 6.1.3: namely, that they have been independently audited, are less than six months old (as at the date of the prospectus) and have not been modified (except in very limited circumstances). A mineral company must also be able to demonstrate that it satisfies the independent business test set out in LR 6.1.4.
Where a mineral company is a new applicant to the Main Market and does not hold controlling interests in a majority (by value) of the properties, fields, mines or other assets in which it has invested, it must demonstrate that it has a “reasonable spread of direct interests in mineral resources and has rights to participate actively in their extraction, whether by voting or through other rights which give it influence in decisions over the time and method of extraction of those resources” (LR 6.1.10).
In addition, the ESMA Recommendations require certain additional disclosures, and in certain cases an expert’s report (in a form to be agreed with the relevant competent authority), in all mineral-company prospectuses. See Chapter 3 for further details.
Similarly, a scientific-research-based company does not need audited accounts that cover at least three years, but it must have published or filed historical financial information since the inception of its business. Such accounts must have been independently audited, must be less than six months old and cannot have been modified (except in very limited circumstances). A scientific-research-based company must also be able to demonstrate that: (i) its historical financial information represents at least 75 percent of its business for the full period; and (ii) it satisfies the independent business test set out in LR 6.1.4.
However, whilst there is no longer a requirement, for example, to have a technical expert’s report, there are additional eligibility requirements for scientific-research-based companies that do not have audited accounts covering at least three years. Such a company must:
Therefore, whilst the Listing Rules offer a concessionary route for scientific-research-based companies that do not have a three-year track record, any applicant relying on this route must be able to satisfy all of the conditions of LR 6.1.12. Any waiver of these conditions would be viewed by the FCA as an effective waiver of the requirement of a three-year track record, which as a fundamental eligibility condition would very rarely be allowed by the FCA.
The ESMA Recommendations require various additional disclosures for prospectuses issued by scientific-research-based companies, including details of the relevant collective expertise and experience of the key technical staff and a comprehensive description of each product whose development may have a material effect on the future prospects of the issuer. (See Chapter 3 for further details.)
Chapter 15 of the Listing Rules presents a single platform for all listed closed-ended vehicles, which include investment trusts, investment companies, venture capital trusts and property investment companies, whilst Chapter 16 deals with all rules regarding open-ended investment funds. All investment entities are required to seek a listing under either Chapter 15 or Chapter 16 (even if they already have a primary listing on another exchange).
Closed-ended investment funds
For closed-ended investment funds, an applicant for listing does not need audited accounts that cover at least three years, nor does it need to satisfy LR 6.1.4 (independent business). However, it must satisfy the following requirements:
Open-ended investment companies
There are very few eligibility criteria for applicants that are seeking a listing as an open-ended investment company under Chapter 16 of the Listing Rules, although it must retain a sponsor for the purposes of its application.
The Specialist Fund Market
Complementary to the FSA’s implementation of the final changes to the regime for investment entities, the London Stock Exchange launched the Specialist Fund Market (“SFM”) in November 2007 to provide a separate, clearly labelled market tailored for highly specialised investment entities such as single-strategy hedge funds, private-equity funds and feeder funds. The SFM aims to bridge the gap between the Main Market regime and AIM. It is a regulated market, so unlike AIM, admission to it does require a prospectus, but the full Listing Rules do not apply.
Issuers on the SFM are required to comply with the existing Admission and Disclosure Standards (the "Standards"). In December 2015, the LSE proposed certain amendments to the Standards which include:
The final rules are expected to be confirmed in early 2016 following a market-wide consultation by the LSE.
Although the Listing Rules do not contain any specific requirements for property or shipping companies, the ESMA Recommendations do contain additional content requirements for prospectuses issued by property and shipping companies (including a valuation report). (See Chapter 3 of this Guide for further details.) In relation to UK real estate investment trusts (“REITs”), the FCA has clarified that a REIT may, depending on its business model, be eligible for a premium listing under Chapter 6 of the Listing Rules, a standard listing under Chapter 14, or a premium listing for closed-ended investment funds set out in Chapter 15 of the Listing Rules. The key determinant will be whether the company is a risk-spreading investment vehicle or a more traditional property company that does not aim to spread risk. If it is a risk-spreading vehicle, then it should apply for the premium (closed-ended investment funds) listing under Chapter 15.
The London Stock Exchange introduced the High Growth Segment in March 2013 to provide an additional route to listing for medium and large high-growth companies. The High Growth Segment has regulated market status but is not part of the FCA’s Official List, so the Listing Rules do not apply. Issuers on the segment are required to comply with the London Stock Exchange’s High Growth Segment Rules and existing Admission and Disclosure Standards. EU directive standards, including the Prospectus Rules and the Disclosure and Transparency Rules (“DTR”), also apply.
In order to join the High Growth Segment, an issuer must: (i) be incorporated in the EEA; (ii) be a revenue-generating trading business; (iii) demonstrate growth in revenues (on a CAGR basis) of at least 20 percent over the three-year period prior to admission; (iv) have a free float of at least 10 percent; (v) appoint a “Key Adviser” in relation to admission; and (vi) set out an intention to join the listed segment of the Main Market over time.
In December 2015, the London Stock Exchange proposed to amend the High Growth Segment Rules, notably by adding an exemption for life science companies. It proposed that where a company is classified as a "scientific research issuer”, the London Stock Exchange may, at its sole discretion, modify or dispense with the requirements that the issuer must be a trading business and demonstrate growth in revenues (on a CAGR basis) of at least 20 percent over the prior three financial years. The London Stock Exchange acknowledged that the revenue growth test is not a relevant test for scientific research based issuers, although it considers that it is appropriate for such companies to have access to the High Growth Segment. The final rules are expected to be confirmed in early 2016 following a market-wide consultation by the London Stock Exchange.
In general terms, overseas companies with a premium listing on the Main Market are required to comply with the Listing Rules in full to the extent that they are permitted to do so.
It is generally possible for an issuer incorporated outside the UK to be assigned UK “nationality” for purposes of the FTSE UK Index Series, provided that it publicly acknowledges adherence as far as practicable to the principles of the UK Corporate Governance Code, the pre-emption rights and the UK Takeover Code and, as mentioned above, has a free float greater than 50 percent.