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High Growth Companies - A New Route To An IPO?

Edmund Tyler of SJ Berwin LLP


At the end of last month, the UK government announced a plan to create a new route to the UK IPO market for high-growth companies, with a particular focus on meeting the needs of internet and technology businesses. The proposals will be developed in tandem with the London Stock Exchange (LSE), and form part of the government's strategy to make the UK "one of the best places in the world to start, run and grow a business". Given current market conditions, it seems optimistic to pin much hope on the IPO market – but any moves in the right direction should be welcomed.

The government says action is needed because European mid-sized high-growth businesses are currently under-represented on the UK public markets. There is also a concern that the US JOBS Act has streamlined the rules on how growth companies can raise finance and list in the US, and that these companies will migrate to the US if action is not taken in the UK. At the same time, the UK regulator has announced plans to tighten up its own rules for companies looking to IPO on the more prestigious "premium" section of the LSE's main market, so the need for alternative paths to market for young companies is arguably becoming more pressing.

Some might say that change is unnecessary, as the UK already has a well-known growth market: the LSE's AIM. But AIM's recent history has been chequered. Last year only 90 companies came to the market – down from over 500 in 2005 – and the situation looks little better for 2012. Figures for new money raised tell a similar story: from a high of nearly £10 billion (€12.45 billion) in 2006, the amount raised last year was less than 7% of that. And most of the activity has been in sectors like mining and exploration, with relatively little in technology.

So, despite its already relaxed entrance criteria aimed at young companies, AIM may not be the answer. The plans of the government and the LSE to focus on making changes to the LSE's main market, rather than AIM, seem to acknowledge that.

AIM is not alone in experiencing difficulties in the current climate. The number of new companies coming to London's main market from January to August this year stands at just 22 – this compares to over 80 listings in the equivalent, more confident, period in 2007. Indeed, according to John Kay's government commissioned review of equity markets, net new issuance in London has actually been negative over the last decade, with more companies buying back shares than issuing new ones. It has been principally a secondary market, not a way to raise new capital.

So what exactly is the government planning to do? Although it is not entirely clear from the outline announcement, it seems that there is a plan to create a new market (or market segment), perhaps based around the existing, less onerous, "standard" listing category. This would allow more relaxed eligibility requirements for high growth companies, including less demanding rules on free float (that is, the number of shares not owned by management and large shareholders) and remove the need for a three-year trading record – but still provide the cachet and reassuring governance framework offered by a listing on the main market. Given that there is already a segment for innovative R&D companies (techMARK®), which is available to companies with a standard listing, this may to some extent be a branding (or re-branding) exercise – not least because the government's freedom to make major rule changes in this area is constrained by the European regulatory framework.

Such changes as there are will be unlikely to bear fruit in the short term, as the government acknowledges. But the plan is to be ready for when conditions improve – in the words of the UK minister for Universities and Science: "There is a rich crop of innovative European high-tech companies that will be going to the financial market over the next few years. We're determined to make sure that as many as possible should do an IPO and float in the UK, not elsewhere".

It is important to learn the lessons of the dotcom era, when a fast-track listing route was created for "innovative high growth companies". This removed the need for a three-year trading record on the part of the company being listed, provided there was a significant capital raising at the time of IPO and the company committed to quarterly reporting once listed. This concession was just as quickly removed when the boom ended and investors in these companies were left out of pocket (although a similar concession still exists for scientific research based companies). And the legacy of this period remains – over 10 years later, European investors are still wary of young technology or internet companies. (More wary, it seems, than US investors – if recent flotations like that of Facebook are anything to go by.)

But, despite this cautionary tale, at times like this it can pay to be optimistic. Any changes that improve access to the London markets – at least for the right kind of companies – while at the same time taking on board the lessons of the 1990s, are to be encouraged. And it may not take more than one or two high profile listings to revive investor sentiment. Last week venture capital- backed Mimecast, which provides email management services, was encouraged enough by the government's plans to say that it would reconsider a London IPO, rather than going to New York, in the next few years.

The government has promised to provide further details on the eligibility criteria and the benefits of the new route to market before the end of the year. The venture capital community, whose fortunes are closely tied to the availability of IPO exit routes, will watch these developments closely – and will no doubt applaud the government's efforts.


Edmund Tyler, Professional Support Lawyer, edmund.tyler@sjberwin.com



Edmund is a Professional Support Lawyer in the Corporate Department.


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