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Government looks to reform rules around stock market flotation in UK


Technology businesses across Europe will be encouraged to float on the London Stock Exchange (LSE) under new proposals aimed at reforming the rules governing listings on the stock market, the Government has said.

But a pension fund trade body has warned that reported plans to allow companies to float with by selling fewer shares than is permitted at the moment would damage the markets and investors' interests.

The Department for Business, Innovation and Skills (BIS) announced that it had "developed a set of ambitious proposals" in partnership with LSE to encourage "European mid-sized high-growth businesses" in particular to "float" in the UK. BIS said those kinds of companies were "currently under-represented on the UK's public markets".

"Proposals will include a planned new route to the UK IPO market for high-growth companies, which is likely to feature reformed rules on free float, eligibility criteria and reporting requirements," BIS said in a statement. "This will ensure that the needs of dynamic businesses – particularly internet and technology companies - and their investors are met."

BIS said that its planned reforms would provide a "launch pad" for companies to obtain a "full Premium Listing" and that they would make the UK "an equally attractive and competitive listing destination" as the US following recent changes there to the regulatory regime affecting US public markets. It said the reforms were part of the Government's wider ambitions of "ensuring that public markets continue to meet the funding needs of growing, ambitious companies."

BIS added that the Government would review whether "the current regulatory rules" in the UK are "deterring investors from funding growth companies". It said it would work with LSE in order to make equity capital more widely available to global firms looking to base themselves in the UK.

David Willetts, the Minister for Universities and Science, said that the planned reforms, which would need the backing of the Financial Services Authority (FSA), would help attract companies to commit to an 'initial public offering' (IPO) in the UK.

An IPO is where the general public is given the chance to buy shares in a company. They are typically utilised by emerging firms looking to raise capital. Earlier this year Facebook launched an IPO on the NASDAQ exchange in the US, although the value of the social networking company's shares has fallen since then.

"There is a rich crop of innovative European high-tech companies that will be going to the financial market over the next few years," Willetts said. "We’re determined to make sure that as many as possible should do an IPO and float in the UK, not elsewhere."

"This bold action will send a signal to entrepreneurs and investors across Europe that London’s public markets are throwing open their doors to high-growth companies. I have no doubt that this new route to market will help to bring new investment and new jobs to London in the months ahead," the Minister added.

Under current rules, companies must make at least a quarter of their shares available to the public in order to be eligible to float on the UK stock market. In a consultation (173-page / 1.33MB PDF) on plans to reform UK stock market listing rules held earlier this year, the FSA said that the "intention behind this rule is to ensure that sufficient liquidity will exist in the secondary market, rather than to encourage wide public participation in an IPO (or indeed impact on the issuer’s corporate governance arrangements)."

BIS has said that it would outline further details on the "eligibility criteria and benefits of the new route to market" before the end of the year, but media reports have suggested that the Government want to change the rules to allow companies to launch an IPO on the LSE, even if they make as little as 10% of shares available to the general public.

However, the National Association of Pension Funds (NAPF) said that companies should not be allowed to launch an IPO on the "Main Market" in the UK unless they offer at least 25% of shares for sale to general public.

David Paterson, head of corporate governance at the NAPF, told Out-Law.com that rule changes around the UK's Alternative Investment Market (AIM) could instead be sought to attract emerging companies to raise capital in the UK.

"As institutional investors, pension funds continue to support a minimum free float of 25% for listings on the Main Market," Paterson said. "The LSE itself says that the Main Market is London’s flagship market for larger, more established companies. We believe this objective should be retained, including the 25% free float."

"However, pension funds are supportive of a more dynamic capital market for high growth companies. If businesses are genuinely hungry for equity capital a listing should be seen as the start of a journey, on which they build their reputation and investor following, thus enabling them to raise more capital on more favourable terms. It is not an end in itself," he said. "We see this as the key function of AIM and so suggest that consideration is given to what modifications are needed to the AIM rules to make it more attractive to both issuers and investors."

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