UK: London Stock Exchange Proposes New High Growth Segment

Background

On February 13, 2013, the London Stock Exchange (LSE) published its proposals for the creation of a new High Growth Segment (HGS) within its Main Market. The aim of the HGS is to help meet the needs of fast-growing companies aspiring to be included in the Premium segment of the United Kingdom Listing Authority's (UKLA) Official List. The HGS is likely to appeal particularly to technology companies, especially where the founders do not wish to give away too much of their initial ownership position.

Below are the key features of the HGS with an overview of its potential impact.

Eligibility Requirements

A key feature of the HGS is that the eligibility requirements for issuers will be less onerous than for a listing on the Premium segment of the Main Market. The proposed requirements are as follows:

(a) the company must be incorporated in the European Economic Area (EEA);

(b) only equity shares issued by commercial companies will be capable of being listed;

(c) there will be a minimum free float of 10% with a value of at least GBP30 million, the majority of which must be raised at admission either by the issue of new securities or the sale of existing securities – this means a minimum market capitalisation of GBP300 million; and

(d) the company must have a historic revenue compound annual growth rate of at least 20% over three years.

Legal Aspects of the HGS

As the HGS will not be a listed segment, companies on the HGS will not be admitted to the UKLA's Official List and so will not be subject to the UKLA's Listing Rules. However, because the HGS will be a segment of the LSE's European Union regulated market, the European Union financial services directives will apply and, accordingly:

(a) companies seeking admission on the HGS will need to produce a prospectus (approved by the Financial Services Authority or a competent EEA authority) and, in the prospectus, companies will be required to state their intention to apply for admission to the Official List in due course – this will be a non-binding statement but it ties in with the LSE's description of the HGS as a "transitional route" to the Official List;

(b) the HGS will have its own rulebook, which is currently in draft form and was published as part of the LSE's proposals; and

(c) companies will be guided by a "key adviser" whose role will be to assist with admission and provide ongoing advice – the key adviser's role will be based on the sponsor role which exists for the Premium segment of the Official List.

Timing

The LSE is currently seeking views from market participants concerning the draft proposals. The consultation period ends on March 8, 2013. The new regime is expected to be in place in the second half of 2013.

Potential Impact

The rationale for the HGS is to offer growth companies a genuine alternative for a London listing, in particular for companies which are too big for an AIM quotation but would also find it difficult to comply with the listing requirements of the Main Market.

The HGS will be of particular interest to internet and technology companies, but may also favour other companies such as high-growth resource companies – note however that resource companies at the exploration stage are expressly excluded from the proposed regime.

The LSE proposal for a HGS is not dissimilar to the regime introduced in the United States for growth companies under the recent Jumpstart Our Business Startups Act (the "JOBS Act") which, in 2012, streamlined requirements for companies generating less than US$1 billion in revenues. The introduction of the HGS also reflects the ongoing competition within the global capital markets, with the LSE also offering companies an alternative to a listing in the United States and aiming to make London a more attractive platform for growth companies.

The 10% free-float requirement is relatively low when compared to the 25% requirement for a Main Market listing on the Premium segment and may appeal to those heads of business who would prefer to keep a larger ownership position in their company, at least in the initial stages. However, concerns have been expressed that the three-year 20% growth requirement may be a significant hurdle which many companies will find difficult to overcome. As a result, it may be some time before the HGS succeeds in attracting a large number of companies.

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