1. High Growth Segment Overview
- The new High Growth Segment of the London Stock Exchange’s (the "Exchange") Main Market opened on 27 March 2013.
- The High Growth Segment is intended to be a halfway house between AIM and the Official List. Unlike AIM, the High Growth Segment is part of the Main Market, which is an EU regulated market so an issuer (which must be incorporated in the EEA) seeking admission will need to produce a prospectus approved by the Financial Conduct Authority (the "FCA") (or home country competent authority) in accordance with the Prospectus Rules and following admission will be subject to the applicable parts of the Disclosure Rules and Transparency Rules. The securities of the issuer will not, however, be admitted to the Official List although a non-binding statement that the issuer intends to apply for admission to the Official List in due course (as well as a statement on how it intends to satisfy the eligibility criteria for admission to the Official List) must be included in the prospectus.
- Rather than appointing a nominated adviser or sponsor for its IPO, the issuer must appoint a ‘Key Adviser’, a new category of adviser drawn from the sponsor list (but approved for this purpose by the Exchange).
- The Key Adviser need not be retained after IPO other than in relation to significant transactions or where a significant event occurs, much more like the requirements of the Official List. By contrast, on AIM the retention of a nominated adviser is a continuing obligation and failure to have one results in the immediate suspension of the AIM company's shares.
- Whereas a nominated adviser owes its duties to the Exchange, the role of a Key Adviser after admission is to advise the issuer only and the Key Adviser does not owe duties to the Exchange in relation to that advice. That said, the rules are similar to those relating to sponsors under the Listing Rules in their dealings with the FCA. Notably the Key Adviser is required to deal with the Exchange in an open and co-operative manner and promptly deal with all enquiries raised by the Exchange. There are also whistle blowing obligations on the Key Adviser to inform the Exchange where it, or the issuer, has failed to comply with the relevant rules and where the issuer denies the Key Advisor access to documents or information that have been the subject of a reasonable request.
- An issuer on the High Growth Segment can only appoint one Key Adviser which is similar to AIM but is in contrast to the Official List where the issuer can appoint joint sponsors.
2. Key Eligibility Requirements for Admission
The issuer must:
- be a public limited company incorporated in the EEA;
- together with its subsidiaries be a trading business;
- be able to show a growth in audited, consolidated revenue of at least 20 per cent. (on a compound annual growth rate ("CAGR") basis) over the three year period prior to the IPO;
- have at least 10 per cent. of its shares in public hands at admission;
- on admission have shares in public hands with a value of at least £30 million, the majority of which must be raised at admission by the issue of new securities or sale of existing securities; and
- have a sufficient number of registered holders to provide an orderly market post admission.
3. Key Continuing Obligations
The matters set out in section 2 (other than the third and fifth bullets) are continuing obligations.
The issuer must also:
- deal with the Exchange in an open and co-operative manner;
- promptly inform the Exchange where it becomes aware that it is likely to fail or has failed to comply with the rules;
- provide the Exchange with information or an explanation to verify that the rules have been complied with;
- appoint a Key Adviser where it is proposing to enter into a significant transaction or a significant event occurs including a notifiable transaction (akin to a class 1 transaction on the Official List), related party transaction or reverse takeover;
- maintain a website on which key information is publicly disclosed (similar to AIM Rule 26);
- announce a notifiable transaction, related party transaction or a reverse takeover (as well as obtain shareholder consent for a reverse takeover); and
- announce certain other matters including changes to the board of directors, accounting reference date, registered office, legal name, capital structure and resolutions (other than those concerning ordinary business) passed in general meeting.
If the High Growth Segment is seeking to reintroduce a route to a regulated market for fast growing companies which was removed with the abolition of the old chapter 25 of the Listing Rules on 30 June 2005, it has introduced two new hurdles which may militate against its success or, at least, reduce the universe of companies which are eligible and that would have been able to list under the old Chapter 25. The first hurdle is that if the issuer is proceeding with the minimum free float of 10 per cent., the requirement for this to be valued at £30 million means that the minimum initial market capitalisation for the issuer is effectively £300 million (contrasted with £700,000 for the Official List). The second hurdle is the unprecedented requirement of 20 per cent. CAGR over the three financial years prior to admission. It is not clear that lowering the shares in public hands test (10 per cent. rather than 25 per cent.) will address the reasons why technology companies, in particular, appear to be more attracted to the US exchanges and investor community, where larger peer groups and greater analyst coverage tend to lead to better valuations than are available in London.
On the up side, an EEA incorporated company which joins the High Growth Segment:
- will not be subject to the costly Sarbane Oxley requirements which depress annual profits even if the initial valuation at IPO in the US is higher than that achievable in London; and
- will have on going transaction costs following admission which are more in line with AIM than the more onerous requirements of the Official List. For example, a transaction that meets the 25 per cent. class test will trigger only an announcement obligation and will not require the issuer to obtain prior shareholder approval as it would on the Official List. However, if the transaction involves the issue of 10 per cent. or more of shares to be admitted to the High Growth Segment a prospectus will be required which will result in more costs than would be the case on AIM.
Investment banks may see the High Growth Segment as an attractive alternative as:
- the obligations of the Key Adviser are less onerous than those of a nominated adviser for fast growing companies which are at an early stage in their development and which have not yet had the experience of sophisticated corporate governance structures; and
- they will be dealing with the new primary market regulation team at the Exchange which, if it behaves in a similar manner to the AIM team, is likely to be pragmatic and more easily accessible than the FCA which no longer enters into dialogue with issuers or their advisers other than in writing.
For a more detailed comparison of the eligibility criteria for AIM, standard listing, premium listing and the High Growth Segment please see the eligibility criteria table.