The London Stock Exchange (LSE) created a new segment of the Main Market in March 2013, the High Growth Segment (HGS), to attract rapidly expanding companies to list in the UK. The new segment sits alongside: (i) the existing Premium and Standard Segments of the Main Market; and (ii) the AIM market.
Alternative to NASDAQ
The HGS is intended to provide rapidly expanding UK and European technology businesses an alternative to listing on The NASDAQ Stock Market (NASDAQ) in the US. NASDAQ has been historically popular with UK and European technology companies looking to list securities as a result of strong investor support from US institutions, extensive research coverage of technology businesses listed on NASDAQ by US banks and a lack of minimum free float requirements. The move by the LSE has parallels with the US’s relaxation of various regulatory hurdles under the Jumpstart Our Business Start Ups Act (JOBS Act), which, among other things, has eased the process for companies known as "emerging growth companies" (defined in relevant US Securities and Exchange Commission (SEC) regulations as a company with total annual gross revenues of less than US$1 billion during its most recently completed fiscal year) to offer securities publicly in the US.
In order to be eligible for admission to the HGS, the issuer must have a prospectus approved by the United Kingdom Financial Conduct Authority (FCA) (formerly, the United Kingdom Listing Authority) or the competent authority of another European Economic Area (EEA) State. In addition, the issuer and its key adviser must establish through submissions to the LSE that it meets certain eligibility criteria, including that it:
- Trading — is a trading company incorporated in the UK or EEA issuing equity shares only;
- Free float — has a minimum free float of 10 percent of which the value must be at least £30 million (approx. US$46 million) the majority of which must be raised by the time the securities are admitted to trading on the LSE through the issue of new securities or the sale of existing securities;
- Growth — has a historic revenue growth of 20 percent (on a compound annual growth rate basis) over a prior three-year period; and
- Assets — has control of the majority of its assets.
In addition, an applicant to the HGS must give a non-binding indication in its prospectus setting out that it intends to apply for admission in the future for a Premium or Standard listing and how it intends to satisfy the eligibility criteria for such listing. Although the statement is non-binding, it reflects the spirit of the HGS which is designed to be a transitional route into a Premium or Standard listing.
The HGS is specifically targeted at companies with a market capitalization between £300 million and £600 million, as these companies will be able to provide the 10 percent minimum free float required (as set out in (b) above). Mineral resource companies at exploration stage and investment entities are not eligible to list on the HGS.
Prospective issuers considering listing on the HGS should consult with their legal advisers and the LSE at the earliest opportunity to discuss their eligibility.
Key Differences to the Other LSE Markets
The HGS requires a minimum free float requirement of only 10 percent compared to 25 percent for the Premium and Standard Segments of the Main Market. Although there is no such minimum free float requirement for AIM companies, the appointed nominated adviser to a proposed AIM company will need to give an assessment of suitability of the company to the LSE to be admitted to trading on AIM, and the lower the free float percentage, the harder it is for the nominated adviser to convince the LSE that the company is suitable for admission. The typical free float for an AIM company is in excess of 25 percent.
Like a Standard Segment listing and an AIM admission, HGS applicants will need to provide audited historical financial information for three years or for such shorter period as Annex 1 of the Prospectus Rules specifies. For a Premium Segment listing, the LSE requires the issuer to provide audited historical financial information for a period of three years. The requirement for Premium Segment listing applicants is stringent, as applicants need to submit historical financial data which represents at least 75 percent of their business for a three-year period.
HGS applicants will need to demonstrate growth in revenue of at least 20 percent on a compound annual growth rate over the prior three years in contrast to Standard listing and AIM applicants who do not need to meet any growth requirements set by the LSE.
HGS applicants will also need to be able to control the majority of their assets from the point of admission in contrast to Premium Segment applicants who will need to demonstrate control over at least a three-year historic period. Standard Segment and AIM applicants are not subject to these "control" rules.
Each issuer applying for listing on the HGS must appoint an LSE-approved "Key Adviser" from the FCA’s list of authorised firms to assist with admission and give ongoing advice. The Key Adviser acts as a conduit between the issuer and the LSE. The Key Adviser will guide the issuer in understanding and meeting its responsibilities and will provide assurance to the LSE that the responsibilities of the issuer have been met.
A Key Adviser will also provide advice to the issuer, once listed, on certain important transactions (for example, notifiable transactions, related party transactions, reverse takeover transactions, a further issue of securities or a purchase of securities, cancellation of its admission to the HGS or if the issuer is in severe financial difficulty, including in relation to any proposed restructuring, reconstruction or disposal). Unlike the relationship between AIM quoted companies and their nominated adviser, an issuer listed on the HGS will not be required to retain a Key Adviser at all times. However, as high-growth companies are likely to undertake regularly the types of key transactions listed above, it is likely that Key Advisers will agree retainers with HGS-listed issuers.
The HGS rulebook lists a number of continuing obligations which must be complied with by issuers. A brief summary of the key continuing obligations is set out below:
- Key Adviser — The issuer must obtain the advice of its Key Adviser on certain key transactions.
- Notifiable transactions — an issuer must notify a Regulatory Information Service (RIS), which is a service approved by the LSE for the distribution to the public of listed company announcements, as soon as possible after the terms of a notifiable transaction are agreed. A notifiable transaction is a transaction outside the ordinary course of an issuer’s business where any percentage ratio is 25 percent or more. The percentage ratio relates to a number of class tests (gross assets test, profits test, consideration test and the gross capital test) which are set out in Annex 1 of the HGS rulebook.
- Related Party Transactions — an issuer must notify an RIS as soon as possible after the terms of a related party transaction are agreed upon. A related party transaction is a transaction where any percentage ratio is five percent or more and it is between the issuer and a related party, which is defined in the HGS Rulebook to include, inter alia, directors and persons who control more than 10 percent of the issuer’s share capital.
- Reverse Takeovers — where an issuer proposes to undertake a reverse takeover (a transaction whereby any percentage ratio is 100 percent or more or which in substance results in a fundamental change in the business, board or voting control) it must obtain prior shareholder approval. Once this is obtained, the admission of the issuer’s securities will be cancelled and the issuer, as enlarged by the reverse takeover, must reapply for its admission of securities to the HGS should it wish to be readmitted and it must satisfy the HGS rulebook eligibility requirements as if it was a new applicant.
- Continuing website disclosures — the issuer must maintain from admission a website containing, inter alia, the following information: a description of the board, a description of the business, its current constitutional documents, certain prescribed information regarding its securities, its financial reports and all notifications to an RIS within the last 12 months.
- Corporate Governance — the HGS rulebook requires an issuer to include in its annual financial report details of the corporate governance code to which the issuer is subject and/or details of the corporate governance code or practices to which the issuer has voluntarily decided to apply and how the issuer has applied the main principles set out in such code or practices. In addition, where the issuer has not complied with relevant HGS provisions, it must include a statement that sets out those provisions and explain the reasons for non-compliance.
HGS is a segment of an EU Regulated Market (the Main Market is authorized and functions in accordance with the Markets in Financial Instruments EU Directive) and, therefore, an issuer on the HGS is subject to certain EU directive standards, such as applicable parts of the FCA Disclosure Rules and Transparency Rules and the Prospectus Rules. The FCA Disclosure Rules govern the disclosure and control of inside information and transactions by persons discharging managerial responsibilities and their connected persons. The Transparency Rules relate to the notification of major shareholdings and the notification and dissemination of information made by issuers of transferable securities. The Prospectus Rules are the FCA rules which were introduced to implement the Prospectus Directive into the UK which provides for a single regime throughout the EU governing the requirement for a prospectus and its content, format, approval and publication. There are a number of continuing obligations that issuers will need to comply with under these rules, including rules on notifiable transactions, related party transactions, reverse takeovers, corporate governance and making ongoing company website disclosures, as described above. Securities admitted to the HGS are not admitted to the Official List maintained by the FCA and therefore the London Stock Exchange Listing Rules do not apply.
HGS — a Worthy Competitor?
Only time will tell whether the HGS will be a worthy competitor to NASDAQ. Nevertheless, the HGS offers another listing alternative in London for high-growth companies, and the regulatory regime of the HGS may prove to be more attractive to investors. Some argue, however, that persuading technology companies to list in London is not as simple as revising the listing criteria and that for London to really compete with New York it will need wider analysis and coverage of technology companies on the research side and a deeper pool of capital targeting technology companies on the buy side.