This week we focus on the FCA's review of the effectiveness of primary markets, including proposed changes to the structure of premium and standard listings, calculating the profits class test, access to listing for specialist companies, and reverse takeovers.


The Financial Conduct Authority has published a discussion paper (DP17/2) and a consultation paper (CP17/4), both as part of a review it is conducting on the effectiveness of the UK's primary markets.

The papers seek views on specific proposed changes to the FCA Handbook, but also fundamental questions about the structure of the UK's listing and markets regime. Topics covered include the attractiveness of London as a trading venue and the various markets within the UK, ease of access to listing for specialist and international companies, the ability to list debt securities in the UK, and how to provide retail access to debt markets in the UK.

The FCA is seeking responses by 14 May 2017.

We highlight below a selection of some of the key items coming out of the two papers.

Premium and standard listings

The FCA is assessing whether the distinction between premium listings (which carry a higher burden of compliance) and standard listings (which are based on EU minimum requirements) remains relevant.

Standard listings were meant for overseas companies to seek a secondary listing in the UK but have increasingly become a "default" venue for issuers that can't meet the requirements for a premium listing. Indeed, an issuer often needs to meet fewer requirements to seek a standard listing than it would to seek admission to an unregulated market, such as AIM.

The FCA is also concerned that the name "standard" list connotes a less prestigious and attractive framework for issuers and so is asking for suggestions for a new name for this type of listing.

International segment

The FCA is also asking whether there should be a new segment specifically designed for international companies wishing to come to the UK. The concern is that these companies may find compliance with the premium list impossible, but would be deterred from the standard list for the reasons above.

Compliance-wise, this would be an intermediate option between standard and premium listings. International segment issuers would have to retain a sponsor when listing, maintain a minimum net market cap, show a three-year revenue-earning track record and apply the rules on related-party transactions. Other features of the premium-listing regime would apply on a "comply or explain" basis.

The profits test

Premium issuers must run four "class tests" when proposing to enter into a transaction. If any test gives a result of 5% or more, the deal is a class 2 transaction and the issuer must make certain disclosures. If any result is 25% or more, it is a class 1 transaction and shareholder approval is required. If any result is 100% or more, it is a reverse takeover, shareholder approval is required, and the issuer's shares may be suspended and (ultimately) its listing cancelled.

One test - the profits test - involves dividing the profits attributable to the assets being bought or sold (e.g. shares in a target company) by the issuer's profits. However, this can give an unrepresentative result, particularly if there have been historic exceptional items or genuine one-off costs.

Currently, issuers can usually get FCA consent to apply an adjusted profits figure, or to disregard the profits test result entirely if it pushes the deal into class 1 but the other tests are all below 5%.

The FCA is proposing to change the regime so that issuers only need to consult their sponsor (and not the FCA) to apply adjusted profits figures or to disapply the profits test result in these circumstances. The issuer would only be able to do this after consulting with its sponsor, and the sponsor would have to form the view that the profits test result is "anomalous".

This essentially codifies existing practice and pushes the burden of review from the FCA to sponsors.

The new derogation would be limited. Premium issuers would still consult the FCA on related party transactions and where any other test result is above 5%. It would also not be available to standard issuers (which are not subject to the class tests but do require approval for reverse takeovers).

Reverse takeovers

As mentioned above, if any of the class tests give a result of 100% or more, the transaction will be a "reverse takeover". This is also the case if a transaction would result in a fundamental change in the issuer's business, board or voting control. This applies to both premium and standard issuers.

One consequence of this is that the FCA will often suspend the issuer's listing. This is on the basis there will be insufficient public information on the target of the transaction unless the issuer can provide that information, and that this could, in turn, lead to a disorderly market in the issuer's securities.

Following the Market Abuse Regulation coming into effect, the FCA is now proposing to assume that companies will have disclosed all relevant information on the target of a reverse takeover. The FCA would no longer operate on the assumption that an issuer's listing will be suspended.

However, the FCA still intends to cancel an issuer's listing on completion of a reverse takeover, and to continue its practice of suspending a listing when the issuer is a shell company (a company whose assets are wholly or mainly cash and short-dated securities). Finally, the FCA will continue to hold a general power to suspend listings in order to protect investors and the smooth operation of the market.

Routes to listing for specialist companies

A company applying for a premium listing must demonstrate a three-year revenue-earning track record by reference to published historical financial information. However, there are currently concessions to this rule available to scientific researchbased companies (SRBCs) and mineral companies.

The FCA is proposing to provide more detail on these existing concessions. It is also proposing to introduce a new concession for property companies. This is because investors typically look more to the value of the property held by these kinds of companies.

To take advantage, a property company would need to demonstrate increases in the gross asset value of its real estate assets over three years, and that 75% of those assets are revenue-generating when it applies to list. The concession would be open to all property companies, but the FCA suggests that two types of company are most likely to use it:

  • Those that have been established for fewer than three years and hold predominantly mature, let assets that generate revenue.
  •  Those that have been developing assets for three years but which focus on projects that may be revenuegenerating only after many years, or decades.


NEX Exchange (formerly ISDX and PLUS!) has issued new Growth Market Rules for Issuers and a new Corporate Adviser Handbook (to replace the previous ISDX rules and handbook).


The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 have been published. They require businesses with a certain minimum number of employees to publish annual metrics regarding pay disparity between male and female employees. For more information, see our Employment colleagues’ update on the new regime.