By Matthew Edwards and Jacqueline Clover
The new High Growth Segment (“HGS”) of the Main Market of the London Stock Exchange (“LSE”) has officially opened for business, signalling London’s commitment to supporting the growth of technology companies incorporated in the European Economic Area.
The equity-only HGS is targeted specifically at fast-growing companies, providing an alternative to joining AIM or applying for a listing on the Official List (the “Official List”) and trading on the Main Market. Many UK-based technology companies have chosen to list on overseas markets, such as NASDAQ in the US, where listing conditions have been seen as more favourable. According to press reports, there has not been an LSE Official List IPO of a European technology company since 2010. Recent international initiatives in the US such as the proposed introduction of the Jumpstart Our Business Startups Act (the “JOBS Act”), which proposes a relaxation in listing admission requirements and a reduction in the burden of continuing obligations for emerging growth companies in the US, have also set the stage for greater tech-friendly investment opportunities abroad.
A key draw of the new HGS is access to capital in exchange for making available as little as 10% of the company for public ownership. This lower free float requirement compares to the Official List requirement of at least 25% of shares in public hands. Notably, NASDAQ’s minimum free float requirement is 10%.
An HGS entrant must have at least 10% of the number of shares admitted in public hands with a value of at least £30 million, the bulk of which must be raised on admission. This may be a tough bar to meet; in practice it may mean that companies seeking to list on the HGS will have to offer more of their shares to the public than just 10%. The 10% minimum free float requirement also implies a market capitalisation of £300m, whereas the market capitalisation requirement for listing on the Official List is £700,000.
Another incentive for listing on the new HGS is that HGS companies do not need to comply with the UK Financial Conduct Authority (“FCA”) Listing Rules. Instead, the HGS has its own Rulebook, public consultation on which closed in March 2013. HGS-listed companies, therefore, face a relatively reduced on-going compliance burden compared to Official List companies.
As HGS companies will be trading on a Regulated Market, the FCA Disclosure and Transparency Rules will apply. HGS companies will also need an FCA (or other European Economic Area competent authority) approved prospectus in order to gain admission.
Each HGS company is required to appoint a Key Adviser, a role comparable to that of a sponsor on the Official List. The Adviser’s role in overseeing company transactions, such as significant share issues, related party transactions and reverse takeovers, may also help to boost minority shareholder confidence in HGS companies.
Companies seeking an HGS listing must have been in business for at least four years prior to listing; entrants must be able to demonstrate a historic revenue compound annual growth rate of 20% or more over a three-year trading period prior to admission. Effectively, for start-ups, this means that only the highest financial performers will be eligible to join.
As the HGS is essentially a transitional marketplace, bridging the gap for companies who do not slot easily into AIM or the Official List, HGS entrants will be required in their prospectus to state their intention to eventually join the Official List, if and when they become eligible. In addition, HGS applicants will be required to provide a self-assessment of how they intend to satisfy the Official List eligibility criteria.