The EU Prospectus Directive (PD) came into force on 1 July 2005 setting out the EU’s requirements to protect investors in listed companies throughout the European Union.
Unintended consequences of the PD include the virtual extinction of rights issues and open offers and the rise of “exchange regulated markets” throughout Europe including AIM, PLUS Quoted and Alternext. The common feature of these markets is that they are run outside the PD by market operators illustrating a significant demand for capital by smaller companies unable to fully comply with the PD.
Until now an IPO on the UK Official List has required much more than the minimum PD requirements – issuers must have a sponsor, a three year track record, at least 25% of their shares in public hands, comply with the Combined Code on Corporate Governance etc. Many have claimed that such additional investor protection is part of the secret of London’s success as a financial centre.
But the European rules were clear. Companies complying with the PD were entitled to a listing on the UK Official List by virtue of the passporting provisions provided they lodge their prospectuses with the FSA. So European issuers could have a prospectus approved in Belgium or Ireland and then demand admittance to the UK Official List without compliance with the additional requirements of the UK Listing Rules.
Fearing investors would be confused the FSA has divided the Official List into two: after April 2010 issuers complying with EU minimum requirements will be given a “Standard Listing” and those embracing the full Listing Rules will be recognized with a “Premium Listing”.
Yet a distinguishing feature of the UK Listing Rules is the requirement to have a Sponsor – an independent financial institution which is prepared to lend its reputation to the aspiring issuer. The FSA can exert indirect pressure on the market by bestowing and removing Sponsor status.
AIM’s distinctive system of Nominated Advisers goes much further. Every AIM company must have a Nomad, who is both poacher and gamekeeper charged with ensuring issuers comply with the rules and remain suitable for listing. The London Stock Exchange can shape the market by controlling the Nomads and has been exercising its authority in both informal and formal ways to keep standards up and unsuitable companies off the market.
Yet such controls are alien to the PD. European politicians believe disclosure is everything and the requirement for home state regulators to approve documents will ensure a high level of disclosure, leaving the market to decide on suitability, liquidity and corporate governance.
With Standard Listing the FSA have cleared the way for domestic UK issuers to achieve listing on a UK public market without the need for a “minder” of any sort – possibly a significant business opportunity for those in the corporate finance business who do not have Nomad or Sponsor status.
It is arguable that the PD rules are tougher on IPOs than the AIM requirements. But the main difference is the need to have a Prospectus signed off by the FSA. Some advisors may see that as a small price to pay to break free from the growing level of interference and control the LSE is exerting over Nomads. And they can sell an Official Listing to putative issuers – conforming with the traditional view that such a listing is superior to an AIM listing.
Standard Listing will undoubtedly be the right product for certain types of issuers. However it is not clear that the FSA were under pressure from the EU to introduce a Standard Listing regime in the UK and history will judge whether their doing so will significantly undermine AIM’s attempt to improve the quality of advisors and issuers on its market.
Donald Stewart is a Partner in Faegre & Benson LLP’s corporate practice and is Chairman of the Quoted Companies Alliance.