Britain is in the midst of a technology revolution, with an increasing number of technology companies choosing to list on the London Stock Exchange (LSE) to raise capital for further expansion.
Xavier Rolet, chief executive of the LSE, said in a statement earlier this month that “the wealth being created by this tech revolution could be shared more widely”, encouraging the next government to enable more opportunity for private retail investors to participate.
Rolet went on to say that “if there is going to be a new Google or Facebook in this country, private investors should be able to share in it”, and believes that up to 20 per cent of floats should be made available to the public – a view shared by Margaret Thatcher in relation to the large privatisations of the 1980s, in order to prevent the majority of shares in IPOs ending up “in the hands of a few of the same institutions”.
The number of IPOs on both the LSE Main Market and AIM has increased greatly over the last year, with a positive outlook for 2015. A total of 219 companies listed on the LSE in 2014, the highest number since 2007, prior to the global financial crisis, raising £12bn. AIM has also seen as increase in IPOs, with 75 companies listing on the market in 2014.
The markets have also been boosted by recent tax changes introduced by the coalition government. Individuals are now able to include AIM stocks as part of their tax-free ISA savings, and stamp duty has been removed from purchases of AIM stock. These changes have led to greater access and interest amongst retail investors in AIM companies in particular.
But how can private investors participate in the next Google or Facebook, and how will the landscape change? The last 20 years have seen it become increasingly difficult for private investors to access IPOs, with a series of regulatory hurdles and burdens imposed on companies and advisers which can often make it uneconomic to offer new share issues to retail clients.
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The key factor for companies which propose to make a public offer as part of an admission to AIM is the need to prepare a formal prospectus document, to be pre-approved by the Financial Conduct Authority (FCA), the requirements for which go significantly beyond the “standard” AIM admission document which would apply where shares are placed only amongst institutional investors.
For companies choosing to list on the Main Market, the requirement to issue a formal prospectus exists (subject to certain limited exceptions) whether or not they also choose to make a wider public offer, so any temptation here to resist making a wider public offer is often influenced more by seeking to minimise additional administration (and/or underwriting) costs and dilution, although companies listed on the Main Market are still required to have at least 25 per cent of their shares in “public hands”.
However, it is interesting to note the emergence of crowdfunding in recent years, a sector now regulated by the FCA, and how this is beginning to influence the approach of companies choosing to list on the LSE. In 2014, we saw the first integrations of crowdfunding into the UK public equity markets when Chapel Down, the ISDX-quoted wine producer, raised a total of £3.95m of which £1.7m was raised by way of a regular institutional placing of shares with the balance (£2.25m) raised via an equity crowdfunding on Seedrs. Whilst this was a secondary raising, rather than a new issue, this was followed in December 2014 by the IPO on AIM of Mill Residential REIT, raising a total of £2.5m comprising £1m by way of a regular institutional placing and £1.5m by way of equity crowdfunding through SyndicateRoom.
The interest of the private retail investor in the UK public markets therefore appears to be on the rise through the crowdfunding platform, often structured through the use of nominee vehicles standing “in front of” the crowd potentially enabling retail investors to participate in the public markets without necessarily constituting a public offer. It will be interesting to see if and how this trend continues, potentially indirectly enabling the sharing of IPO wealth encouraged by Rolet; listed companies may well take heed and follow the more conventional route of allowing retail investors to participate directly in new share issues as both interest and demand grows to share in the fast-paced technology revolution.
James Lyons is a partner at law firm Ashfords.
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