With European and UK equity capital markets
moribund, lawyers are calling for the adoption of a US-style
regulatory regime to ensure they remain competitive.
Lawyers in the UK have warned the European initial public
offering (IPO) model is completely broken. They argue a shift
to the US more efficient IPO execution and marketing
practices is the only way to encourage more start-ups to list
in London and the EU.
The UK government last week revealed plans to relax listing rules to encourage fast-growing
technology companies to list on the London stock exchange
(LSE). The European Securities and Markets Authority (Esma)
is also expected to publish a consultation paper this week as part of
efforts to boost capital access for smaller companies and
head off any preference for raising money in the US.
But Latham & Watkins Olof Clausson said changing the
listing rules would do little to attract listcos to the
regions markets. EU and UK markets have some
serious problems that a simple change to the listing rules
will not address, he said.
What needs to change
Pre-deal research had taken on increasing significance in the
marketing of a deal, he explained. This had created a
tremendous amount of additional work for investment bankers
and lawyers to ensure consistency of information across the
IPO prospectus, marketing data as well as analyst
presentations and equity research. This had thereby affected
the speed and cost at which a company was able to list.
Others believed the growing focus on equity research had also
placed increasing pressure on equity analysts to squeeze as
much positive news as possible out of a company, unduly
influencing IPO pricing.
A London-based ECM lawyer said changes needed to be made to
allow the publication of equity research later in the IPO
process. Its much healthier to allow IPO pricing
to develop organically, he said. Weve
forgotten that an IPO should be priced at the lowest price a
company ever trades at.
It would be better, he argued, to follow the US system in
which a draft prospectus was filed with the Securities and
Exchange Commission (SEC) six or eight weeks before an IPO
road show. This allowed institutional investors to properly
research a company before the road show started. More and
deeper institutional knowledge allowed for more effective
capital formation, he said.
The US model is much more efficient, when it comes to
due diligence, drafting the prospectus and marketing a deal
without the involvement of equity research, than the EU
model, he said.
Its obviously not perfect but US dealmakers are
able to go to market more quickly and at less cost than their
EU and UK counterparts and that ultimately makes their market
more attractive, he said.
Another UK-based ECM in-house counsel said regulators had
lost touch with market realities. The listing rules
have very little to do with how we execute IPOs today,
He questioned if the EU prospectus directive had been applied
The IPO prospectus is no longer the key document it was
meant to be, he explained. Regulators dont
realise that its actually the analysts research
report not the prospectus that drives the IPO process. If
they knew the extent to which information is made available
in research reports, theyd be horrified.
Regulators needed to focus much more on how IPOs are marketed
in the EU and UK today, and the documentation used for that
process, he said. I struggle to see the point of filing
a prospectus with the regulator, for the regulator to review
if the regulator then doesnt even look at any of the
other marketing documents being used, he said.
An EU Jobs Act?
Under UK proposals fast-growing technology companies will be
able to float as little as 10 % of their business on the LSE.
The current requirement is that at least 25 % of the shares
of a listed company be freely-tradeable.
Both the UK rule changes and Esmas paper aim to address
the difficulties faced by small to medium enterprises (SMEs)
in accessing financing. They mirror the US Jumpstart Our Business Startups Act (Jobs
Act), as signed into law by President Obama on April 5 2012,
which intended to improve capital formation for US growth
Clausson said the Jobs Act had been a Silicon Valley driven
initiative. However, he believed it remained to be seen what
market impact it would have.
Jones Days Daniel Busher said the battle cry on both
sides of the Atlantic had been that the IPO model was broken,
but for very different reasons. The Jobs Act is an
attempt to address the issue in the US, he explained.
The European market needs to also address reducing the
burdens, shortening the timetable but still providing
meaningful information to investors.
Replacing written research with analysts speaking
directly with investors, like in the US, was being actively
considered, he said. The Jobs Act allows confidential
submissions but then the prospectus must be public 21 days
before the road show, allowing investors to focus on the
principal disclosure document, he said. That
seems like a good idea, and could be done with pathfinders,
another idea being actively considered.
Allen & Overys Mark Dighero believed the UK move to
ease listing rules for SMEs was a good idea in principle. But
he remained sceptical it would have much impact in
Lowering the free float requirement is a good idea, but
it doesnt address the liquidity issues investors will
face if they are only offered small pools of shares, he
said. Changing rules to make SME IPOs cheaper and
faster is again a nice idea but if that was really the main
issue why arent such companies looking to list on
Londons AIM market, which was created in part for that
The poor performance of EU and UK ECM has eroded
investor confidence in the market, he said.
Changing the listing rules wont change
that, Dighero added. Nor will it dissuade
technology companies from listing in the US, where the market
is more knowledgeable about technology and more willing to
invest in techcos.
Another UK-based ECM lawyer said the wall of money available
in the US made it a very attractive market for buyers.
Theres a huge willingness to back companies in
the US, he said. Its hard for the smaller
EU and UK markets to compete with that.
He argued that shifting to a US regulatory regime, and
lessening the focus on pre-deal research was not the right
way to go, however. It would create a whole minefield
of legal issues, he said.
I dont think the EU model is completely
broken, he said. It would be great if we came up
with a better one but the IPO model were currently
following works in the rules.
Indeed, Akin Gumps Strauss Hauer & Feld
partner Anthony J Renzi in Washington DC last month argued
European and UK markets, such as the Oslo Stock Exchange and
Londons AIM, presented an attractive alternative to a US IPO for many SMEs.
But the UK-based ECM lawyer believed the US draft
prospectus model was a good idea in theory. The obvious
benefit of this is that lots of investors get to look at the
preliminary numbers and make an educated decision on the
stock, he said.
But he warned companies would be uncomfortable with the
public airing of information. Its a bit like
opening up your kimono and letting everyone take a
look, he said.