Module 9: Stock Exchange Regulations

Question 1

Reasons for listing

Answer 1

1. Free trading of shares - companies shares are traded freely. Investors know they will be able to sell them on at any time => more attractive than similar unlisted business
2. Raise future finance - easier for a company to raise fresh equity by issuing issuing new shares

Question 2

Alternative investment market (AIM)

Answer 2

Those that do not meet criteria for Main Market may be eligible for admission to trading on AIM (LSE).

AIM offers similar benefits to full listing without imposing the full burden

E.g.

1. Do not need to have a three year track record
2. No requirement for 25% of the shares to be in the hands of the general public
3. AIM has more flexible regulatory regime => more appropriate to the size and profile of those listed

Stepping stone towards obtaining full listing

Question 3

Market Abuse Regulation (MAR)

Answer 3

Introduced in July 2016 - more regulation of AIM listed companies - bringing them more in line with companies listed on the Main Market

Main MAR requirements:

• additional rules around disclosure of inside info
• Extensive record keeping requirements when disclosure is delayed
• maintenance of insider lists
• introduction of ‘closed period’ prior to financial results during which directors cannot usually deal in shares

Question 4

Main Market - two tier system introduced April 2020

Answer 4

Premium and standard listings (both require a prospectus)

Premium - more onerous standards than those required by EU law

Standard listings - subject to the minimum EU requirements.

Question 5

Admission to listing
LSE operates two markets, the Main Market and AIM. Comp only listed if it trades on the Main Market.

Company must satisfy two distinct sets of criteria

Answer 5

Financial Conduct Authority (FCA) Listing Rules - admission to listing

LSE rules - admission to trading

Question 6

FCA Listing rules - Admission to listing

Answer 6

Specific regulatory requirements comp has to meet to be allowed to list on the market

Question 7

LSE rules - admission to trading

Answer 7

sits alongside FCA’s listing rules to make access to the LSE as straightforward as possible

Question 8

Listing rules are split into three:

Answer 8

The Listing Rules
THe Prospectus Rules
The Disclosure Rules

Question 9

The Listing Rules

Answer 9

Contains the eligibility criteria for listing, duties of sponsors, continuing obligations of the listed companies.

Listing rules apply to the Main Market only
Not all prov’ns apply to standard listings

Question 10

The sponsor

Answer 10

Approved by the FCA, sponsor provides assistance and assurance in the process of listing a security

Question 11

Sponsor is needed in the following circumstances:

Answer 11

• seeking initial premium listing
• premium listed company issues more shares
• class 1 or reverse takeover transactions take place
• company enters into a related party transaction (sponsor is recommended)

Question 12

Qualifications of the sponsor

Answer 12

Must be qualified, competent and independent:

• be on the FCA’s qualified list
• satisfy the FCA they are competent
• be independent of the company

Question 13

Conditions for listing: The company

Answer 13

1. Incorporated for both standard and premium listings (must be as plc)
2. Published audited accounts which cover at least three years for premium listing (latest accounts of a period not ended more than 6 months before date of listing)
3. Must be a revenue generating business for a premium listing (historic revenue earning record covering at least 75% of its business and control over majority of assets for past 3 years)
4. Sufficient working capital (supply a working capital statement (premium listing, this must be unqualified)

Question 14

Conditions for listing: The shares/securities

Answer 14

1. shares must be freely transferable
2. Market capitalisation - at least £700k shares and £200k of debt
3. At least 25% of shares in the hands of the public
4. Whole class of securities must be listed
5. Warrants/options to subscribe to shares must not exceed 20% issued equity
6. Convertible securities must be convertible into listed securities/securities capable of being listed
7. UK applicants: shares must be eligible for electronic settlement
8. securities must conform to law in company’s place of incorporation
9. whole class of securities must be admitted to trading

Question 15

Special rules for premium listed companies with a controlling shareholder. What is a controlling shareholder?

Answer 15

Shareholder with a holding of more than 30% OS.

Question 16

Controlling shareholder

Answer 16

Rules introduced to protect minority SH interests

Rules require a RELATIONSHIP MANAGEMENT AGREEMENT be drawn up
Stipulate transactions between comp and controlling SH must be arm’s length and robust disclosures in the FS.

More power given to independent SHs in terms of appointment of directors, cancelling a listing, or transferring to a standard listing

Question 17

The Prospectus rules

Answer 17

Formal disclosure document that provides details relating to a financial instrument that is being offered for sale to the public

Question 18

Prospectuses

Answer 18

Published where securities are admitted to an EU regulated market or when offer is made to the public

Standard listing prospectus contains a section explaining that a standard listing means SHs have a lower level of regulatory protection than premium listing

Question 19

Passport

Answer 19

If prospectus is issued and approved by a member state of the EU then it can be taken to any other member state provided a summary statement in local language is supplied

Question 20

Prospectus: the directors responsibilities

Answer 20

Every director signs a certificate of responsibility to confirm prospectus includes sufficient info so investors can understand:

• issuer’s assets and liabilities, financial position and prospects
• the rights attaching to the securities to which the listing particulars relate

Signing the certificate makes board members personally liable

Question 21

Contents of the prospectus

Answer 21

1. SUMMARY of approximately 2,500 words detailing directors, advisors, key financial info, reasons for offer, risks and prospects
2. A REGISTRATION DOCUMENT - detailed info on the issue
3. SECURITIES NOTE - description of the securities

Question 22

Content of the prospectus summed up as follows:

Answer 22

a) The persons responsible (directors names, auditors, 3 years of unqualified accounts, names and addresses of banks, legal advisers, sponsor, reporting accountants)
b) the issuer and its capital
c) risk factors
d) the group’s activities
e) the issuer’s assets and liabilities, financial position, profit and losses (accounting info for prior 3 years, working capital statement, disclosure of amount of loan capital, borrowings and contingent liabilities)
f) the issuer’s mgmt and board practices (full details of senior mgmt, names of audit and remuneration committee members, statement of compliance with corp governance)
g) trend info
h) related parties

Question 23

The accountants report

Answer 23

used in both premium and standard listings - appointed at an early stage of the issue process

Question 24

The long form audit report definition

Answer 24

Premium listing - sponsor will ask reporting accountant for a DETAILED REPORT OF THE COMPS PAST PERFORMANCE, ITS CURRENT NET ASSET POSITION AND RELIABILITY OF ITS FORECASTS = long form audit report

reporting accountant is expected to highlight any major problems

No specific regulation that require the prep of long form audit report

Question 25

Long form report contents

Answer 25

1. quality of comp's financial and mgmt accounting info systems 2. major functional areas of mgmt 3. future prospects 4. current net asset position 5. summary of past performance 6. company business and history 7. mgmt structure and remuneration policies

Question 26

Profit forecasts

Answer 26

Prospectus rules describe rules over publication of profit forecasts Reporting accountant must report on the forecast to confirm presented on a basis consistent with accounting policies Many comps don't publish profit forecasts because of additional costs of getting the audited separately and fear of not meeting them statements relating to future prospects must be clear and unambiguous - determine in advance of with sponsor whether statement would constitute a profit forecast Forecast must include statement of principal assumptions. Must be readily understandable and specific. Restricted to those matters beyond mgmt control.

Question 27

The short form report

Answer 27

The Prospectus rules require production of a short-form report in any ONE of the following situations: - material change to group structure or business in the past three years or during period since publication of latest FS - material change in the accounting policies or material adjustment - where there has been a qualified audit report or disclaimer in the past three years prepared by an independent accountant. They give an opinion on the truth and fairness of the info disclosed.

Question 28

The Disclosure rules

Answer 28

based on the MAR => apply to premium and standard listings on the Main Market (NOT AIM). Listed comps announce publicly any INSIDE INFO that directly concern it + kept on company website for FULL YEAR INSIDER LISTS must be maintained - list of all senior mgmt, ad hoc names of those working on a particulare project, advisers Transactions between persons discharging managerial responsibility (PSMRs) and their connected persons need to be disclosed within FOUR days and issuer must make PUBLIC DISCLOSURE - price shares changed hands and number of shares sold. PDMRs = directors + executive committee members

Question 29

Continuing obligations of a listed company

Answer 29

1. Interim accounts (standard and premium listings) 2. Specific events - announcements made so that all users have access to the same info. RIS and RNA. 3. Transaction in shares - premium listed. Size determined class test ratios 4. Related parties - any transaction between comp and related party disclosed to SHs by means of a circular

Question 30

Class Tests

Answer 30

In supplemental material

Question 31

Class 2

Answer 31

Any % ratio is 5% or more but each < 25% Notify the RIS of the FULL PARTICULARS of the transaction as soon as the terms are agreed

Question 32

Class 1

Answer 32

Any percentage > 25% Each is less than 100% ``` Disclosure requirements the same as class 2 But IN ADDITION - send the SHs an explanatory circular and seek their approval in a general meeting ```

Question 33

Reverse takeoever

Answer 33

Any % is 100% or more or would result in a FUNDAMENTAL CHANGE in the business, board or voting control Requirements same as class 1 but FCA and LSE will suspend the company's listing and trading in their shares. Company will have to prepare a prospectus as if a new applicant

Question 34

Reverse takeover definition

Answer 34

Transaction that some unlisted companies use in some locations to obtain listing without resorting to an initial public offering. Unlisted company buys enough shares to control the listed company. Private comp then issues shares in the unlisted company to exchange shares in the listed one => private company effectively has therefore become publicly traded company In the UK - listed company will be suspended and a new prospectus needs to be issued.

Question 35

Dark pool trading

Answer 35

Global phenomenon Private forums for trading shares, not accessible to the general public (40% of US stock trades now) Controversial as outside the public gaze If shares are ordered 'off exchange' by the buyer in a dark pool, the individual trades go effectively unrecorded in the public eye until some time after purchase is complete Arguable that this limits the free flow of information in financial markets, meaning quoted prices may not reflect all relevant information => market efficiency is reduced as a result of dark pools Efficient market - number ordered and price limit is publicly available when order is placed => price of shares increases due to this signal