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The Regulatory Influences Of Future Ipos

The Regulatory Influences Of Future IPOs

Tuesday, 30 May 2023

We discuss the key changes in IPO governance in 2023; from shorter settlement cycles to the increasing power of the retail shareholder.

2022 was a quiet year for IPOs. Admittedly, this was influenced by a raft of macro factors that few would have predicted at the start of last year. Many are hopeful that 2023 will be a stronger year for IPOs.

That being said, regulatory changes are afoot. Not only for some IPOs with a global footprint. While these impending alterations are positive for global listings and public firms alike, it does mean compliance and registrar teams will need to be ready for some significant changes. We look at some of the key issues impacting listed firms now.

Get ready for shorter settlement cycles

It seems highly likely that the US will move to a T+1 settlement cycle by spring 2024, eventually reaching a T+0, in the future. While this means settlement times will decrease dramatically, undoubtedly good news, it also means information will need to be processed at twice the current speed. This will have knock-on effects in terms of administration.

The positive news is that shorter settlement time de-risks activity and has the potential to reduce costs. However, it does add pressure to post-trade operations; mainly for global participants due to the reduced business day between the trade and consequent settlement.

With the US leading the charge it is likely that these changes will become commonplace in years to come. It also makes sense. It will help with efficiencies from a regulatory standpoint plus it will help ride out market volatility which seems to becoming increasingly common. With its huge geography, stretching across several time zones, the US’s post-trade operations can be moved to the West Coast; allowing them to buy more processing time for themselves.

The challenge will be how quickly Europe can follow. Put simply, Europe doesn’t have the same advantages as the US. The US is free from the variety of indices and listing infrastructure that Europe has. A rushed job in Europe could lead to inefficiencies and increased costs.

This potential move is a watershed moment for all, and it could impact the UK too. Inevitably we could adopt the same settlement regime. The UK currently operates to T+2. However, those with share certificates are presently lucky to achieve T+10. The move to a much swifter settlement time could herald complete digitisation. It will present registrars with significant opportunity to support electronic processes and communications. The Austin Review has already highlighted the need for digital reform within the UK, and this trend of shortening trade times will support this agenda.

Knowing who owns your shares has never been more important

The sanctions imposed in the aftermath of the Ukraine war has shown listed firms the importance of knowing who owns their shares. This trend for good compliance will only continue. Proof of non-compliance inevitably leads to some implications in the future. Therefore, firms need to be constantly reviewing their own processes and those of their share registers, to ensure no sanctioned individuals are still holding assets.

A more efficient Ben Owner Analysis process could enable a better understanding of a post-IPO register make-up. The amendment to the Economic Crime Bill, which became law on June 14th, 2022, places even greater personal responsibility and risk upon the responsible officers of the Issuer and, within this framework, Sanctions management is incorporated.

The change in the law has removed the defence of not knowing if a sanctioned individual lies within a beneficial holding. Yet, the current s.793 powers of the Companies Act 2006 creates a potential time lag for issuers to know the precise details of every ultimate beneficial holder at every point in time. Fortunately, the digitisation of this process would provide issuers with better clarity of their investor base. This could provide further comfort around identifying any sanctioned individuals.

Secondary capital raising could revolutionise London’s listing potential

The Austin Review laid out in pretty stark terms how London could change its ways, as the world’s fifth oldest exchange looks to modernise. One of the many recommendations is centred on changing secondary capital raising laws, and 2023 could be the year this comes into play. Combine that with the FCA’s newly announced Primary Markets Effectiveness Review, and we could see a pivotal 12 months for London.

In short, the Austin Review laid out that there is a need to reform and update the secondary capital raising regime in the UK and that it can be made materially cheaper, more inclusive, and more efficient. The report also notes the need to help retail investors become closer to the process; providing them with the same terms and conditions as institutions. Regarding IPOs, firms were also encouraged to engage retail investors earlier. They recommended the FCA halve the six-day period, for which an IPO prospectus must currently be made available to retail investors, to three days.

Interestingly, the Austin Review encouraged little regulatory oversight of secondary capital raising; helping to reduce the time, cost and bureaucracy involved. The Australian market was heralded as the example to follow, adopting the format of a ‘cleansing notice’; meaning no prospectus is required. Adopting this approach would streamline the process for UK firms, significantly reducing the steps currently required.

The recommendations are likely to lead to the need for a speedier, easier, and more efficient way in which retail investors can take part in secondary capital raisings. This will no doubt lead to more reliance on appropriate online solutions to receive instructions and payments from retail investors, further moving the industry towards full digitisation. This is because the need to return applications and cheques in the post will be less viable if issuers adopt the recommendations for quicker follow-on offers and apply shorter windows for rights issues and open offers. In essence, the Austin Review could help transform UK share issuance. We may well soon see the back of paper share certificates for good, as we adopt a more nimble and accountable process.

When you factor in the FCA’s goal to increase London’s attractiveness for primary and secondary listings, we could see a shake-up in IPO activity in London in the near future.

These three regulatory changes mean global stock markets could undergo a small evolution in 2023. While some are longer term (such as the US’ ambition to reach T+0 around 2025), we could see a lot of movement across Europe this year, as it looks to follow in the footsteps of the US, while also addressing long-running individual headwinds.

For listed firms, this brings about its own challenges. It means those running the share register, or fundraising, will have a busy few months. They will be continuing to develop digital operations and adapting to the increasing importance and collective power of retail investors.

While it’s unlikely that we’ll see wholesale change in the next 12 months, we’ll certainly see the ground being laid and the infrastructure created. Therefore, my recommendation to firms is to work with a partner who is able to help navigate these times of regulatory influence and change. To ensure operations are only ever enhanced, ‘glocal’ knowledge is an absolute must.