No one would deny that the rules governing what companies can list on the stockmarket, and on what conditions, were in need of radical reform.
Over almost three decades, regulators have tightened and tightened the rules. The aim was to protect investors and make equity investment safer for ordinary people. As is so often the case with regulation, however, it has had unintended consequences. In this case, the number of listings has fallen dramatically.
The safety of the graveyard
The number of companies quoted on the London market has fallen by 40% since its 2008 peak. Entrepreneurs have decided to remain private, or else sell out to a venture-capital fund; existing businesses have realised it is easier to sell to a private-equity firm than struggle on with all the hassle of a stockmarket listing.
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Investors may have more protection – although even that has not been proved – but there’s little point in that if there is nothing to invest in, or if the only remaining listed businesses are a handful of century-old multinational conglomerates with dismal growth prospects. It is the safety of the graveyard.
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A shake-up of the system was long overdue. The Financial Conduct Authority, the financial regulator, this week put forward a series of proposals that, if agreed, could be implemented by the end of this year.
Dual-class shares will be permitted so entrepreneurs can sell some equity while also making sure they retain control of their business. The “free float” requirement – the actual percentage of shares that are available to buy and sell – will be lowered from 25% to 10%. The minimum market capitalisation for a flotation will be raised from £700,000 to £50m. And there will be a general tidying up of the rule book to reflect changes in technology and the way the markets operate.
That’s better than nothing. But only just. Allowing dual-class shares will encourage a few more fast-growth companies that need capital to raise it from a public listing rather than the venture capital funds. And lowering the free-float requirement will allow a few more tightly held businesses to list on the stock exchange.
Against that, raising the minimum size of an IPO to £50m is a terrible idea. It may have escaped the notice of the bureaucrats and lawyers at the FCA, but most new businesses start small. We should not be making it harder for new businesses to raise money. So it is a very mixed bag.
Don’t fear the imaginary threats
Step back and it will seem odd that there are any restrictions at all. Above and beyond basic health and safety rules, we don’t impose them on many products. Nor do we impose them on small private companies. If a friend, colleague or relative suggests you take a stake in a new venture, then that is up to you, and to them.
You might invest a few thousand in exchange for a modest stake, or you might not. But it would be up to you. You would take a risk, and see how it worked out. Likewise, in the booming crowd-funding market, there are very few restrictions on what kinds of companies can raise capital and on what terms. So why do we need them on the main stock exchanges?
The regulators will argue there has to be some level of investor protection. But the rules don’t work anyway: there are plenty of businesses listed on the market that tick all the right boxes and still collapse. Patisserie Valerie and Carillion are just two recent examples. The assumption is that investors couldn’t possibly understand the risks and opportunities in buying shares. Yet 90% of equities are owned by sophisticated institutions perfectly able to do their own research. The other 10% are owned by savvy, well-informed individuals with access to unlimited information on the web. If they can take on Wall Street over the valuation of GameStop, they can surely assess a dual-class share structure as well.
The threat the rules are guarding us against are mostly imaginary. A few tweaks are not enough. We should simply scrap all the rules on share listings and allow a completely free and open market. It wouldn’t be any riskier than it is now – and would be a lot more vibrant and dynamic.
