Who is looking after equity markets for growth companies?

The Quoted Companies Alliance has set up a petition for a working group to design an appropriate structure for UK equity markets on the 10 Downing Street website. If you support it, please click here to add your name to the petition by the deadline of April 11th.

We request that the Government set up a working group to design an appropriate structure for equity markets. There are a series of measures being promulgated that will greatly affect how the UK’s markets function, including the Prospectus Directive (for companies wanting to raise public money); the FSA's introduction of Standard Listings for UK companies; and confusing tax rules for CGT taper relief, SIPPs, VCTs, EIS and IHT relief. These could lead to a situation that significantly impairs the attractiveness of the UK’s dedicated growth markets (AIM and PLUS-quoted), where smaller companies currently go to seek vital funds, at a time when banks are reluctant to lend to them.

Background

 

The Quoted Companies Alliance (QCA) has called on the Government to set up a working group to design an appropriate structure for UK equity markets in response to a series of measures that threaten their structure and operation. Together, the proposals could significantly harm the attractiveness of the UK’s dedicated growth markets – AIM and PLUS- quoted – where smaller companies currently seek vital funds, at a time when banks are reluctant to lend to them. The QCA, the representative body for the UK’s small and mid-cap quoted companies, has written to Chancellor Alistair Darling, highlighting a lack of strategic coordination and the danger to equity markets for smaller companies that are essential to the UK economy. The measures include:

1. The Prospectus Directive – Changes to the Directive would restrict the European Commission’s much-needed concessions for smaller companies raising public funds, to those companies on the Official List, excluding those on exchange-regulated markets. This would create a more onerous public fundraising regime for AIM and PLUS-quoted companies than those on the Official List. While the Commission has suggested that the concessions could be extended once the Market Abuse and Transparency Directives apply to exchange-regulated markets, this would take years to achieve, by which time the damage will be done. The QCA has asked the Chancellor to support its call for the European Commission to accelerate its Market Abuse and Transparency Directive reviews, so that all changes are implemented simultaneously and soon.

2.    Standard Listings – The Financial Services Authority has introduced admission for UK companies to the Official List by way of bare compliance with the EU Prospectus Directive. While superficially attractive, this option requires no Sponsor; the Combined Code does not apply; and shareholder approval is not needed for transactions such as takeovers. There is no suitability threshold for companies and much of the UK’s advanced system of corporate governance will not apply.

3.    Tax Rules – None of the current tax benefits – CGT taper relief, SIPPs, VCTs, EIS or IHT relief – is specifically designed to enhance equity funding for smaller, growth companies. While EIS and VCT investors may invest in AIM and PLUS-quoted companies, they cannot buy shares in smaller companies on the Official List. Equally neither AIM nor PLUS-quoted shares can be held in an ISA, a major impediment to liquidity in smaller company stocks. Tax benefits have been conceived without reference to the overall regime for equity markets.

These measures reflect a piecemeal approach to equity funding and the structure of equity markets. When macro-supervision is the watchword of future financial services regulation, no consistency in policy appears to have been adopted. The QCA did announce on 29 March 2010 its delight with the Government’s announcement to consult on widening the scope of VC schemes (including the VCT Scheme and EIS) and on the inclusion of AIM shares in ISAs.  This follows lobbying pressure from this QCA campaign, the London Stock Exchange and other industry bodies.