EQUITY FINANCE EXAM NOTES
(1) FLOTATIONS
SGS 1-2
Financial Conduct Authority – UK financial services regulator responsible for the conduct FCA
of firms authorised under FSMA and the regulation of conduct in the retail and wholesale
financial markets
UK Listing Authority – a division of the FCA UKLA
London Stock Exchange LSE
Recognised Investment Exchange – recognised by the FCA and therefore exempt from the RIE
general prohibition in respect of regulated activities under FMSA including the LSE
Financial Reporting Council – independent regulator responsible for promoting confidence FRC
in corporate reporting and governance
European Securities and Markets Authority – a European supervisory authority for the ESMA
securities sector
Companies Act 2006 CA 2006
Financial Services & Markets Act 2000 FSMA
Financial Services Act 2012 FS Act
Listing Rules LRs
Prospectus Rules PRs
Disclosure Guidance & Transparency Rules DTRs
Listing, Prospectus, Disclosure Guidance & Transparency Rules LPDT Rules
Market Abuse Regulation (596/2014) MAR
The UK Corporate Governance Code
UK Stewardship Code
CREST: Euroclear UK & Ireland Limited’s electronic settlement system for trading in
uncertified securities
Multilateral Trading Facility – a trading system for buyers and sellers of shares/securities MTF
which includes AIM (but not the Main Market of the LSE – which is a regulated market)
National Storage Mechanism – provided by Morningstar plc for the storage and NSM
publication of regulated information (known as the ‘document viewing facility’ under the
LRs)
“Regulated Market” defined in the FCA Handbook and includes the Main Market of the LSE but not
AIM
“Prescribed Market” defined in the regulations made under FSMA and includes the Main Market
and AIM. The LSE is an RIE.
“Quoted company” defined in CA 2006 as including a company whose equity share capital is listed
on the Official List
“Traded company” defined for the purposes of Part 13 CA 2006 as being a company any shares of
which (i) carry rights to vote at GMs and (ii) are admitted to trading on a regulated market in an EEA
state
Operational Objectives of the FCA:
i) To secure an appropriate degree of protection for consumers – consumer protection objective
ii) To protect and enhance the integrity of the UK financial system – integrity objective
iii) To promote effective competition in the interests of consumers in the markets for regulated
financial services and services provided by RIEs – competition objective
,Under s.1B(6) FMSA, the FCA’s general functions are to:
i) Make rules under FMSA
ii) Prepare and issue codes under FSMA
iii) Give general guidance under FSMA; and
iv) Determine the general policy and principles by reference to which it performs particular
functions under FSMA. The explanatory notes to the FS Act state that the FCA’s objectives are
intended to provide a mandate for the FCA to take action. They are not intended to impose on
the FCA a statutory duty to take action and they should not be interpreted as establishing a
standard of conduct to be expected of regulated firms
Why would a company seek a listing?
Advantages Disadvantages
Access to Capital to fund growth and/or reduce Burden of Disclosure & Reporting Requirements:
debt: a flotation is a way of gaining an injection of companies listed on the Official List must comply
cash into a company with a large number of regulatory requirements
The LPDT Rules, MAR and the LSE’s
Admission & Disclosure Standards must be
observed post-listing and failure to comply
can lead to penalties, censure or even the
suspension of trading and listing of a
company’s shares
Providing a Market: shareholders can take Management Times: company directors can expect
advantage of ready-made public markets, also to dedicate practically all of their time to a
floating on a market will enable employees to flotation for a number of months – they need to
either realise gains or provide an opportunity for continue to run the business effectively
them to invest in further shares – therefore
creates good incentive packages for employees
and executives
Public Profile: publicity created by a flotation is Changes to the Board: the company’s directors are
usually good for business. Progress is also able to potentially more exposed to the risk of being sued
be closely monitored, enabling a company to gain in their personal capacity. A listed company will
the confidence of its investors also need to comply with the Corporate
Governance Code. Plus finding non-executive
directors of the right experience may be difficult
and costly
Provision of liquidity – there are new types of Costs & Fees: the expense involved is significant
investors and the public- opens up a greater pool Between 7-8% is lost in fees to financial advisers
of investors creating further access to capital such as the Sponsor and Underwriter
Loss of Control: the directors of a listed company
need to accept that they will be subject to
additional influences and pressures
Institutional investors may be in a position
to block resolutions
Listed companies should also follow the
guidelines issues by the bodies which
represent institutional shareholders, such
as the Investment Association (IA) and the
Pensions and Lifetime Savings Association
(PLSA)
,Advisers on a listing to the Main Market
Investment Bank
o ‘Global coordinator’ – its functions can include:
Financial adviser
Acting as Lead Underwriter
Preparing research on the company
Acting as Broker
Acting as Sponsor
Broker
o Act as agents for clients who want to buy or sell shares
o Receive a commission for doing so
o In the context of a primary issue: the broker will be responsible for finding investors for the
shares
Sponsor
o A requirement of the FCA that an applicant for a premium listing appoints a sponsor to
assist with its application (LR 8.2.1R)
o Sponsors must be approved by the FCA (LR 8.6.2R)
o The sponsor is responsible for a number of matters:
Helping the company puts its application for listing together and submitting the
application to the FCA
Satisfying itself that the company meets all the relevant requirements and conditions
for listing; and
Making a declaration to the FCA that it has performed its responsibilities under the
LRs
o The responsibilities of a sponsor are set out in LRs 8.3 & 8.4
o The FCA will monitor and supervise the sponsor to ensure that it continues to satisfy the
criteria for approval as a sponsor and to ensure that it remains in compliance with the
applicable LRs (LR 8.7)
o Under ss.88A-88E FSMA the FCA can impose a wide range of sanctions on sponsors failing to
perform their duties
Reporting Accountants
o Must appoint a firm of accountants to produce financial information about it
o The RA’s will produce the long-form report, short-form financial information, and the
working capital review for the prospectus plus various comfort letters
Solicitors
o The legal advisers will generally be responsible for ensuring the company is prepared for
flotation
o Prepare legal due diligence report and draft and verify the prospectus
Other Advisors
o Public relations advisers
o Registrars
o A ‘receiving bank’
Premium & Standard Listing
When a company applies for listing it can apply for its equity shares to be subject either to a
‘premium listing’ or a ‘standard listing’
Companies which apply for premium are subject to those same EU minimum standards but also
more stringent UK requirements
, It is possible to migrate from a standard to a premium listing of shares and vice versa without
having to cancel the initial listing
If a company with a premium listing wants to move down, it needs the support of 75% of SHs
PREMIUM STANDARD
Three-year accounting history Yes – LR 6 No
required?
Sponsor? Yes – LR 8 No
Share dealing restrictions? Yes – MAR Yes – MAR
Corporate governance Yes – UK Corporate Governance Yes – DTR 7
standards? Code, LR 9 & DTR 7
Inclusion in FTSE UK Index Yes (provided the FTSE’s No
series? eligibility criteria are met)
Rules governing the relationship Yes – LRs 6 & 9 No
between company and a
“controlling shareholder” (i.e.
with 30% or more of the
shares)?
Shareholder approval required Yes LR 10 No
for significant transactions?
Shareholder approval required Yes LR 11 No
for related party transactions?
CREST
In private limited companies’ shares are evidenced by share certificates and when a shareholder
wishes to sell his shares, he needs to execute a stock transfer form which is then sent to the Stamp
Office to be stamped
o The stamped form is then sent with the relevant share certificate to the Company Secretary
As a listed company usually has a large number of members, it is impractical for its Company
Secretary to update the register of members by hand
Listed companies must ensure its shares must be compatible with electronic settlement
The Central Securities Depository (CSD) Regulation is an institution which holds financial
instruments and allows ownership of those instruments to be transferred electronically by the
updating the electronic records:
o CREST is the CSD for the UK
o The CSD aims to harmonise the timing and conduct of securities settlement across the EU
What is CREST?
A computerised system which allows shares to be held, and trades those shares to be settled,
electronically. CREST is owned and operated by Euroclear UK & Ireland Ltd
A transferee in a CREST transaction pays a stamp duty reserve tax (SDRT) which is imposed on
transaction and is payable at a rate of 0.5% of consideration
How can a SH hold shares through CREST?
Be a direct user
o Has the hardware and software capabilities to have a direct connection to CREST
Be a sponsored member
o Does not have a direct link to CREST but appoints a direct user to communicate with CREST
on his behalf
o A sponsored member holds stock in his own name
Hold shares through a nominee
(1) FLOTATIONS
SGS 1-2
Financial Conduct Authority – UK financial services regulator responsible for the conduct FCA
of firms authorised under FSMA and the regulation of conduct in the retail and wholesale
financial markets
UK Listing Authority – a division of the FCA UKLA
London Stock Exchange LSE
Recognised Investment Exchange – recognised by the FCA and therefore exempt from the RIE
general prohibition in respect of regulated activities under FMSA including the LSE
Financial Reporting Council – independent regulator responsible for promoting confidence FRC
in corporate reporting and governance
European Securities and Markets Authority – a European supervisory authority for the ESMA
securities sector
Companies Act 2006 CA 2006
Financial Services & Markets Act 2000 FSMA
Financial Services Act 2012 FS Act
Listing Rules LRs
Prospectus Rules PRs
Disclosure Guidance & Transparency Rules DTRs
Listing, Prospectus, Disclosure Guidance & Transparency Rules LPDT Rules
Market Abuse Regulation (596/2014) MAR
The UK Corporate Governance Code
UK Stewardship Code
CREST: Euroclear UK & Ireland Limited’s electronic settlement system for trading in
uncertified securities
Multilateral Trading Facility – a trading system for buyers and sellers of shares/securities MTF
which includes AIM (but not the Main Market of the LSE – which is a regulated market)
National Storage Mechanism – provided by Morningstar plc for the storage and NSM
publication of regulated information (known as the ‘document viewing facility’ under the
LRs)
“Regulated Market” defined in the FCA Handbook and includes the Main Market of the LSE but not
AIM
“Prescribed Market” defined in the regulations made under FSMA and includes the Main Market
and AIM. The LSE is an RIE.
“Quoted company” defined in CA 2006 as including a company whose equity share capital is listed
on the Official List
“Traded company” defined for the purposes of Part 13 CA 2006 as being a company any shares of
which (i) carry rights to vote at GMs and (ii) are admitted to trading on a regulated market in an EEA
state
Operational Objectives of the FCA:
i) To secure an appropriate degree of protection for consumers – consumer protection objective
ii) To protect and enhance the integrity of the UK financial system – integrity objective
iii) To promote effective competition in the interests of consumers in the markets for regulated
financial services and services provided by RIEs – competition objective
,Under s.1B(6) FMSA, the FCA’s general functions are to:
i) Make rules under FMSA
ii) Prepare and issue codes under FSMA
iii) Give general guidance under FSMA; and
iv) Determine the general policy and principles by reference to which it performs particular
functions under FSMA. The explanatory notes to the FS Act state that the FCA’s objectives are
intended to provide a mandate for the FCA to take action. They are not intended to impose on
the FCA a statutory duty to take action and they should not be interpreted as establishing a
standard of conduct to be expected of regulated firms
Why would a company seek a listing?
Advantages Disadvantages
Access to Capital to fund growth and/or reduce Burden of Disclosure & Reporting Requirements:
debt: a flotation is a way of gaining an injection of companies listed on the Official List must comply
cash into a company with a large number of regulatory requirements
The LPDT Rules, MAR and the LSE’s
Admission & Disclosure Standards must be
observed post-listing and failure to comply
can lead to penalties, censure or even the
suspension of trading and listing of a
company’s shares
Providing a Market: shareholders can take Management Times: company directors can expect
advantage of ready-made public markets, also to dedicate practically all of their time to a
floating on a market will enable employees to flotation for a number of months – they need to
either realise gains or provide an opportunity for continue to run the business effectively
them to invest in further shares – therefore
creates good incentive packages for employees
and executives
Public Profile: publicity created by a flotation is Changes to the Board: the company’s directors are
usually good for business. Progress is also able to potentially more exposed to the risk of being sued
be closely monitored, enabling a company to gain in their personal capacity. A listed company will
the confidence of its investors also need to comply with the Corporate
Governance Code. Plus finding non-executive
directors of the right experience may be difficult
and costly
Provision of liquidity – there are new types of Costs & Fees: the expense involved is significant
investors and the public- opens up a greater pool Between 7-8% is lost in fees to financial advisers
of investors creating further access to capital such as the Sponsor and Underwriter
Loss of Control: the directors of a listed company
need to accept that they will be subject to
additional influences and pressures
Institutional investors may be in a position
to block resolutions
Listed companies should also follow the
guidelines issues by the bodies which
represent institutional shareholders, such
as the Investment Association (IA) and the
Pensions and Lifetime Savings Association
(PLSA)
,Advisers on a listing to the Main Market
Investment Bank
o ‘Global coordinator’ – its functions can include:
Financial adviser
Acting as Lead Underwriter
Preparing research on the company
Acting as Broker
Acting as Sponsor
Broker
o Act as agents for clients who want to buy or sell shares
o Receive a commission for doing so
o In the context of a primary issue: the broker will be responsible for finding investors for the
shares
Sponsor
o A requirement of the FCA that an applicant for a premium listing appoints a sponsor to
assist with its application (LR 8.2.1R)
o Sponsors must be approved by the FCA (LR 8.6.2R)
o The sponsor is responsible for a number of matters:
Helping the company puts its application for listing together and submitting the
application to the FCA
Satisfying itself that the company meets all the relevant requirements and conditions
for listing; and
Making a declaration to the FCA that it has performed its responsibilities under the
LRs
o The responsibilities of a sponsor are set out in LRs 8.3 & 8.4
o The FCA will monitor and supervise the sponsor to ensure that it continues to satisfy the
criteria for approval as a sponsor and to ensure that it remains in compliance with the
applicable LRs (LR 8.7)
o Under ss.88A-88E FSMA the FCA can impose a wide range of sanctions on sponsors failing to
perform their duties
Reporting Accountants
o Must appoint a firm of accountants to produce financial information about it
o The RA’s will produce the long-form report, short-form financial information, and the
working capital review for the prospectus plus various comfort letters
Solicitors
o The legal advisers will generally be responsible for ensuring the company is prepared for
flotation
o Prepare legal due diligence report and draft and verify the prospectus
Other Advisors
o Public relations advisers
o Registrars
o A ‘receiving bank’
Premium & Standard Listing
When a company applies for listing it can apply for its equity shares to be subject either to a
‘premium listing’ or a ‘standard listing’
Companies which apply for premium are subject to those same EU minimum standards but also
more stringent UK requirements
, It is possible to migrate from a standard to a premium listing of shares and vice versa without
having to cancel the initial listing
If a company with a premium listing wants to move down, it needs the support of 75% of SHs
PREMIUM STANDARD
Three-year accounting history Yes – LR 6 No
required?
Sponsor? Yes – LR 8 No
Share dealing restrictions? Yes – MAR Yes – MAR
Corporate governance Yes – UK Corporate Governance Yes – DTR 7
standards? Code, LR 9 & DTR 7
Inclusion in FTSE UK Index Yes (provided the FTSE’s No
series? eligibility criteria are met)
Rules governing the relationship Yes – LRs 6 & 9 No
between company and a
“controlling shareholder” (i.e.
with 30% or more of the
shares)?
Shareholder approval required Yes LR 10 No
for significant transactions?
Shareholder approval required Yes LR 11 No
for related party transactions?
CREST
In private limited companies’ shares are evidenced by share certificates and when a shareholder
wishes to sell his shares, he needs to execute a stock transfer form which is then sent to the Stamp
Office to be stamped
o The stamped form is then sent with the relevant share certificate to the Company Secretary
As a listed company usually has a large number of members, it is impractical for its Company
Secretary to update the register of members by hand
Listed companies must ensure its shares must be compatible with electronic settlement
The Central Securities Depository (CSD) Regulation is an institution which holds financial
instruments and allows ownership of those instruments to be transferred electronically by the
updating the electronic records:
o CREST is the CSD for the UK
o The CSD aims to harmonise the timing and conduct of securities settlement across the EU
What is CREST?
A computerised system which allows shares to be held, and trades those shares to be settled,
electronically. CREST is owned and operated by Euroclear UK & Ireland Ltd
A transferee in a CREST transaction pays a stamp duty reserve tax (SDRT) which is imposed on
transaction and is payable at a rate of 0.5% of consideration
How can a SH hold shares through CREST?
Be a direct user
o Has the hardware and software capabilities to have a direct connection to CREST
Be a sponsored member
o Does not have a direct link to CREST but appoints a direct user to communicate with CREST
on his behalf
o A sponsored member holds stock in his own name
Hold shares through a nominee
