Reduced levels of liquidity have been a developing theme over the last 12 months – from a decrease in M&A activity to a quietening of the IPO markets.
As a result, we have seen a marked increase in companies looking to third-party platforms, which facilitate a secondary market in equities, as a convenient way of offering existing shareholders and employees liquidity.
However, to date, these secondary platforms have typically been located outside of the UK (such as the Nasdaq Private Markets platform (NPM) which was launched in the US in 2014 and executed over $45 billion in transactional volume). The UK has been lagging behind in terms of an equivalent, primarily due to the absence of regulatory regime to facilitate it. This has resulted in many UK companies being forced to utilise platforms outside of the UK as a stopgap measure.
The Financial Conduct Authority (FCA)'s announcement of plans to create a platform known as an 'Intermittent Trading Venue' (ITV) that will allow windows for trading in private companies' shares at pre-determined intervals is therefore a timely and welcome development to bolster the UK's credentials as a competitive and innovative global financial hub.
What is the ITV?
The Capital Markets Industry Task Force, chaired by Julia Hoggett (CEO, London Stock Exchange plc), has been formed with the intention of creating an ITV – a platform whereby existing shares in private companies can be traded through auctions on a periodic basis, thereby granting existing shareholders and employees access to liquidity before a private sale or IPO.
In the words of the London Stock Exchange, "investors get more access to liquidity moments; early shareholders and VC and PE funds can find exit opportunities; new institutional investors can gain access to companies they might not be able to otherwise; and, critically, staff can have access to liquidity too".
Can it be used for primary fundraising?
The ITV will be for trading of existing shares only – it is not intended to allow private companies to raise capital through new share issuances. However, the ability of companies to facilitate much improved liquidity through a secondary market may in itself provide a stimulus to allow investors to participate in primary fundraising rounds.
Which companies will be eligible?
While full details of the ITV are yet to be disclosed, we know that private companies will need to satisfy certain criteria in order to be eligible to use the platform. By way of analogy, in order to undertake a secondary transaction on NPM, a company must:
- have raised at least $30 million in funding over the last two years or have a valuation of at least $50 million, and
- be profitable, with at least $750,000 in annual net income.
Assuming that similar criteria would be introduced to allow companies to access the ITV, then it's likely that the platform would only provide access to later-stage companies (i.e., series C and beyond), rather than earlier and more cash intensive seed, A or B stage companies.
Who are the investors?
Retail investors will be prevented from investing via the ITV, with the focus being on attracting both UK and international professional investors. Whom exactly the scheme attracts and the extent of engagement, is still to be seen – but by analogy to the US, we would expect this to include pension funds, investment funds, family offices, high net worth investors and other wealth managers.
Part of the success of the NPM platform has resulted from the role of financial intermediaries in connecting companies with potential investors through the platform, and facilitating trading through the provision of private market data (including in relation to private company valuations and pricing).
Whilst there are signs that some of the US-based operators (such as Forge Global) will be expanding into the UK and European market, there are a number of pre-existing top-tier intermediaries in the London market which specialise in the private growth equity asset class who we'd expect to play a key role in the growth and success of the ITV.
Will investors want protective rights in order to participate?
Our experience from advising clients who have utilised non-UK platforms (including NPM) indicates that investment funds acquiring a specified minimum number of shares as part of a secondary transaction will still expect to receive certain investor rights (such as board representation, veto rights and other contractual protections) – whether through pre-existing investment documents (such as a shareholders' agreement) or through bespoke arrangements. We would expect a similar approach to be taken in relation to a secondary transaction which takes place on the ITV.
How easy will it be to utilise the ITV?
In addition to satisfying the eligibility criteria, companies utilising the ITV will need to comply with certain disclosure obligations.
Disclosure would be through a closed, centralised portal more like a data room than RNS announcement style disclosures. It is expected that financial and other material information would be provided to eligible investors via the ITV portal about three days before any auction opens. This process is expected to be facilitated using an FCA registered auction agent to ensure that only appropriate (i.e., professional) investors would be able to access the company information on the portal.
Specific requirements are yet to be outlined, but the more extensive the disclosure requirements, the more time intensive, costly and complex the process will be for companies. Accordingly, striking an appropriate balance between offering ease of access to companies and adequate protection by way of disclosure for investors will be crucial to the success of the platform.
What information would be given to selling shareholders and employees?
A modified ITV market abuse regime would likely apply as long as the information is available on the ITV portal, with a view to ensuring equality of information between those buying shares and those shareholders who are selling. This would mean that for three days before an auction opens and until it closes, the company utilising the ITV would be subject to a proportionate market abuse regime. After the auction window, the ITV market abuse regime would fall away.
In practice, we would expect this to require the company to send an offer document (containing material disclosures) to the selling shareholders, in line with the approach taken on platforms outside of the UK.
Timeline for launch
The FCA and His Majesty's Treasury have published a timeline for the LSE ITV sandbox, with engagement planned for Q2 2024, and for the ITV to be up and running between October 2024 to March 2025.
Conclusion
While the full details of the ITV are still to be determined, the plans set out provide plenty of green shoots for hope. And clearly, with the UK's 34,000 strong scale-up community, generating over £1 trillion of turnover a year, there is a definite audience.
Whether the ITV will change the current trend for UK companies to utilise platforms outside of the UK to facilitate secondary transactions will depend on the detail of its implementation. But it's a step in the right direction.
Contact
To hear more about the plans for the ITV, or to discuss options in relation to carrying out a secondary transaction which utilises a platform outside of the UK, please contact Paul Thorpe.
