Don’t let Spac mania sway London’s IPO reforms

This year’s IPO market has every pandemic celebration well and truly covered. Takeaway courtesy of Deliveroo. Drinks from Virgin Wines. Greetings from your nearest and dearest via Moonpig.

So good that you might choose to spend your next birthday this way. Except of course you won’t. The appeal of restaurants, bars and real live human companions will almost certainly win the day.

It’s no coincidence that these companies have chosen now to sell shares to investors. 

Lockdowns and closures have nicely juiced the historic information they are able to put in their listing documents. As to the future: well, they can’t possibly discuss that. Please refer to the “current trading and prospects” section of the prospectus (a couple of hundred anodyne words in a 250-page document).

The pandemic plays rushing to market seem to reinforce a conclusion of Lord Jonathan Hill’s review of UK listing rules: that both investors and issuers are frustrated by the restrictions around giving forward-looking information in an IPO process.

And there is frustration. The listing prospectus, notes one observer, has become a document for legal protection rather than a source of information for potential investors. Still, there is reason to be cautious when inviting issuers to share their divinations more freely.

Liability is the underlying problem. Companies share more information when raising private financing than they do in a public offering. The legalities of the latter mean caution around making forecasts or giving guidance that might prove wrong for reasons beyond their control.

Hill recommends adjusting that liability level: directors’ defence in future lawsuits could rest on showing “due care, skill and diligence” in putting the information together, and an honest belief that it was true at the time.

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Straight stupidity in emails aside, this looks largely unenforceable. But there is also concern that the craze around special purpose acquisition companies (Spacs) is affecting everyone’s thinking. The hype, and in particular a laxer US regime around information provision for Spacs, has fuelled talk that the IPO process needs updating.

What better illustration could there be than the contrasting fortunes of Deliveroo and Cazoo, the online seller of used cars.

Deliveroo, which on Monday said it would price towards the bottom of its price range, is battling concerns about its labour practices and business model from a handful of long-only UK institutions, which control a relatively modest slice of the funds available for high-profile listings.

Cazoo, meanwhile, has sidestepped the lengthy IPO process. It has found itself a blockbuster valuation in the warm embrace of a US Spac founded by hedge fund billionaire Dan Och.

The fact is that Cazoo’s choice seems to owe as much to willingness to throw money at high-growth, persistently lossmaking companies, as it does the strictures of an IPO. For better or for worse, the London market essentially likes profits and dividends. Investors in the UK may not be as jazzed about the opportunity to match the revenue multiple on a lossmaking peer such as Carvana even if they could see the business plan.

None of which is to say the IPO process isn’t ripe for an overhaul. It is. But if liability is to be changed it should be with safeguards, perhaps a requirement for independent public auditing of profit outlooks (they tend to be “more conservative”, bemoans one practitioner, which really is rather the point).

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One laudable aim is to end the ludicrous dance whereby semi-illuminating information is presented in one format to chosen analysts, then scattered in deliberately obtuse fashion throughout a prospectus for everyone else. But in a world of democratised investing, why not open up the process through webcasts and streamed investor meetings? Publish the pre-IPO research while you’re at it. 

No one really benefits if the more fanciful forecasting of Spac-land is allowed into what is a deliberately rigorous IPO process. Nor is it possible to bridge fully the information asymmetry between a management team issuing information and potential investors trying to judge its relationship with reality.

But if directors are going to be given more wriggle room on the legal hook around forward-looking information, then it should at least come as part of a more transparent, open process for everyone.



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