How the SpaceX IPO revealed a ‘back door’ into Britain’s capital markets

The UK’s public offer platform regime was rolled out as part of a package of reforms designed to get capital flowing into British companies. Now SpaceX has used it to raise funding in the biggest IPO of all time – in New York. Maisie Grice asks whether the changes are working as intended.

In January, the financial watchdog changed its fundraising rules in a bid to make it easier for companies to raise equity and attract retail investors.

The introduction of public offer platform (POP) regime by the Financial Conduct Authority (FCA) was designed to allow companies looking to raise over £5m to sell shares to a wide investor base without the need for a regulated public market or a lengthy prospectus document.

In particular, the POP regime was designed to allow “greater flexibility for smaller and scaling companies” to raise capital  from a “broader investment base”, including retail investors, the FCA said.

But since its introduction only one company has taken the opportunity to use the regime to make a UK retail offer: SpaceX.

SpaceX skips through

SpaceX rocketed onto public markets earlier this month in a blockbuster Nasdaq listing that valued the firm at $1.7 trillion.

Founder Elon Musk has long played up the importance of retail money against the scale and power of Wall Street’s biggest insitutional investors. The structure of the deal carved off roughly a quarter of the shares on offer specifically for individual investors, including in the UK, despite Brits typically being unable to take advantage of US debut.

In total, British retail investors bought around $364m in SpaceX shares, according to reports.

Under UK listing rules, such a fundraising would normally require the issuer to prepare a prospectus specifically for UK investors, meaning a company cannot use the regulatory documents acceptable in its domestic market in the UK.

But the POP regime has allowed SpaceX to bypass the prospectus requirement.

Swerving scrutiny

The satellite company handed over the reins for the UK offer of its IPO to Marex Financial, with the platform using a POP licence to allow UK retail brokers to purchase shares for customers.

Freetrade, AJ Bell, Etoro and Hargreaves Lansdown were among the firms who used the platform to sell shares to the public.

Crowdcube Capital, Capital Rise and Retail Book have also secured POP permission.

City figures are now questioning if the regime is too lax, and if the lack of regulatory scrutiny could expose investors to riskier companies.

“The danger is that they’re putting retail investors somewhat at risk because they are saying we’re allowing people to skip steps to access retail investors who aren’t institutionally aware, but we think it’s safe enough to do so,” said Michael Field, chief equity strategist at Morningstar.

“That’s easy to say when it comes to SpaceX because it’s big and so widely held.”

Field acknowledged that a company coming from an unfamiliar market could create a governance “minefield”, as they lack the scrutiny of companies coming from the US, who are subject to scrutiny from the Securities Exchange Commission upon listing.

A two-tier system?

Others have flagged concerns that allowing SpaceX and any other foreign player who may use POP may create a “two-tier system” in which companies can list overseas but still reap the benefits of a UK retail offer.

“The POP regime was originally intended to help private UK companies raise growth capital from British retail investors, not to be a backdoor for overseas IPOs,” said Mike Coombes, chief operating officer at retail investment platform Primary Bid.  

“If foreign issuers can reach UK investors more easily than companies listing in London that creates an obvious policy inconsistency and a two-tier system.

“It also raises a broader question: if participation in major overseas IPOs is considered appropriate without an FCA-approved prospectus, what does that say about the necessity of those same requirements for UK companies?”

But Coombes acknowledged that the watchdog has the ability to bend the rules once more if it decides that the current framework is “producing unintended outcomes”.

“I would expect it to be carefully considering the balance between investor access, consumer protection, and the competitiveness of UK markets,” he added.

‘It’s not a negative’

While the regime does not exclude foreign companies from making use of it, ultimately it does defy its original intentions, according to Julian Morse, co-chief executive at Cavendish.

“It’s a bit of a shame that it’s effectively the first one that’s really used it,” he told Morning Wire, adding that the system could “have been more defined for domestic companies”.

However, Morse said SpaceX using the POP regime raised awareness and legitimacy, potentially increasing the likelihood of smaller companies using it in future.

Speaking to Morning Wire, Gibson Dunn partners Chris Haynes, Steve Thierbach, and counsel Tom Barker, who led the on the UK side of the deal, said Space X’s use of the POP regime will likely open the door to more US firms expanding onto London’s market – but will not undermine British companies listing in the City. 

“Space X has opened the market to people that historically were not retail shareholders, and that’s a good thing for the UK equity markets, whether that applies to UK listed companies or companies thinking about listing here – it’s not a negative,” Thierbach said.

An FCA spokesperson said: “We want to encourage retail investing in the UK. We know that these types of deals have the potential to transform how people here engage with investing. Our rules are designed to ensure that investors are presented with all the information they need to make an informed decision.”