How an obscure SEC proposal could boost listings on European stock exchanges
A little-known regulatory proposal taking shape in the United States could deliver a welcome boost to Europe’s stock exchanges, which have been struggling for years to stem an exodus of companies to New York. The Securities and Exchange Commission is in the early stages of a proposal to tighten the rules for foreign companies that trade on U.S. exchanges, a move that could inadvertently prompt dozens of stocks to seek a secondary listing in London or another major financial center. The plan targets the definition of a “Foreign Private Issuer” — a status that allows non-U.S. companies like chip stock Arm and media company Spotify — to avoid some of the SEC’s most stringent regulatory requirements, such as the exemption from quarterly reporting. One of the key changes being floated would require FPIs to have an active listing on a “major” non-U.S. exchange to qualify for these benefits. Legal experts say most companies that are currently listed only in the U.S. but incorporated elsewhere would choose to have a second listing rather than face the full burden of complying with U.S. domestic reporting standards. “It could inadvertently stimulate the London markets,” said Robert Newman, co-head of UK capital markets at law firm DLA Piper, which advises listed companies on listing decisions. The potential shift comes as European exchanges are grappling with several high-profile companies that have increasingly opted to list in the U.S., lured by higher valuations and greater liquidity. The regulatory loophole The SEC’s proposal stems from what it sees as a growing regulatory loophole. When the FPI framework was created, it was built on the assumption that foreign companies listing in the U.S. were already subject to “meaningful disclosure and other regulatory requirements in their home country jurisdictions.” But that’s changed dramatically over the past two decades, according to the SEC’s concept release outlining the proposal. In 2003, the most common homes for these companies were the U.K. and Canada, both with regulatory regimes familiar to the SEC. By 2023, the most common jurisdiction of incorporation was the Cayman Islands, known for its limited corporate governance and disclosure rules. Meanwhile, mainland China has become the most common headquarters location. “From the SEC’s perspective, this universe of foreign private issuers is subject to a lighter touch regime in the U.S., but they’re not subject to significant oversight in their home jurisdiction,” said Mike Bienenfeld, a U.S. lawyer specializing in SEC compliance at law firm Linklaters. Bienenfeld cautioned that it was difficult to predict the results of the early-stage proposal as the SEC could also choose to take no action or arrive at a different decision. What if the proposal becomes a rule? However, should the SEC move forward with a foreign listing requirement, affected companies would face a choice between taking on a new listing overseas or subjecting themselves to the more rigorous oversight regime applicable to U.S. domestic companies. This includes filing detailed quarterly reports, rather than providing updates just twice a year. Companies would have to convert their accounting from International Financial Reporting Standards (IFRS) to U.S. Generally Accepted Accounting Principles (U.S. GAAP), a significant undertaking, according to Linklaters’ Bienenfeld. They would also become subject to U.S. proxy rules, votes for executive compensation, and stricter insider-trading reporting requirements. “It’s not an insignificant cost, particularly for a lot of these smaller companies,” said John Stone, a U.S. securities lawyer at DLA Piper, adding that most companies would opt for a secondary listing in a major jurisdiction instead. If the SEC goes ahead, it will kick-start competition among global stock exchanges. The London Stock Exchange, with its deep capital markets and a regulatory framework the SEC knows well, could be a significant beneficiary. “I think, to the extent the SEC chooses to really enforce the original intention of this rule, that could require companies to list elsewhere,” said David Schwimmer, chief executive of the London Stock Exchange Group . “London would be the natural location for that.” However, it won’t be the only contender. Exchanges in the Euronext network—which includes Paris, Amsterdam, and Dublin—as well as those in Canada and Hong Kong, could vie for these secondary listings. Nasdaq operates several exchanges in the Nordics that could compete too. Ultimately, the decision for companies will depend on factors like cost, access to deep capital pools, the efficiency of the listing process, and access to quality research analysts. “It is certainly something that we talk to potential listers about,” Schwimmer added. The push back Many foreign companies that are currently listed on a U.S. exchange have expressed their reservation at the SEC’s concept release. Nasdaq-listed Virax Biolabs , a U.K.-headquartered healthcare and diagnostics company, said the SEC’s proposal would “impose an unreasonable and material compliance burden” and “unintentionally penalise” them. Virax has no business operations or infrastructure in the U.S. and its Cayman island entity “serves purely as a legal listing vehicle”, according the company. “We support thoughtful regulatory oversight and understand the SEC’s intent,” James Foster, chief executive of Virax told CNBC. “However, applying a rigid ownership threshold without considering operational substance risks creating uncertainty for compliant global issuers — especially those in emerging sectors like biotech.” In a submission to the SEC , Foster added that if Virax becomes a more U.S.-focused business, it “would voluntarily transition to U.S. domestic filer status” instead.
