Listing rules between London and New York differ substantially in what it is that a company is allowed to do. It’s possible to agree with either set of rules, possible to disagree to. But as investors for us the importance is to know what they are. Once we do then we can assess risk and how it affects what it is that we want to do.
The three big differences at present are over tech listings, SPACs and China. They’re all offshoots of the rules and laws in general – these are effects of those rules that is.
China is the easiest one to understand. In order to buy into Alibaba (NYSE: BABA) say, we need to be in New York. Or China, but then we’re not allowed to buy Mainland stocks. This is also true of any of the China players and the reason is that London simply won’t allow the structures used. Foreigners just aren’t allowed to own, directly, Chinese assets in this manner. So, one doesn’t buy into Alibaba itself. Rather, to a complex Cayman Islands structure, which has some vague and handwavey option and rights relationship to the actual operating company itself. Note that this is true of all Mainland businesses quoted or listed outside China.
We might be happy with this and those stocks do trade in line with the underlying business. But actual direct, real and whole ownership isn’t quite there. London won’t allow this, New York will. So, if we want to play the China economy that’s where we’ve got to be willing to buy – New York.
SPACS, this is really just a new method of having a shell company that a real business is injected into. London has long been a home of shells but the rules were tightened up over the past couple of decades. A SPAC is a new company listed, with cash and the intention to merge. There is talk of loosening the rules in London but it may or may not happen. So, if we want to play in this world of bringing new businesses to a listing without that IPO examination we need to be in New York. Or have a trading account that is at least.
We may or may not wish to play with SPACs but we can’t in London that is.
Finally, there’s the issue over tech companies. London has plenty of such, small ones on AIM, large ones on the main market. However, there are two things that London doesn’t allow, one in the rules, the other is more a cultural thing.
The rules don’t allow – except in exceptional circumstances and DMGT (LON: DMGT) was until recently one of them – dual and more complex share structures. So, tech founders who wish to continue to control through higher voting A shares and the like while selling the economic interest can’t. They thus find New York appealing.
We can think either way about this. We want a piece of the action and don’t care about control – that would have worked well with either Google (NASDAQ: GOOGL) or Meta (NASDAQ: FB) over the years for example. Or we might care. The thing being that as the dual-class isn’t – really – allowed in London some goodly portion of the Big Tech companies float over there. So, if e want to be in we’ve got to be there too.
Then there’s that cultural thing. London tends – and this is investor preference – to like companies only once established, profitable and cashflow positive. American inventors are happier with folks announcing that they’re going to continue to lose money as they take part in the landrace to stake out positions. So, again, if we want to be in companies that are trying this we have to trade New York stocks, not London.
There are entirely valid reasons to prefer either set of regulations, each set of risks and rewards. The point here is just that lesson for the next year of investing, for 2022. The sets of listing regulations are different. So, if we wish to be exposed to a certain set of activities – China, certain Big Tech ideas – then we’ve got to be willing to trade New York.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.