High-tech companies based in London's Tech City could soon be given new incentives to list on the London Stock Exchange (LSE), but will the government's attempts to woo local businesses fortify the industry, or will high-growth tech companies end up suffering at the hands of investors who do not understand what they're buying into?

The news yesterday that Downing Street is working with the LSE on a new set of IPO regulations, designed to encourage internet and technology companies to float in the UK, was broadly welcomed by the investment industry.

Stefan Glaenzer co-founder of Passion Capital, said that enabling more European companies to IPO in London will create new jobs and investment, and help those companies grow into “world-beaters”. He suggested that more effort needs to be put into creating digital companies that “end up on the buy side and not sell out”.

Meanwhile, Reshma Sehoni, founder of Seedcamp, said that the quality of the entire business ecosystem will improve if the UK remains globally competitive, and stressed the importance of “retaining more of our best tech companies and all the jobs and revenues that they create”.

However, not everyone is convinced that the new IPO regulations are a silver bullet to the problem of European technology businesses opting to list on Nasdaq rather than on the LSE.

techcity20_hr.jpg The government's proposals include reducing the minimum percentage of shares required to be in public hands or “free float” from 25% to as low as 10% - following in the footsteps of the US government's Jumpstart Our Business Start-ups (JOBS) Act, which was passed earlier this year.

High-growth companies will also have to present accounts for fewer past years than they do now under the new regulations, and there will be less stringent criteria for the composition of their boards.

While more relaxed regulations make the prospect of a flotation on the LSE more attractive to company executives and board members, small free floats are often less attractive to prospective shareholders, because they can reduce trading liquidity and make controlling shareholders too dominant.

“The potential for lower liquidity, greater volatility and prevalence of controlling shareholders will need to be factored into investment decisions by prospective investors,” said Philip Secrett, Partner, Corporate Finance at Grant Thornton UK LLP.

Secrett also said that concerns over a weakening of corporate governance need to be addressed, and a clear message given that the proposals are targeted at larger tech companies and do not undermine AIM - the London growth market which already has no minimum requirements on shares in public hands.

It is now up to the Financial Services Authority to decide whether to approve the measures put forward by the government. The UK technology sector is seen as one of the most promising generators of growth and jobs for the economy, and there is a strong feeling that something needs to be done to make the UK a more attractive and competitive listing destination for high-tech businesses.

According to TechMarketView analyst Anthony Miller, “barely a trickle” of UK software and IT services (SITS) companies have made it through since the 2008 downturn, and there are now fewer than 100 UK-headquartered SITS companies listed on the LSE Main Market or on AIM, compared to 158 four years ago.

However, Miller questioned whether this is actually a bad thing, highlighting that many of the SITS companies listed on the LSE have market caps below £10 million. In fact, relaxing the rules for IPO could end up being just as detrimental to the economy as hindering companies' attempts to go public by forcing them to reach high standards.

“Whether lowering the bar for new listings will encourage more of the ‘right sort’ of companies to reach public status is a proposal which itself needs some ‘due diligence’,” said Miller.

Robin Klein, partner at Index Ventures, added that London-based investors need to be educated about technology, so that they can recognise opportunities when they come along and be able to make informed decisions.

“European bankers need to study up on how to properly value internet companies, better understand their business models and assess the competitive advantages of their strategies,” he told the Financial Times.

The government is right to be considering radical action on this issue - the potential economic benefits are too great to ignore. However, the government needs to tread carefully, and ensure than any legislation does not undermine the success and growth of the flourishing tech industry in East London and the rest of the UK.