New Markets for Innovative SMEs --The Cases of UK, Korea, Canada Yibin Mu, CFA Senior Capital Market...
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Transcript of New Markets for Innovative SMEs --The Cases of UK, Korea, Canada Yibin Mu, CFA Senior Capital Market...
New Markets for Innovative SMEs--The Cases of UK, Korea, Canada
Yibin Mu, CFASenior Capital Market Specialist
The World BankJune 2008, Shanghai
2@Yibin Mu 2008, [email protected]
Outline
1. Reason of introducing new Markets
2. Features of new markets3. Good practice of new
markets4. Policy implications
3@Yibin Mu 2008, [email protected]
Reasons for new markets
Debt finance is not suitable for innovative SMEsLack of cashflowLack of revenue recordLack of collateral
Innovative SMEs need equity financeVC needs an exit channelSMEs are too small for main marketsInnovative SMEs are too big for
informal investors
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What is new market
Alternative investment market
Two modelsSecond boardJunior stock exchange
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Snapshot of new markets New market Main market Economy Name Name United States Nasdaq 1971 New York Stock Exchange (NYSE) 1792 Finland Helsinki New Market List 1999 OMX 1912 United Kingdom Alternative Investment Market (AIM) 1995 London Stock Exchange (LSE) 1801 Canada TSX Venture (TSX-V) 1999 TSX Group 1878 Spain Nuevo Mercado 1999 BME Spanish Exchanges 1831 Ireland Irish Enterprise Exchange (IEX) 2005 Irish Stock Exchange (ISEQ) 1793
Mothers 1999 Tokyo Stock Exchange (TSE) 1878 Japan Hercules 2000 Osaka Stock Exchange (OSE) 1949
Italy Mercato Expandi 2003 Borsa Italiana 1997 Austria Semi-Official Market/Third Market 1999 Wiener Börse 1771 France Nouveau Marché (now Alternext) 2000 Euronext 1801 New Zealand Alternative Market (NZAX) 2003 New Zealand Exchange 1870 Greece NEXA 2001 Athens Stock Exchange 1876 Slovenia Free Market 2000 Ljubljana Stock Exchange 1989 Malaysia Mesdaq Market 1997 Bursa Malaysia 1964 Poland Sitech 2000 Warsaw Stock Exchange 1991 China SME board 2004 Shenzhen Stock Exchange 1990 Hong Kong Growth Enterprise Market (GEM) 1999 Stock Exchange of Hong Kong 1986 Korea KOSDAQ 1996 Korea Exchange 1956 Singapore Sesdaq 1994 Singapore Exchange 1999 Brazil Novo Mercado 1999 São Paulo Stock Exchange 1890 Turkey Second National Market 1998 Istanbul Stock Exchange 1986 Philippines SME Board 1998 Philippine Stock Exchange 1992 Thailand Market Alternative Investment (MAI) 1999 Thailand Stock Exchange 1974 South Africa Alternative Exchange (AltX) 2003 Johannesburg Stock Exchange 1887
6@Yibin Mu 2008, [email protected]
Outline
1. Reason of introducing new Markets
2. Features of new markets3. Good practice of new
markets4. Policy implications
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Corporate governance
AIMOwned wholly by LSEOperated as a separate entity
TSX-VAcquired by TSX groupOperated as a separate entity
KosdoqOriginally, established as a separate entityLater, merged with KSEOperated as a separate department with
decision-making processNasdoq
Existed as a separate entity
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Relationship with main marketsTSX-V
Cooperative Encourage best listed firms to move to TSX
Kosdaq Competitor to KSE Retain large firms
AIM Mixed
Nasdaq When established in 1971, Nasdaq viewed as a market
for small-cap firms from the OTC marketplace When firms grew too big, they naturally moved from
Nasdaq to the NYSE However, as Nasdaq itself grew, it began to retain firms Competitor to NYSE
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Market operations
Overall, adopt relaxed listing and maintenance requirements
Example: AIMRelinquished EU “regulated mkt status”No need to follow strict EU standards of
listing and disclosureLess prescriptive rules typically include
operating history, minimum number of shareholders, past financial performance, number of free-float shares
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Trading system
Types Countries of new markets
Order-driven
Korea, Canada, Italy, Ireland, Finland, Austria, Japan, Greece, New Zealand, Singapore, Malaysia, Thailand, Philippines, Turkey, Poland, Brazil, Slovakia, Russian, Hong Kong (China)
Quota driven
UK, France
Hybrid UK, Spain
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Relative Market Size
Relative Market Sizes (New Market to Main Market)
1% 0.2%
36%
2%
73%
3%
22%
2%6%
2%0%
20%
40%
60%
80%
Majority Mkts Canada U.K. Korea Nasdaq
Prop
ortio
n
Share Trading ($ value)
Market Capitalization
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Liquidity
Overall mixed The turnover ratio of Kosdaq is
exceptional 690%The top 100 firms, which account for 10 percent
of total listed firms, provide more than 55 percent of the market’s trading volume.
AIM, TSX-V: Rather low liquidity Solutions
Concentrate on selected liquid sharesProviding liquidity-enhancing mechanisms such
as a market maker for illiquid shares
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Market dynamics
High entry and high exit of firms: reflecting the market orientation toward high-growth SMEs
Kosdaq AIM TSX-V
New listing ratio
6% 9.3% 2.8%
Delisting ratio
2.4% 4% 6.4%
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Outline
1. Reason of introducing new Markets
2. Features of new markets3. Good practice of new
markets4. Policy implications
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Good practice
A. Reduce costs of accessing new markets
B. Maintain new market integrityC. Provide effective supportive
services for current and potential listing firms
D. Link the new market operations with strong industrial policies
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A.1. Flexible and tailored listing rules
UKAIM: formulates and monitors the rules for
nominated advisers and companiesLSE: UK Listing Authority (UKLA), a division of
the market regulator Financial Services Authority (FSA), formulates and enforces the rules
Korea and CanadaTSX-V, Kosdaq: Offer much lax listing rules for
VC firms than the main markets
A.Cost of access
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A.2. Relatively light coproate govanance AIM
Does not prescribe CG requirements for AIM companies;
The companys’ mentor” (Nomad) and investors ensure that AIM companies adopt appropriate CG standards
TSX-V also applies flexible CG rules, fewer rules than the main market, for example, TSX-V companies: only a majority of the members of
the audit committee must be independent, and there are no financial literacy requirements
TSX companies: all committee members must be independent and financially literate
Kosdaq companies, if their total assets are below KRW 2 trillion Exempt from having an audit committee, a minimum
number of outside directors, and an external executive search committee
Venture firms listed in Kosdaq are not required to have at least one-quarter of their directors to be external
A. Cost of access
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A.3. Relatively lower direct costs
KoreaKosdaq: A flat KRW 50,000 for VCKSE: listing fees start at 0.04 percent of the
firm’s capital stock.UK
AIM: A flat annual fee of £4,535 for all its listed firms
LSE: Graduated fee according to listing capitalization (maximum £272,400).
CanadaTSX-V: A listing fee that ranges from C$5,000
to C$15,000Main market: C$10,000, along with 0.13
percent of listing capitalization.
A. Cost of access
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A.4. Similar disclosure rules
Listed firms are required to comply with almost the same level of disclosure as in the main market, with only a few exceptions.
Example Firms listed on TSX-V are given 120 and 60
days to submit annual and interim financial statements, respectively, instead of 90 and 45 days on TSX.
For firms listed on AIM, financial statement reporting is required on a half-yearly basis rather than quarterly.
A.Cost of access
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B.1.Institutional supporting arrangment (1)
AIM:Mentorship plays a critical role in institutional
arrangements. In AIM, the Nomad system is designed to ensure that companies receive ongoing support
The prospective firm appoints an adviser (Nomad) from a list of LSE-accredited advisers
A Nomad works with the issuer to ensure that the issuer is suitable for admission to AIM and, once admitted, complies with AIM rules
Nomads must maintain a ongoing relationship with the firm, assisting its functions of disclosure and corporate governance
B.Market integrity
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B.1 Institutional supporting arrangment (2)
Kosqaq Underwriters of KOSDAQ-listed firms must have at
least a one-year business consulting contract before submitting a registration statement and prospectus to the regulator.
TSX-V The regulator operates annual workshops to train listed
issuers Each year, more than 500 directors and officers of listed
venture capital companies attend these events Mentors often have a different perspective than venture
capitalists, as the latter seek exit after listing, while the former remain accountable for the company’s performance for a certain period of time even after listing. Mentors are responsible for maintaining the reputation of the market.
B.Market integrity
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B.3. Lock-up requirement
AIM: Applies related-party lock-up rules for new listed firm with a two-year track record or revenue
KOSDAQ: imposes a one-year lock-up for major shareholders and related persons
TSX-V: Securities of major shoareholders are escrowed for three years
B.Market integrity
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B.4. Timely and strict delisting of unqualified firms
WhySupport the market’s reputation as a
high-risk, high-return market Maintain a high level of market integrity Establishing a reputation for disciplined
management
To do so, a market surveillance system is needed to support effective enforcement.
B.Market integrity
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B.4. Delisitng criteriaB.Market integrity
Delisting criteria
Kosdaq False statements or material omissions in the listing application Merger with another company Unfaithful disclosure Inactive trading for two quartersImpaired capital ratio Negative certified public accountant audit given on financial statementsOrdinary loss of more than 50 percent of paid-in capital for three consecutive years or market capitalization of less than KRW 2 billion for a specified period
TSX-V Failure to meet “tier maintenance requirements” or exchange requirements in a timely manner Failure to pay its annual sustaining fee, filing fees, or any other charge due to the exchangeSuspension of listed shares for 12 monthsFailure to proceed with a reactivation plan after suspensionNo longer an operating company, discontinuation of a substantial portion of its operations or business, or sale or disposal of its principal operating assets
AIM Suspension of trading (for reasons including failure to meet the AIM’s rules or the exchange’s trading rules, investor protection at risk, and harm to market integrity or reputation) for six monthsFailure to appoint a replacement Nomad within a month following suspension for ceasing to retain a Nomada
a. New rulebook for Nomads introduced in February 2007.
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C.1. Promoting institutional investment
The rules barring institutional investors from participating in new markets or allowing them only to participate in the main markets need to be eased.
AIM: Rlies largely on institutional investorsThe share of institutional investors is growing: from
38.3 percent in 2004 to 40.9 percent in 2005 Korea:
KOSDAQ is driven predominantly by retail investors, which explains the high turnover compared to other markets
Guidelines for institutional investors have been revised since 1998
By 2005, institutional investors accounted for 9.0 percent of KOSDAQ investors
C.Supportive service
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C.1. Promoting instituional investment #2
While TSX is also dominated by retail investors, TSX-V provides a unique way for SMEs to go public through its hallmark Capital Pool Company (CPC) initiative. Unlike a traditional public offering, TSX-V enables
experienced managers to form a CPC (with no commercial operations and no assets but cash), to list on its market, and to raise capital.
The CPC then invests the funds raised in a growing business.
Once the CPC has completed its qualifying transaction and acquired an operating company , its shares continue trading as a regular listing on TSX-V. In 2005, 85 CPCs were listed on TSX-V, raising C$60.1 million,
More than 200 former CPCs had graduated to the main market. Since 1987, the CPC program has enabled more than 1,350 firms to list on TSX-V.
Supportive service
27@Yibin Mu 2008, [email protected]
C.2. Facilitating daily liquidity AIM
It has market makers (members of the exchange) that provide liquidity for AIM securities
Each AIM-listed company is required to appoint a broker—a securities house that is an LSE member—to promote the company to investors by connecting buyers and sellers and providing research coverage.
The broker can be the same firm as the Nomad as long as a Chinese wall exists between the two functions. As of the end of 2005, there were 85 Nomads and 89 nominated brokers.
KOSDAQ Planning to introduce market makers to provide
liquidity, as in the main market. KOSDAQ Star, KOSDAQ IT, and KOSDAQ Venture cover different sector shares listed on KOSDAQ
TSX-V does not have market makers
Supportive service
28@Yibin Mu 2008, [email protected]
C.3. Enhance the visibility of listed firms
New markets provide more proactive information services to investors compared to the main markets.
KOSDAQ supports a program called KRP (Korea Exchange Research project), KPP provides analyst reports for small firms to bridge the
information gap between listed firms and investors.
TSX-V has two programs that help small issuers to gain visibility: Company Showcase, a program offered in Canada’s
main cities throughout the year TSX Venture 50, a ranking of the top 10 companies on
TSX Venture in five industry sectors. This ranking was first launched in December 2005
Supportive service
29@Yibin Mu 2008, [email protected]
C.4. Raising public awareness of alternative investment
TSX-V runs a Public Venture Capital Campaign to foster public awareness of venture financing.
Kosdaq organizes regular road shows for investment relations both in and out of the country for small listed firms every year.
Supportive service
30@Yibin Mu 2008, [email protected]
Linking with industrial policies Having a large supply of good-quality
equities from the SME sector is a key to creating successful new markets.
To ensure a stable flow of new equities into new markets, the governments offer industry policies to support SMEs1. Inroduce a flexible stock compensation
system, 2. Promoting venture capitalism and skills 3. Provide tax incentives for new market listing
and investment 4. Provide funding support 5. Promoting networking of angel investors
D.Linking with industrial policies
31@Yibin Mu 2008, [email protected]
D.4. Provide funding support to innovative SMEs UK
UK has shifted its focus from regulatory and tax policies to bridging the “equity gap” for SMEs
Has established technology funds and regional venture capital funds to support invonative SMEs
Enterprise Capital Funds offers a matching fund scheme in which the government provides a loan to the venture capitalist
US U.S. Small Business Administration offers public-private
financing for innovative SMEs Canada
Business Development Bank of Canada is the federal government’s main venture capital funding institution
Korea A public mother fund (a fund-of-funds) provide matching
funds to venture and innovative SMEs Public and private matching funds for information
technology SMEs Two government policy banks provide active support to
innovative SMEs
D.Linking with industrial policies
32@Yibin Mu 2008, [email protected]
D.5. Promoting networking of angel investors
Angel investors are encouraged to invest directly in business start-ups
Canada The National Angel Organization (NAO) is the primary
organization for angel investors at the national level. The NAO has two main mandates: (a) lobby on behalf of
angel investors and (b) provide professional development to angel investors through a national conference.
Europe European Business Angel Network (EBAN)
Korea Established in 2003, Korea Business Angel Network
(KBAN) is to promote the dissemination of information on venture business and investment opportunities
Linking with industrial policies
33@Yibin Mu 2008, [email protected]
Outline
1. Reasons of introducing new markets
2. Features of new markets3. Good practices of new
markets4. Policy implications
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Policy implications
New markets (NM) contribute to inovative SME development
Not a panacea for all countriesEnvironment for NM
Large number of inovative businessFinancially sustanaible
Policy support necessaryLight costs of regulations, transactions and
complianceAppropraite institutional and policy framework
for NM