Listing standards of SME stock exchanges
The document covers the importance of SME exchanges and discussed the listing standards of some of the famous SME stock exchanges across the world and the future of such exchanges in India
Niroop G J PGP/11/097
Small and medium enterprise (SME) exchanges 3
AIM London 4
Key Criteria for listing 5
Mothers Exchange 6
Listing Criteria 6
Growth Enterprise Market – GEM 8
GEM Listing Requirements 8
(I) Financial Requirements: 8
(II) Acceptable Jurisdictions: 8
(III) Accounting Standards: 8
(IV) Suitability for Listing: 9
(V) Operating History and Management: 9
(VI) Minimum Market Capitalisation: 9
(VII) Market Capitalisation of Public Float: 9
(VIII) Public Float: 9
(IX) Spread of Shareholders: 10
(X) Offering Mechanism: 10
(XI) New Issue Price: 10
Listing Process for a listing application 11
JSE Alternative Exchange (AltX) 12
Expected Benefits 12
For companies: 12
For investors: 13
For the South African economy: 13
Extraordinary Support 13
Designated Advisers 13
Listing Requirements 15
Market for Alternative Investment – MAI 16
Criteria for listing on MAI 16
NYSE ALTERNEXT 17
MARKET PARTICIPANTS 17
LIQUIDITY PROVIDERS 17
Role of LPs 17
New LP profiles 19
MARKET MAKERS 19
LISTING SPONSORS 21
Conditions for becoming a listing sponsor 22
Mixed Results 25
1. Good performance 25
2. Bad performance 27
Growth of KOSDAQ 29
LISTING STANDARDS 30
TSX Venture exchange Canada 31
The steps to list on TSX Venture Exchange 31
Filing a prospectus is a five-step process: 32
Listing Requirement 32
Listing Fees 33
Four different methods at TSX Venture Exchange 33
Direct Listing 33
Reverse Take-Over 33
TSX Venture Capital Pool Company Program (CPC) 34
SME Exchange in India 35
Small and medium enterprise (SME) exchanges
The objective of SME exchanges is to provide a way for smaller companies to raise capital. These companies, due to their smaller sizes, cannot raise capital from larger exchanges. The companies which would want to raise money from SME exchanges would generally range from young, venture capital-backed start-ups to well-established, mature organisations looking to expand.
These small and mid-sized firms usually cannot meet the stringent requirements that are necessary for listing on bigger exchanges. SME exchanges are designed specifically for these companies. These exchanges provide a way for the small companies to get listed, and also provide an alternative investment option for the investors, who can buy the equity of smaller businesses.
There are numerous reasons why small company would want to get itself listed on an SME exchange. The reasons are essentially the similar to why any company would want to go public. But, the priorities in case of the small firms are different. For example, listing on an exchange creates a heightened public profile of a small company. This is very important for most small companies getting listed on SME exchange, but not as important for a well-established company getting listed on a major exchange.
Some of the reasons why a small company wants to get itself listed on an SME exchange include:
• To provide access to capital for growth
• To create a market for the company’s shares
• To place an objective market value on Company’s business
• To encourage employee commitment by making share schemes more attractive
• To increase the company’s ability to make acquisitions using quoted shares as currency
• To create a heightened public profile
• To enhance status with customers and suppliers
There are many SME exchanges around the world. Presently, we do not have such an exchange in India. Examples of some of the popular SME exchanges around the world are –
• AIM London
• NYSE Alternext
• JSE Alternative Exchange South Africa
• Market for Alternative Investment (MAI) Thailand
• TSX Venture exchange Canada
• Mothers (Market of the high-growth and emerging stocks) Japan
• Gems- Hong Kong
• KSODAQ – Korea
The London Stock Exchange created AIM with the objective to offer smaller companies from any country and any industry sector ? the chance to raise capital on a market with a pragmatic and appropriate approach to regulation.
AIM is designed to be a highly flexible public market offering many unique attributes both for companies and investors.
Companies do not need a particular financial track record or trading history for getting listed on AIM. There is also no minimum requirement in terms of size or number of shareholders. This more flexible approach reflects the fact that AIM was designed specifically for smaller growing companies, and has helped AIM to become the leading global growth market.
• No minimum size of company
• No minimum proportion of shares to be in public hands
• No trading record requirement
• No prior shareholder approval for the majority of transactions
• No restrictions on the transferability of the company’s shares*
• No requirement to be incorporated in the United Kingdom
Key Criteria for listing
1. An applicant must appoint a nominated adviser and an AIM company must retain a nominated adviser at all times.
2. An applicant must produce an admission document and other supporting documents in specified formats.
3. Where an applicant’s main activity is a business which has not been independent and earning revenue for at least two years, it must ensure that all related parties and applicable employees as at the date of admission agree not to dispose of any interest in its securities for one year from the admission of its securities.
4. Where the applicant is an investing company, a condition of its admission is that it raises a minimum of £3 million in cash via an equity fundraising on, or immediately before admission.
5. Disclosure of developments that are not public knowledge but likely to cause substantial prize movements.
6. Disclosure of corporate transactions
7. Disclosure of half-yearly financial statements
8. Annual reports
9. Disclosure of other miscellaneous information.
Mothers (Market of the high-growth and emerging stocks) was established by the Tokyo Stock Exchange on November 11, 1999. The exchange was set up in order to provide venture companies access to funds at an early stage of their development and to provide investors with more diversified investment products.
1. Applicant should make, at the time of listing, public offering of minimum 1,000 trading units of newly issued shares, or a public offering of minimum 1,000 trading units of newly issued shares and previously issued shares, of which minimum 500 trading units should be of newly issued shares.
2. Applicant should secure minimum 300 new shareholders by the initial public offering at the time of listing.
3. A market capitalization of at least JPY 1 billion at the time of listing.
4. Turnover, for the business should be recorded by the day prior to the listing application date. This is because if the business is still being planned or going through a feasibility assessment stage and yet to generate any significant revenue, it is not considered eligible for listing.
5. Financial Statements
6. Applicant is to have contracted, or has agreed to contract, with one of shareholder service agents by the time of application.
7. There should be no restrictions on transfer of stocks.
8. Applicant has agreed, or is to have agreed, to deposit their securities into a central securities depository, Japan Securities Depository Center, Inc.
9. Applicant should be able to disclose their business results appropriately and timely on quarterly basis.
Figure below compares the listing criteria of Mothers with other sections of the Tokyo Stock exchange.
Growth Enterprise Market – GEM
GEM is an alternative stock market operated by Hong Kong Exchanges and Clearing Limited. It caters to the growth enterprises particularly those emerging ones, i.e. enterprises that have good business ideas and growth potential.
Gem offers growth enterprises an avenue to raise capital. It offers investors an alternative of investing in “high growth, high risk” businesses and provides a fund raising venue and a strong identity to foster the development of technology industries in Hong Kong and the region. Gem promotes the development of venture capital investments.
GEM Listing Requirements
The following shows some of the basic requirements for listing equity securities on the Exchange.
(I) Financial Requirements:
A GEM new applicant must have a trading record of at least two financial years comprising:
• A positive cashflow generated from operating activities in the ordinary and usual course of business of at least HK$20 million in aggregate for the two financial years immediately preceding the issue of the listing document.
• Market cap of at least HK$100 million at the time of listing.
(II) Acceptable Jurisdictions:
Chapter 24 of the GEM Listing Rules provide the general framework applicable to all overseas companies seeking a listing on the Exchange. GEM Rule 24.05(1)(b) and the explanatory notes thereto set out the shareholder protection standards that are expected of an overseas company when seeking a primary listing on the Exchange.
Applicants incorporated outside Hong Kong and other recognised jurisdictions seeking a primary listing on GEM are assessed on a case-by-case basis and have to demonstrate they are subject to appropriate standards of shareholder protection, which are at least equivalent to those required under Hong Kong law.
(III) Accounting Standards:
A new applicant’s accounts must be prepared in accordance with either Hong Kong Financial Reporting Standards or International Financial Reporting Standards. Banking companies must also comply with the Financial Disclosure by Locally Incorporated Authorised Institutions issued by the Hong Kong Monetary Authority.
Accounts prepared in accordance with US GAAP are acceptable if the company is listed, or will be simultaneously listed, on either the New York Stock Exchange or the NASDAQ National Market
(IV) Suitability for Listing:
Both the issuer and its business must, in the opinion of the Exchange, be suitable for listing. An issuer or its group (other than an investment company) whose assets consist wholly or substantially of cash or short-dated securities will not normally be regarded as suitable for listing, except where the issuer or group is solely or mainly engaged in the securities brokerage business.
(V) Operating History and Management:
A GEM new applicant must have a trading record of at least 2 full financial years with:
• Substantially the same management throughout the 2 full financial years.
• Continuity of ownership and control throughout the full financial year immediately preceding the issue of the listing document.
Exception: The Exchange may accept a shorter trading record period and waive or vary the ownership and management requirements for newly-formed “project” companies and natural resources exploitation companies, supported by reasons acceptable to the Exchange.
(VI) Minimum Market Capitalisation:
The expected market capitalisation of a new applicant at the time of listing must be at least HK$100 million.
(VII) Market Capitalisation of Public Float:
The expected market capitalisation at the time of listing of the securities of a new applicant which are held by the public must be at least HK$30 million.
(VIII) Public Float:
At least 25% of the issuer’s total issued share capital must at all times be held by the public. Where the issuer has one class of securities or more, the total securities of the issuer held by the public at the time of listing must be at least 25% of the issuer’s total issued share capital. However, the class of securities for which listing is sought must not be less that 15% of the issuer’s total issued share capital, having an expected market capitalisation at the time of listing of not less than HK$30 million. The Exchange may, at its discretion, accept a lower percentage of between 15% and 25% in the case of issuers with an expected market capitalisation at the time of listing of over HK$10 billion.
(IX) Spread of Shareholders:
The equity securities in the hands of the public should be held among at least 100 persons. Not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders.
(X) Offering Mechanism:
A new applicant is free to decide on its offering mechanism and may list on our Exchange by way of placing only.
(XI) New Issue Price:
GEM Listing Rules do not impose conditions on the new issue price. However, new shares cannot be issued at a price below their nominal value.
Monetary Value of Equity Securities to be Listed
(HK$ million) Initial Listing Fee
Not exceeding: 100 100,000
100 to1,000 150,000
Listing Process for a listing application
(H – stands for the provisional hearing date by the Listing Division)
Clear Business Days(Note 1) GEM Requirements
H – 25 Application for advance booking to the Exchange ? Submit the advance booking form (Appendix 5A to the GEM Listing Rules) with a timetable
? Pay the full amount of the initial listing fee
? Submit the documentary requirements under GEM Listing Rules 12.14, 12.17, 12.22 and 12.23.
H Approval/ Rejection :
Hearing prior to 1 July 2008 – by Listing Committee
Hearing date after 1 July 2008 – by Listing Division Rejection
Discretionary appeal to GEM Listing Committee
? After notification of approval in principle but before the date of issue of the listing document, lodgement of documents with the Exchange pursuant to GEM Listing Rule 12.24
Issue of prospectus ? By no later than 11 a.m. on the intended day of authorisation of the prospectus, lodgement of documents with the Exchange pursuant to GEM Listing Rule 12.25
? After the issue of the prospectus but before dealings commence, lodgement of documents to the Exchange pursuant to GEM Listing Rules 12.26 and 12.27
Dealings in shares commences
JSE Alternative Exchange (AltX)
The Alternative Exchange (AltX), a division of the JSE Limited (JSE) is the exciting parallel market focused on good quality small and medium sized high growth companies.
The JSE Ltd (“JSE”) is licensed as an exchange under the Securities Services Act, 2004 and Africa’s premier exchange. It has operated as a market place for the trading of financial products for nearly 120 years. In this time, the JSE has evolved from a traditional floor based equities trading market to a modern securities exchange providing fully electronic trading, clearing and settlement in equities, financial and agricultural derivatives and other associated instruments and has extensive surveillance capabilities. The JSE is also a major provider of financial information. In everything it does, the JSE strives to be a responsible corporate citizen.
AltX is designed to appeal to a diverse range of companies in all sectors including:
• Young and fast-growing businesses including start-ups;
• Family-owned businesses;
• Black economic empowerment companies; and
• Junior mining companies.
AltX plays a vital role within the JSE, by providing smaller companies not yet able to list on the JSE Main Board with a clear growth path and access to capital. To be eligible for listing, a company must appoint and retain the services of a registered Designated Adviser.
• Access to long-term investment capital for development of the business;
• Access to a central trading facility thereby providing liquidity;
• The ability to realise value through an effective price discovery mechanism;
• Improved image amongst suppliers, customers, staff and other stakeholders due to the prestige associated with being a listed entity; and
• The opportunity to use the issue of shares as consideration for an acquisition.
• The opportunity to diversify share portfolios by investing in a wide range of high-growth small and medium sized companies; and
• Increased confidence due to the knowledge that AltX is regulated by the JSE, which provides substantial investor protection.
For the South African economy:
• Grows the economy by providing growth opportunities to small and medium sized companies; and
• Promotes black economic empowerment in South Africa.
The AltX Team is committed to the success of the market and strives to provide extraordinary support to all stakeholders. In order to achieve the objectives of exceptional communication, ongoing education, marketing and relationship management with companies, Designated Advisers and the investment community, AltX has created the Knowledge Exchange.
Knowledge Exchange initiatives include the partnership between AltX and the Department of Trade and Industry (the dti). The dti supports AltX in the belief that it will help promote black economic empowerment and encourage entrepreneurs in South Africa. Another Knowledge Exchange initiative is the AltX collaboration with the Wits Business School (WBS) and the Institute of Directors (IoD) to provide the Directors Induction Programme (DIP). DIP is a compulsory education programme for all executive and non-executive directors of AltX companies.
The main role of a Designated Adviser is to competently, professionally and impartially advise the applicant company on all its responsibilities during the application process and its responsibilities to maintain its status once listed. The Designated Adviser is the guardian of the listed company’s compliance with the JSE Listings Requirements and other applicable regulation as defined.
The Designated Adviser must ensure that:
• the company complies fully with the applicable JSE and Altx Listings requirements;
• all relevant documentation required by the Listings Requirements has been submitted;
• each company brought to the JSE by the DA is suitable for listing;
• each pre-listing statement is compliant with the Listings Requirements and has been completed accurately and fully, without omissions and/or without misleading or false information;
• all directors of each company have the necessary expertise and experience, understand the nature of their responsibilities under the Listings Requirements, the Companies Act, the SRP Code and GAAP, are aware of the expectation to prepare and publish all information necessary and that Directors’ declarations need confirmation and verification;
• all new appointees to the board of directors of the company are fully briefed as to the nature of their responsibilities;
• all directors complete the Directors Induction Programme within 2 months of their appointment (if newly appointed) or upon confirmation of acceptance on Altx;
• the directors of each company are timeously informed of any amendment to the Listings Requirements or other regulations;
• all periodical financial information announcements are reviewed with the directors prior to publication to check accuracy and full disclosure;
• regular reviews are held of the company’s actual trading performance and financial condition to ensure appropriate disclosure of information to investors;
• at least one of the DAs attends all company board meetings in an advisory capacity; and
• all of the approved executives of the DAs attend at least 4 of the 6 annual DA forums hosted by Altx.
The JSE Limited Listings Requirements are published by Lexis Nexis. The table below shows some of the major listing requirements of both the JSE Main Board and AltX.
Listing Requirements Main Board AltX
Share Capital Rand 25 million Rand 2 million
Profit history 3 Years None
Pre-tax Profit R8 million N/A
Shareholder spread 20% 10%
Number of Shareholders 300 100
Sponsor/DA Sponsor Designated Adviser
Publication in the press Compulsory Voluntary
Number of transaction categories * 2 2
Special Requirements N/A Appoint Financial Directors
Annual listing fee 0.04% of average market capitalisation with a minimum of R26334 and a maximum of R121700 (including VAT). R22 000 (including VAT)
Education Requirements N/A All directors to attend Directors Induction Programme
Transaction > a50% of market capitalisation Category 2:
Transaction < 50% of market capitalization Circular to shareholders Shareholder meeting Shareholder approval Kicks in at 25% for Main Board Announcement on SENS (Stock Exchange News Service) Company website (if applicable) AltX Website Voluntary publication in press Kicks in at 5 to 25% for Main Board Market for Alternative Investment - MAI The Market for Alternative Investment (MAI) was established by the Stock Exchange of Thailand as a fund-raising site for small and medium enterprises with high-potential to growth or newly-established companies with high market value. It is an alternative channel for capital raising. The companies with high-potential to growth and a need for fund raising can get listed on MAI. Criteria for listing on MAI MAI seeks companies with high potential to list on the market. To support investor confidence, MAI requires that companies wishing to list have a record of profitable business before offering shares to the public. Most importantly, firms must demonstrate good corporate governance, transparency and reliability. Some of the major criteria for companies getting listed on MAI are the followings: Factors Listing Criteria Status Is a public limited company or juristic person established by specific law Paid-up Capital > 20 million Baht
Distribution of shares to minority shareholders > 300 small shareholders of ordinary shares and the aggregate number of shares > 20% of paid-up capital
Definition of minority shareholders : Non-Strategic Shareholders
Public Offering The shares must have already been granted by the Office of the Securities and Exchange Commission (SEC) > 15 % of paid-up capital
Track Record Track Record > 2 years before filing an application, Net Profit in the latest year > 0 ; or
Track Record > 1 year before filing an application , Market Capitalization > 1,000 million Baht
Financial Condition Equity > 20 million Baht
Conflict of Interest No conflict of interest according to the criteria specified in the Notification of the SEC
Corporate Governance and Internal Control – There shall be an internal control system according to the criteria specified in the Notification of the SEC
– Must appoint audit committee > 3 directors with qualification as required by SEC
Management – Qualifications of the management team have no prohibited characteristics and comply with what are specified by the SEC
– The scope of authority and duties of audit committee according to the criteria specified in the Notification of SEC
Articles of Association The articles of association of the company and the subsidiary company shall consist of the complete stipulations according to the criteria specified in the Notification of the SEC
Silent Period Strategic Shareholders* > 55 % of paid-up capital after IPO for 1 year. After the first six months : allow to sell shares a maximum of 25% of total locked up shares. After a year: allow to sell the rest shares
Financial Statements and Auditor – Financial Statements which posses the features in accordance with the criteria specified in the Notification of the SEC
-The auditor of the applicant must be approved by the SEC
Financial Advisor Must appoint financial advisor
*Definition of Strategic Shareholders
• Government, state enterprises and government agencies
• Director, managers and the management including related persons
• Shareholders holding shares > 5% of paid-up capital including related person
• Shareholders having an agreement not be sold within the silent period
NYSE Alternext is a tailor-made market for small and midsized companies seeking simplified access to the stock market. Its streamlined listing requirements and trading rules are suited to the size and business needs of small and mid-cap firms while ensuring investor transparency.
NYSE Alternext was created by Euronext to meet the needs of small and midsized companies seeking simplified access to the stock market. It opened for business on 17 May 2005. NYSE Alternext’s streamlined listing requirements and trading rules are suited to the size and business needs of small and mid-cap firms. The rules also ensure investor transparency.
Alternext is an exchange-regulated market with a lighter regulatory regime. It is not a regulated market as defined by the Markets in Financial Instruments Directive (MiFID) of 21 April 2004. It is regulated by Euronext through a body of rules applicable to intermediaries and listed companies.
Role of LPs
Liquidity Providers (LPs) act as market makers in the Euronext Cash market model’s order-driven system.
The role of LPs on Euronext’s market is to:
• protect against variations in volatility on the market;
• guarantee transactions at all times at the best price;
• boost the volume of transactions in the orderbook.
In this way the Liquidity Provider is a market specialist for its stocks, and as a result is often the principal point of contact for the issuing company. The Liquidity Provider agreement for equities is combined with a liquidity contract in many cases*. This links the issuing company to a Euronext market member offering a placing, analysis and advisory service, or specializing in initial public offerings (IPOs).
Liquidity Providers mainly concentrate on small and mid caps, since listed companies with large market capitalization generate greater liquidity. The criteria for liquidity provision on large-cap stocks are more restrictive and liquidity provider agreements are not permitted for any of the stocks in the Euronext 100 index.
When the LP enters into a commercial agreement with Euronext to provide liquidity on any stock or exchange-traded fund (ETF or tracker), it undertakes to quote two-way bid and offer prices with a minimum volume size, gauged either by the number or the value of shares, and within a minimum price range or spread.
The warrants market is traded via the dedicated product segment, NextWarrants. In this instance it is mandatory that the issuer of the warrant is also the LP for the launch of the product. The same rules apply for certificates and convertible bonds.
The market in trackers, traded on the NextTrack segment of Euronext, requires a minimum one LP to launch any product. These LP contracts are specific for each national market. In the bond market LP contracts are based on the national governing rules which differ according to the method of quotation and the issuer, government or corporate. Furthermore, members can take up the option of being bid-only LPs.
Members considering becoming Liquidity Providers must be members of the Euronext country in which they want to provide liquidity, and be authorized to trade in the capacity of either dealer or broker/dealer.
New LP profiles
The Euronext Cash Market has recently reviewed its Liquidity Provider (LP) policy and will introduce two LP profiles in the near future. This is to better reflect the activity of LPs on the Cash Market. These profiles relate to LPs on equities only. Euronext will communicate the implementation date and schedule in due course.
Since the introduction of the harmonized Liquidity Provider concept in 2001, Euronext has observed some changes in the behaviour of active Liquidity Providers, with two distinct types of activity. This has enabled us to establish two distinct types of LP, classified by their activity.
Profile 1: “Corporate Broker” profile
In the first category are LPs whose activity is strongly related to that of mid and small caps. These LPs provide listing sponsorship, research and/or promotional services to companies throughout the listing process, in addition to the usual LP trading service once the company has listed. Due to the corporate finance nature of their activity, these LPs will be classified as ‘Corporate Broker profile’ LPs. The profile of this category remains the same as the current LP profile, and Euronext aims to have a maximum of two LPs per equity.
Profile 2: “Dealer profile”
The second type of LP consists of LPs that provide quotes on the more liquid equities. These LPs perform hedging and arbitrage activities and are therefore focused on blue chips, foreign shares, and multi-listed equities in the Euronext zone (often equities that function as the underlying for options). These LPs will be called ‘Dealer profile’ LPs, after their style of trading (for own account and without any client involvement).
A new Liquidity Provider profile has been developed for these Dealer profile LPs, and these LPs must respect a ‘List of eligible equities for LP activity’, which will be created by Euronext. Dealer profile LPs will have adjusted requirements and trading fees.
A market maker is a participant that can trade orders directly for its own account. Market makers must be entities with trading-member status.
The role of market markers is to promote market liquidity by continuously displaying indicative bid/ask spreads for minimum quantities of the stocks they have undertaken to follow.
This makes it easier to trade blocks of shares, for which investors sometimes have difficulty finding a counterparty in the main market.
Market making is a bilateral process involving a market maker and a financial intermediary acting for its client.
Market makers undertake to quote indicative bid/ask spreads for a minimum quantity of shares of their choosing during the following time periods at least:
• 9:00 to 15:30 for auction traded shares
• 9:00 to 17:30 for continuously traded shares
If they wish, market makers can also operate between 7:15 and 9:00 and also from:
• 15:30 to 19:00 for auction traded shares
• 17:30 to 19:00 for continuously traded shares
All Alternext-admitted companies must have a listing sponsor. The listing sponsor is a long-term financial partner that helps the company prepare for listing on Alternext and guides it throughout its life on the exchange. It assists the company in meeting its market transparency requirements and fulfilling its other obligations. The presence of the listing sponsor is intended to bolster investor confidence.
Listing sponsors commit to:
• Guiding and helping applicants prepare for listing:
? Provide information about legal and regulatory requirements
? Prepare the information document (either a prospectus approved by the regulator or an offering
? Circular prepared under the joint responsibility of the sponsor and the company) for distribution to potential investors
? Present a full admission dossier to Euronext
? Avoid potential conflicts of interest.
The listing sponsor must provide Euronext with written confirmation that the applicant complies with the listing rules. It also certifies that it has performed customary due diligence.
• Helping the company throughout its listing by undertaking to:
? Ensure, for at least two years, that the companies it sponsors meet their disclosure requirements
? Inform Euronext whenever a company fails to meet its disclosure requirements or, in general, its obligations as a listed company
? Act as Euronext’s main point of contact for queries about the companies it sponsors.
If a listing sponsor fails to meet its obligations, Euronext can discipline it by:
o Issuing a warning, which is posted on the Alternext website
o Striking it off the list of Alternext-approved listing sponsors.
Conditions for becoming a listing sponsor
A listing sponsor is a company acting as an investment services provider, audit firm, legal counsel or corporate finance specialist.
Candidate listing sponsors must make a contractual commitment to Euronext and meet all the following criteria:
o At least two years’ experience advising companies in equity finance
o Successful completion of equity-related transactions involving the preparation of information documents
o Suitably qualified staff
The register of listing sponsors will be continually updated and posted on the Alternext website, the official channel for disclosing information about companies listed on this market.
KOSDAQ market has opened on July 1, 1996 to meet both the needs of investors who want high risk-return opportunities and emerging enterprises that have to finance capital for growth. Its function can be stated as follows:
(1) to facilitate corporate financing for promising small and medium-sized firms and venture businesses,
(2) to provide new exciting investment opportunities for investors, and
(3) to help venture capital firms redeem investment capital and set up new investment funds.
KOSDAQ is the Korean version of America’s NASDAQ (National Association of Securities Dealers Automated Quotation) System, which is a part of the OTC market. The U.S. OTC market is the largest segment of the U.S. secondary market in terms of the number of issues traded as well as the diversity of quality. While about 2,600 issues are traded on the New York Stock Exchange, almost 6,000 issues are actively traded on the NASDAQ market.
As of last March, KOSDAQ market consists of 328 registered companies, of which 261 firms are of small and medium-sized enterprises. Among them, there are 113 venture firms and 8 mutual fund companies. Although it amounts to almost the half of Korea Stock Exchange in terms of the number of listed companies, KOSDAQ’s total equity market value is as little as 8.5 trillion won, just 5% of KSE. The most serious problem of KOSDAQ market is the lack of liquidity. Currently, the average daily trading volume is less than 1% of that of KSE.
However, KOSDAQ market has been on a strong rally since the start of this year on the back of small investors’ active buying of venture business shares. Stock prices of some venture firms, including telecommunications and Internet-related corporations, are on an upward spiral. While KOSDAQ Index has risen by 75% since the beginning of this year, Venture Index – an auxiliary KOSDAQ market index – has been up as much as 120%. For example, shareholders of Goldbank Communications, an Internet-related venture firm, have enjoyed incredibly thirtyfold increase in stock price during the five month period, from 960 won early this year to 30,700 won in May. This kind of hot market results from the worldwide phenomenon of crazing for Internet-related shares. The U.S. stock market these days is represented by the strength of Internet-related shares such as Yahoo, Amazon, and so on. For instance, Amazon, the Internet bookstore, has earned as high as 800% increase in stock price during the past one year. High stock price is mainly due to the fast growth in annual sales of USD 610 million in 1998, compared to USD 148 million in 1997. But market opinions are divided as for the appropriateness of prices of these venture shares. Some people believe they are over valued, others do not.
We have to realize that not all venture businesses are ‘Midas touch’. Each year as many as 400 ~ 800 venture firms are newly listed on NASDAQ, but almost the same number of companies are delisted following business failure. It applies to KOSDAQ market as well. Those who consider investing to KOSDAQ stocks should acknowledge that high expected returns are given in reward for high risks taken.
On 1 July 2006, Korea’s KOSDAQ market – modeled after NASDAQ of the United States – attains its first decade of operation. Like its sister market in New York, KOSDAQ was created to meet two demands: raising capital for venture firms and small and medium-sized enterprises (SMEs) and providing a new market for investors to put their money into companies with growth potential.
KOSDAQ grew on the government’s policy to foster the information and technology industry. And the tech-laden market has owed its dramatic growth to years of low interest rate that kept funneling liquidity into the market. Knowing its growth potential, investors rushed to the market, sometimes making blind investment. Speculative trading in turn overheated the market, sending stock prices spiraling upward.
Bubbles that formed in the short-lived boom of 2000 have burst, leaving the market in the doldrums ever since. Today, KOSDAQ focuses more on quality growth rather than on quantity expansion.
1. Good performance
Over the past decade, KOSDAQ has grown to be the world’s fourth largest secondary stock market in market capitalization, after NASDAQ of the US, JASDAQ of Japan and AIM of the UK. KOSDAQ’s market capitalization reached 59.9 trillion Won on 23 June 2006, rising 7.8 times from 7.6 trillion Won in the late 1996. Trading volume and value have grown dramatically: in the first six months of 2006, 69.28 billion shares changed hand on the market, or 2,309.3 times larger than the number of shares traded in 1996. The aggregate value of shares traded in the first six months of 2006 reached 234.5 trillion Won, or 195.4 times bigger than that of 1996. As of 23 June 2006, the number of companies listed on the market rose 2.8 times to 929, up from331 in the late 1996.
The KOSDAQ market has played a valuable role as the primary provider of capital for SMEs and venture companies. From its opening to May 2006, the tech-focused KOSDAQ supplied a whopping 26.9 trillion Won in capital for SMEs and venture firms through issuance of new stocks and initial public offerings. This role has recently weakened. The amount of fund raised from KOSDAQ market each year peaked at 7.1 trillion Won in 2000. In 2003, this amount fell drastically to 23.9% of the amount of 2000.
Certainly, the market has contributed to the growth of listed companies. The combined sales of companies listed on KOSDAQ reached 61.6 trillion Won in 2005, accounting for 7.6% of Korea’s GDP. The number of workers they hired grew to 189,595 in 2005, up 2.3 times from the late 1999. Together with the market, the information and technology industry has risen to account for 14.5% of Korea’s GDP in the first quarter of 2006. It was four times higher than 3.6% of 1995.
2. Bad performance
KOSDAQ’s volume growth hasn’t been followed by quality. To better understand the performance of KOSDAQ-listed companies, Samsung Economic Research Institute has analyzed their sustainable growth rate and multiple of intangible assets. (Sustainable growth rate refers to maximum growth rate that a firm can sustain via business and financial activities while multiple of intangible asset means the value of intangible assets divided by capital.) According to our analysis, sustainable growth rate has fallen more and more in companies listed on the KOSDAQ market. Regardless of their weak performance, stock prices rose sharply in 2005.
Most KOSDAQ-listed companies can still grow bigger. In the late 2005, only 52 of the KOSDAQ-listed venture firms had generated more than 100 billion Won in sales. Some companies including the Internet-business NHN Corporation and electronics equipment maker Humax have successfully developed their business lines. Even so, their scale was much smaller than that of successful venture firms in the US. Humax’s equity capital was worth US$380 million in the late 2005, but this was less than a sixtieth of the US food provider Sysco Corporation and a twentieth of the US search engine provider Google.
The financial difficulty of smaller companies with sales of less than 10 billion Won was worse than that of bigger companies. Small-scale service venture firms were hit hardest by aggravating growth potential. In 2005, sustainable growth rate of non-venture firms with sales of less than 10 billion Won decreased 31.2% and that of venture companies with sales of less than 10 billion Won fell 58.3%.
The service industry had a much lower sustainable growth rate. Venture companies in the service industry with sales of less than 10 billion Won each saw their sustainable growth rate tumble by 62.2% in 2005. The non-venture service firms with sales of less than 10 billion Won each also shed their sustainable growth rate by 42.3% for the year. Nevertheless, the number of small venture firms which have existed for more than 11 years reaches 57, accounting for 70.3% of total number of small venture firms with sales of up to 10 billion Won. It means that weak performance does not necessarily lead to business closedown.
Small-scale venture firms have used money raised through initial public offerings as operating funds. From 1998 to 2005, a large-scale venture firm with sales of more than 50 billion Won raised 30.6 billion Won, on average, from the KOSDAQ market. On the other hand, a small-scale venture firm with sales of less than 10 billion Won each raised a whopping 88.7 billion Won from the KOSDAQ exchange. Some small-scale venture firms are reluctant to invest the money raised from the stock market. The amount of facility investment made by non-venture firms from 1998 to 2005 is 2.2 times higher than the money they raised from KOSDAQ during the same period. Venture firms invested a mere 30% of the money they raised from the KOSDAQ market.
To sum up, KOSDAQ has been a big help to SMEs and venture businesses that are not qualified to raise capital from the main KOSPI market (KOSPI stands for Korea Stock Price Index). However, its role as the primary provider of capital has weakened and health of the market has aggravated with lots of KOSDAQ-listed businesses suffering from liquidity problems. The share of companies that showed operating deficits in the KOSDAQ-listed venture firms soared from 10.3% in 1999 to 33.8% in 2005. It means that a considerable number of KOSDAQ-listed venture companies survive on the funds raised from the initial public offerings, without generating profits. The market has suffered further setbacks in the wake of a series of scandals related to accounting fraud and other irregularities, which have eroded investors confidence?
Growth of KOSDAQ
We submit the following four recommendations as a way of helping KOSDAQ achieve its original goal of fostering SMEs and venture businesses.
Firstly, the KOSDAQ market operators should have efficient systems in place so as to remove unviable companies from the market. The nation’s venture business industry can further grow only when the financially troubled companies with little hope for survival are squeezed out of the market. Promoting merger and acquisition (M&A) market can be a good solution. If venture capital, government capital and private equity funds flowed into the economy and restructured Korea’s industries, they would be a catalyst for troubling companies to go out of the market.
Secondly, KOSDAQ must enhance its transparency. If the Financial Supervisory Committee and KOSDAQ Committee closely cooperated, they can restore confidence of investors and prevent market distortion. Transparency is a prerequisite to attracting investment and fostering the stock market.
KOSDAQ must also improve its investment environment. In March 2006, it introduced the KRX Research Project that connected research firms and listed companies that wanted to release analytical reports on corporate performance. It must continue this project in order to provide timely information to investors.
Thirdly, the market must provide diverse securities products and promote activities of ‘market makers’ who quote a buy and sell price in financial instruments hoping to make a profit on the turn or the spread between the bid and offer. Market makers can encourage promising SMEs and venture businesses to list on the market and give more convenience to investors. In order to run the new system efficiently, KOSDAQ needs to increase the number of market makers and teach listed companies and investors the concept of market makers. At the same time, it should diversify products and improve transparency of information.
Finally, M&A business should play a role in driving SMEs and venture businesses. Currently, mistrust of financial information has discouraged investors and institutions from pursuing M&As. Therefore, financial institutions such as banks and securities firms need to provide more accurate information on SMEs. At the same time, KOSDAQ operators should create business environment whereby a venture capital can pursue M&A activities without too much hassle.
Category KOSDAQ Market
(Non-venture business) KOSDAQ Market
Equity Capital At least 3 bn Korean Won At least 1.5 bn Korean Won
Years of Operation Exempt
Capital status No capital impairment No capital impairment
Ratio of public offering At least 10% of total issued voting stocks
(if minority shareholding is less than 30%, at lest 20% of total issued voting stocks)
Shareholders At least 500 owning at least 30%
Sales Revenue N/A N/A
Return on Equity At least 10% or 2 bn Korean Won At least 5% or 1 bn Korean Won (exempt if certified as venture business with high growth potential and viable technology, and obtained at least Grade A from Credit Guarantee Fund or ETRI)
Net Income Must record positive ordinary income in the most immediate fiscal year. Must record positive ordinary income in the most immediate fiscal year (exempt if certified as a venture business with high growth potential and viable technology)
TSX Venture exchange Canada
Listing on TSX Venture Exchange is an option for emerging companies, providing access to public venture capital to facilitate their growth. Companies listed on TSX Venture Exchange are provided with the opportunity to gain a solid foothold in the public market, with the potential to work towards graduation to the senior exchange and access to larger pools of capital.
Whereas listing on Toronto Stock Exchange (TSX) is the right choice for well-managed, growth-oriented companies with strong performance track records. Toronto Stock Exchange is globally recognized as one of North America’s premier stock exchanges, known for its high standards of fairness and innovative approach to trading.
The steps to list on TSX Venture Exchange
1. Contact Business Development to set up an advisory meeting.
2. Prepare your internal and external advisory team (management, directors, investment dealer, legal counsel, auditor, IR professional).
3. Prepare your TSX Venture Exchange Listing Application and prospectus.
4. Submit application and supporting documentation.
5. TSX and TSX Venture Exchange review for listing approval.
Filing a prospectus is a five-step process:
1. File a preliminary prospectus with TSX Venture, as well as with your home province securities commission and other provincial jurisdictions where securities will be sold.
2. Regulatory authorities review the prospectus and inform your professional advisors of any deficiencies.
3. After all deficiencies are cleared to the satisfaction of the regulators, file an amended prospectus in final form.
4. The securities commission will issue a final receipt as acceptance of the prospectus.
5. This approval allows your company to begin selling securities in the provinces where a final receipt has been issued.
Listing requirements for TSX Venture Exchange are sector and stage of development specific. Listing requirements depend on the basis of Property Requirement, recommended work program, Working Capital and Financial Resources, Net Tangible Assets or Revenue, Sponsorship. And these requirements vary from Sector to Sector.
The following division has been made by exchange for listing purpose
• Oil & Gas
• Diversified Industries (includes Consumer and Industrial Products; Technology; Cleantech; Life Sciences; Research and Development; Communications and Media; Real Estate and Investments; Financial Services; Forest Products; Utilities and Pipelines)
• Structured Products (Includes Exchange Traded Funds (ETFs) and Closed End Funds)
• Capital Pool Company Program
Original Listing Fees for TSX Venture Exchange range between CDN$5,000 and CDN$30,000, with an annual sustaining fee payable after the first year. There are also additional fees for certain transactions, such as property acquisitions, secondary public offerings and private placements. The details of Fees can be seen in excel attached.
Four different methods at TSX Venture Exchange
An issuer already listed on another stock exchange may list directly on TSX Venture Exchange if they are able to meet listing standards. As well, these issuers may be eligible for certain exemptions from regulatory and reporting requirements, provided they are listed on a stock exchange recognized by TSX, and if that stock exchange has similar listing requirements as TSX Venture.
IPO is normal process that is followed in all exchanges around the world.
In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a “shell” since all that exists of the original company is its organizational structure. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution than through an initial public offering (IPO).
TSX Venture Capital Pool Company Program (CPC)
The Capital Pool Company (CPC) program is a unique listing vehicle offered exclusively by TSX Venture Exchange. The program is a two-phased process, involving the following steps:
Creating the CPC:
• Three to six individuals with an appropriate combination of business and public company experience put up a minimum of $100,000 in seed capital.
• These founders incorporate a shell company – the Capital Pool Company (CPC) – and issue shares in exchange for seed capital at a minimum price between the greater of $0.05 and 50% of the price at which subsequent shares are to be sold via prospectus.
• The CPC and its advisors prepare a prospectus that outlines management’s intention to raise between $200,000 and $1,900,000 by selling CPC shares at typically twice the issuance price of the seed shares, and to use the proceeds to identify and evaluate potential acquisitions.
Selling the shares:
• The CPC files the prospectus with the appropriate securities commission(s), and applies for listing on TSX Venture Exchange.
• The broker sells the CPC shares, pursuant to the prospectus, to at least 200 arm’s length shareholders, each of whom buys at least 1,000 shares. No one purchaser can purchase more than 2% of the offering, and no one purchaser together with his, her, or its associates or affiliates can purchase more than 4% of the offering.
• Once the distribution has been completed and closed, the CPC is listed for trading on TSX Venture Exchange. The symbol includes a .P to identify the company as a CPC.
SME Exchange in India
Currently, there is no exchange in India exclusively for SMEs. However, the SEBI Board has already given the go-ahead for creation of a separate SME exchange. SEBI is in the consultation process for a separate SME Exchange. However, it is unlikely that the Indian exchange will dilute any standards or relax regulations for SMEs, for protecting investor interest and also the integrity of the markets. Also, it is likely that the exchange will have a minimum ticket size for transactions so that only high networth individuals will be eligible and smaller uninformed investors won’t burn their fingers.