New Markets for Innovative SMEs The Cases of UK, Korea, Canada

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New Markets for Innovative SMEs--The Cases of
UK, Korea, Canada

• Yibin Mu, CFA
• Senior Capital Market Specialist
• The World Bank
• June 2008, Shanghai

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Outline

• Reason of introducing new Markets
• Features of new markets
• Good practice of new markets
• Policy implications

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Reasons for new markets

• Debt finance is not suitable for innovative SMEs
• Lack of cashflow
• Lack of revenue record
• Lack of collateral
• Innovative SMEs need equity finance
• VC needs an exit channel
• SMEs are too small for main markets
• Innovative SMEs are too big for informal investors

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What is new market

• Alternative investment market
• Two models
• Second board
• Junior stock exchange

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Snapshot of new markets
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Outline

• Reason of introducing new Markets
• Features of new markets
• Good practice of new markets
• Policy implications

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Corporate governance

• AIM
• Owned wholly by LSE
• Operated as a separate entity
• TSX-V
• Acquired by TSX group
• Operated as a separate entity
• Kosdoq
• Originally, established as a separate entity
• Later, merged with KSE
• Operated as a separate department with
  decision-making process
• Nasdoq
• Existed as a separate entity

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Relationship with main markets

• TSX-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 AIM
• Relinquished EU regulated mkt status
• No need to follow strict EU standards of listing
  and disclosure
• Less prescriptive rules typically include
  operating history, minimum number of
  shareholders, past financial performance, number
  of free-float shares

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Trading system
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Relative Market Size
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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 markets trading volume.
• AIM, TSX-V Rather low liquidity
• Solutions
• Concentrate on selected liquid shares
• Providing 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

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Outline

• Reason of introducing new Markets
• Features of new markets
• Good practice of new markets
• Policy implications

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Good practice

• Reduce costs of accessing new markets
• Maintain new market integrity
• Provide effective supportive services for current
  and potential listing firms
• Link the new market operations with strong
  industrial policies

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A.1. Flexible and tailored listing rules
A.Cost of access

• UK
• AIM formulates and monitors the rules for
  nominated advisers and companies
• LSE UK Listing Authority (UKLA), a division of
  the market regulator Financial Services Authority
  (FSA), formulates and enforces the rules
• Korea and Canada
• TSX-V, Kosdaq Offer much lax listing rules for
  VC firms than the main markets

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A.2. Relatively light coproate govanance
A. Cost of access

• 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

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A.3. Relatively lower direct costs
A. Cost of access

• Korea
• Kosdaq A flat KRW 50,000 for VC
• KSE listing fees start at 0.04 percent of the
  firms 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).
• Canada
• TSX-V A listing fee that ranges from C5,000 to
  C15,000
• Main market C10,000, along with 0.13 percent of
  listing capitalization.

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A.4. Similar disclosure rules
A.Cost of access

• 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.

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B.1.Institutional supporting arrangment (1)
B.Market integrity

• 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

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B.1 Institutional supporting arrangment (2)
B.Market integrity

• 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 companys performance for a
  certain period of time even after listing.
  Mentors are responsible for maintaining the
  reputation of the market.

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B.3. Lock-up requirement
B.Market integrity

• 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

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B.4. Timely and strict delisting of unqualified
firms
B.Market integrity

• Why
• Support the markets 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.

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B.4. Delisitng criteria
B.Market integrity
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C.1. Promoting institutional investment
C.Supportive service

• 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 investors
• The 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

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C.1. Promoting instituional investment 2
Supportive service

• 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 C60.1 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.

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C.2. Facilitating daily liquidity
Supportive service

• AIM
• It has market makers (members of the exchange)
  that provide liquidity for AIM securities
• Each AIM-listed company is required to appoint a
  brokera securities house that is an LSE
  memberto 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

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C.3. Enhance the visibility of listed firms
Supportive service

• 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 Canadas
  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

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C.4. Raising public awareness of alternative
investment
Supportive service

• 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.

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Linking with industrial policies
D.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 SMEs
• Inroduce a flexible stock compensation system,
• Promoting venture capitalism and skills
• Provide tax incentives for new market listing and
  investment
• Provide funding support
• Promoting networking of angel investors

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D.4. Provide funding support to innovative SMEs
D.Linking with industrial policies

• 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 governments 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

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D.5. Promoting networking of angel investors
Linking with industrial policies

• 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

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Outline

• Reasons of introducing new markets
• Features of new markets
• Good practices of new markets
• Policy implications

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Policy implications

• New markets (NM) contribute to inovative SME
  development
• Not a panacea for all countries
• Environment for NM
• Large number of inovative business
• Financially sustanaible
• Policy support necessary
• Light costs of regulations, transactions and
  compliance
• Appropraite institutional and policy framework
  for NM