Enhancement of the Business Environment in the Southern Mediterranean Markets for the Public Listing and Trading of Securities O
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The European Union’s project for ENP South Countries EUROPEAID/133918/C/SER/MULTI Enhancement of the Business Environment in the Southern Mediterranean Markets for the Public Listing and Trading of Securities of SMEs A Survey of International Experience and Good Practices Prepared by: John Thompson November 2017 This project is financed A project implemented by by the European Union GIZ International Services and Eurecna Disclaimer This report has been prepared with financial assistance from the European Commission. The opinions expressed herein are those of the authors and may not represent the position of the Commission. Markets for the Public Listing and Trading of Securities of SMEs: A Survey of International Experience and Good Practices Acknowledgment This document has been prepared by Dr. John Thompson, for the Small and Medium Business Agency, as part of EU project EBESM. Enhancement of the Business Environment in the Southern Mediterranean 1 Table of contents Summary and Overview…………………………………….…………...………3 I. The Challenge of Constructing Effective SME Markets ................................................. 5 II. SME Markets in Historical Perspective .......................................................................... 7 III. Present Global State of SME Markets ..................................................................... 10 IV. Developments in Major World Regions .................................................................. 13 a. North America ......................................................................................................... 13 b. Europe ..................................................................................................................... 23 c. Asia .......................................................................................................................... 45 V. Conclusions .................................................................................................................. 61 Enhancement of the Business Environment in the Southern Mediterranean 2 Summary and Overview Since the 1990s, and especially in the past ten years, efforts have been made in several countries to develop special exchanges or platforms to list and trade securities issued by SMEs. This report surveys the experience of major markets, highlights instances of success and suggests some policy lessons for officials in Israel. The challenges of financing smaller companies are common throughout the world. There is a global consensus that the traditional stock exchanges for larger companies, with their strict and costly rules, are not well suited to smaller companies. More flexibility is needed on key issues such as history of profitability, disclosure and corporate governance in order to reflect the realities of smaller companies. Virtually all markets that have successfully introduced dedicated SME platforms have targeted fast-growing companies in the belief that investors are only willing to accept the opacity, risk and lower liquidity of SMEs if they can find companies that offer the possibility to obtain outsized returns. Additionally, most exchanges and platforms agree that the smallest viable companies that are those with market capitalization in the range of $15-20 million equivalent. The principal exception is NewConnect in Poland which has listed much smaller companies. Most markets seek a broad sampling of traditional and high theology sectors, while a few (notably KOSDAQ in Korea) give preference to technology companies. While many features of successful SME markets are universal, the specific institutional and regulatory structures vary among world regions. In Europe the main institutional innovation of the past two decades has been the spread of platforms organized as Multilateral Trading Facilities (MTFs) rather than exchanges. The MTF concept was introduced by AIM in the United Kingdom in 1995 and 20 MTFs covering nearly all economically significant countries are operating in Europe. An MTF is a special mechanism in which the trading platform itself assumes overall responsibility for regulation of trading practices as well as disclosure and corporate governance rules for listed companies. Each MTF sets its own listing and trading rules and its own means of enforcing those rules. A simplified offering document rather than a prospectus is required. Requirements about minimum numbers of shareholders, free float, disclosure and corporate governance are also more flexible than for listed companies. MTFs are usually not subject to the full oversight by of the securities regulator. Enhancement of the Business Environment in the Southern Mediterranean 3 One key institutional feature of MTFs is that listed companies must be affiliated with special categories of advisory intermediary with responsibility for determining whether the company is suitable for listing while assuring compliance with all rules of the MTF as long as it is listed. MTFs also mandate listed firms to engage institutions to assure minimal liquidity in trading and to provide research on the listed company. The investor base for most MTFs consists of institutional investors and asset managers who have expertise in this asset class. However, the NewConnect market in Poland has had notable success in reaching retail investors. There are several instances Asia where SME markets are organized as exchanges (not MTFs) and the investor base is predominantly retail. In Japan costs of listing are rather low and many smaller companies have listed in the past two decades, but the number of new listings has been trailing off in recent years. The Growth Enterprise Market (GEM) in Hong Kong has encountered significant structural difficulties and now is in the process of reorganization. Probably the most relevant case for Israel in Asia is KOSDAQ of Korea, the largest SME market in the world, which has been operating since 1996. KOSDAQ began as an exchange that specialized in listing emerging technology companies, especially in the IT field. Listing rules still favor dynamic companies with continuing emphasis on companies in high technology fields, which accounts for75% of listings. With the support of government, KOSDAQ has developed special techniques to identify tech companies with potential and guide them to eventual public listing. While the average size of newly listed companies is still rather high, KOSDAQ is building an infrastructure to identify promising earlier stage smaller companies and provide various kinds of support for companies that may seek listing in the medium term. Because both countries have strong tech sectors and venture capital industries, KOSDAQ may be highly relevant for Israel. In North America, meanwhile, the main development has been the drastic decline in the use of public equity markets in the United States. The number of listed companies is less than half its level of 1997 and small IPOs have become negligible. Certain initiatives have been undertaken to reverse this trend, but it is too early to determine the degree of success. In Canada, the Toronto Stock Exchange TSX Venture had achieved a record number of listed SMEs, but has undergone a serious correction and is now undertaking a basic structural reform. Enhancement of the Business Environment in the Southern Mediterranean 4 I. The Challenge of Constructing Effective SME Markets This report summarizes the experience of advanced countries in developing specialized exchanges and other platforms to list and trade securities issued by small and medium enterprises (SMEs.)1 The objective of the report is to identify major trends and to draw lessons from the experience of other countries in order to assist the Israeli authorities in deciding a) whether to build such a market, and b) if the answer is positive how such a market should be organized. In this report, the expressions “market” and “platform” are used more frequently than “exchange.” An exchange is defined as a market that is legally identified as an exchange for listing and trading public securities and is subject to the full panoply of official regulation. A platform means any mechanism for listing, distributing price information and trading securities, usually with electronic means, whether legally recognized as an exchange or not. Some platforms (notably MTFs in Europe as explained below) have many features of an exchange such as rules for listing and trading but are characterized otherwise for regulatory purposes. There are inherent and long-recognized problems in listing and trading SMEs securities on traditional exchanges, which were designed to list and trade the securities of larger companies. The markets for larger companies are characterized by broad communities of individual and institutional investors that hold diversified portfolios of liquid assets and make continuing informed assessment about the structure of their portfolios. In the past few decades, the trend has been for markets in the securities of major companies to become increasingly liquid and for liquidity to be further enhanced by the use of derivatives and sophisticated electronic trading techniques. The owners of a listed company may be widely dispersed group of individual and institutional investors or there may be a block of controlling shareholders. In either case, the corporate governance system must develop means to protect the rights of minority investors and adjudicate conflicts among investors. In order to accomplish these aims, companies are legally required to establish elaborate