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.
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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
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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.
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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.
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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 governance structures with boards, committees, defined procedures and extensive written documentation. Additionally, listed companies are obliged to disclose pertinent data to investors according to prescribed rules.
1 This report does not define SME rigorously. The EU definition placed a ceiling on SME as those with maximum of 250 employees, € 50 million in turnover and a balance sheet of € 43 million. Israel generally considers 100 employees as the upper boundary.
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The authorities of many countries have frequently sought to deal with problems of conflicts of interest and investor protection by imposing elaborate rules disclosure and corporate governance. In many countries rules were made even more restrictive after the year 2000, following the exposure of cases of egregious corporate malfeasance in major countries (Enron, Parmalat etc.) Legislators and regulators tightened norms of disclosure to increase transparency and enhance the accountability of corporate insiders.
The control mechanisms that characterize large listed companies are usually of lesser applicability for smaller companies. Indeed, if applied too rigorously, these control mechanisms completely stifle the development of a market. Most small companies are closely owned and do not have the sharp separation of ownership, control and management that characterizes larger companies. The non-controlling owners are seldom institutional investors who concerned about pursuing investor activism. The controlling owners might be the entrepreneurial founders of a newly founded innovative tech company or they may be a dispersed family group that has inherited ownership of the company. Either of these kinds of owners may consider the firm to be their personal property and may be reluctant to share information and control with outsiders and therefore may not be inclined to construct the elaborate governance systems that are required of public companies. They may also hesitate to become vulnerable to shareholder lawsuits and shareholder activism. Those in control of a company may also believe that public listing may force the company to focus on producing short term results to meet the expectations of investors, which might be detrimental to long-term value creation. These concerns will be magnified if information about the company is scarce and trading in its shares is thin.
There is a much closer link between the company and its trading platform for SMEs than for large companies. An investor in a more liquid equity market has access to all necessary information which is imposed by the regulator. An equity of a large company may be traded one or more regulated exchanges, a crossing network or an OTC market. The investor is typically indifferent as to which platform the security is traded. Conversely, SMEs can in most cases only be traded on a specific platform. If the investor does not trust the platform, he will not invest in the company.
The issue of scale is crucial for markets in SME securities. It frequently costs almost the same to prepare reports or to undertake audits, to create governance structures for small companies as it does for large companies. In any case, the costs of compliance are proportionately higher for small companies.
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The question of scale is also important from the point of view of investor demand. Securities of SMEs will trade infrequently and in smaller volumes, which narrow their potential investor base. Obtaining information and performing research on smaller companies is expensive and many investors see the costs of monitoring investments in SMEs as too high to be profitable. These are all hurdles that SMEs must face when going public. None of these is necessarily fatal, but collectively they require substantial adaptation to develop a functioning market in SME securities.
Most of the discussion in this report focuses on the design of the market, but it is well to remember that other issues than market design may be equally or more important in determining the ultimate success of the market. Any platform functions as part of a broader ecosystem in which issuers and investors interact. Key participants in the ecosystem include the regulators, the intermediaries (brokers and investment banks) that deal in those securities as well as supporting institutions such as designated advisers, accountants, lawyers and suppliers of research and information. All of these institutional factors are embedded in a legal and historical context.
If a country lacks any significant part of the ecosystem, even the best designed market will fail. For example, in southern Europe many countries are characterized by medium-sized family-held companies engaged in traditional trade or industrial activity where business owners are averse to disclosing data to outsiders or sharing control with minority investors. These same countries often do not have strong traditions of capital market investment, retail investment or developed communities of institutional investors with substantial assets. In these cases, the prospects for the emergence of a thriving SME market will not be good, no matter how well constructed the market may be. Conversely, as will be seen below, the United States previously had a thriving market in listed SMEs, but SMEs are using that market on a much smaller scale than in the past.
II. SME Markets in Historical Perspective
The challenge of developing markets for investment in SMEs has been present for decades. For a number of years, many traditional exchanges had special “boards” or sections of the markets in which smaller companies with lower requirements regarding free float, number of shareholders, corporate governance, and the frequency and detail of mandatory disclosure. Most of these exchanges were developed by main boards (or senior exchanges) and were frequently seen as part of a system of developing candidates for future listing on the main board.
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There have been several accelerated efforts to develop exchanges for SMEs in recent decades. During the 1980s and 1990s many countries in Europe believed that the lack of markets for smaller and fast-growing companies was aggravating their problems of slow growth and job creation, which they saw as comparing unfavorably with the United States. One of the perceived structural weaknesses was the lack of newer and dynamic companies to undertake innovation in the early stages in the firm’s development. The model of applied innovation typically culminated in a public listing. NASDAQ was seen as the quintessential market for fast growing companies, particularly those with a high technology component. In Europe, the segmentation of the capital market into national markets appeared to be an additional obstacle to development of an appropriate market place for fast growing companies.
As the technology boom gained steam during the late 1990s, several traditional exchanges launched what were described as “growth markets” which specialized in listing innovative companies with high growth prospects. These markets included the Neuer Markt in Germany and the Nouveau Marché in France. Several of these exchanges joined a network (Euro NM) spanning several European countries, which allowed for stocks to be cross-listed on all associated exchanges. Serval pan-European trading systems such as EASDAQ and NASDAQ Europe were inaugurated at this time.
All these markets experienced surging volumes of new listing, heavy trading and sharply rising prices during the tech boom of the late 1990s, but none survived the tech bubble of 2000. In the ensuing years, prices on these exchanges had dropped precipitously and liquidity evaporated. After 2000, most of these exchanges were closed or consolidated into newer exchanges. This report will not attempt a detailed analysis of the causes of the failure of SME exchanges before 2000, but will focus on attempts to build new SME platforms since that time.
It is important to specify what criteria should be used in gauging the success of an SME market. Since the objective of using the capital markets is to raise funds for investment the critical measure of success is the capability of the market to attract a flow of new issues (IPOs), secondary issues and/or bond issues. The market should have some liquidity, meaning that listed companies should trade with some frequency, recognizing that liquidity will nearly always be less in an SME market than in a main board. Finally, the market index should have a generally rising trend. If the market concentrates on newer companies with better than average prospects, it should produce positive returns for investors. All SME markets that failed have followed the pattern of declining prices, loss of liquidity and disappearance of new issues.
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One final consideration to keep in mind is that SME markets, like all segments of the capital markets, are subject to cyclical and secular trends. Asset prices, trading volumes and valuations all are subject to long-term movements that are only partly understood by those in the market. Major corrections in the market often render some segments of the market uneconomic. For example, in the past few decades several markets in securities and derivatives have undergone major corrections such as the 1987 market break, the 2000 tech bubble and the post-2007 global financial crisis GFC). Each of these shocks led to the disappearance of categories of securities, trading techniques, institutions and in some cases entire marketplaces.
Some of these shocks have been extremely significant for SME markets Thus, among the significant SME markets in the world that were formed in the 1990s, only two (i.e. AIM in the United Kingdom and KOSDAQ in Korea) survived the bursting of the tech bubble after 2000. Figure 1 below shows the benchmark indexes for these two exchanges, neither of which has regained its pre-2000 peak. It should be remembered that while the numbers give an unflattering picture of AIM and KOSDAQ, these are the two that survived. Presumably, the performance was even worse for the other markets, which did not.
A second powerful correction occurred with the post 2007- Global Financial Crisis (GFC) of 2007. While the impact of the GFC has not led to the demise of many exchanges, the volume of new issues and indexes have in many cases not regained their pre-2007 level ten years later. It is one test of a market whether it can survive long-term reverses in market conditions and periodic crises. Thus, one feature that should be considered when assessing the viability of a new potential market is whether it will have the resiliency to adapt to long-term structural changes and to withstand periodic shocks.
Some words of caution about the availability and comparability are in order. In the first place, definitions of SME differ widely. 2The United States considers companies with fewer than 500 employees to be in the middle market category whereas the EU works with a definition of 250 employees balance sheet of less than €43 million and turnover of less than €50 million. Israel uses the definition of a maximum 100 employees.
It is also difficult to find comparable data on SME markets. The World Federation of Exchanges (WFE) provides significant amounts of data on SME markets, but several
2 For an international comparison, see USAID (2007).
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key markets especially the London Stock Exchange (as well as the Warsaw Stock Exchange) are not members of the WFE, and do not report figures regularly to the WFE.
Figure 1: Long-term Performance of SME Markets: AIM and KOSDAQ (1996=100)
275 250 225 200 175 150 125 100 [ערך] 75 50 [ערך] 25 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
AIM (UK) KOSDAQ (Korea)
Sources: KOSDAQ and Thomson Reuters
III. Present Global State of SME Markets
Having noted the limitations of existing data, it instructive to examine some broad global trends in order to understand better the developments on individual markets. A convenient point of departure is the data on Alternative and SME Markets published annually by the World Federation of Exchanges (WFE). The WFE is probably the world’s most frequently cited source of statistics on SME markets. Statistics of the WFE needs to be interpreted carefully, but their figures nevertheless give revealing insights into global developments. According to the WFE, there are now four exchanges in the Western Hemisphere --one each in Argentina, Brazil, Canada and the United States, unchanged from 2002. There are 24 exchanges in Europe, Middle
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East and Africa (EMEA)3, up from 17 in 2002 and 15 in the Asia Pacific region (10 in 2002.)
With regard to the number of companies listed, vastly different patterns can be observed. Between 2002 and 2015 the number of listed companies has declined in the Western Hemisphere from 2613 to 2472. In EMEA, the number of listed companies almost doubled from 1259 to 2151. In in the Asia Pacific region meanwhile listed companies jumped almost six-fold--from 758 to 4214.
Figure 2 below presents WFE data on current market capitalization of the world’s SME markets. Since the year 2000, using data from the World Federation of Exchanges. As will be explained below the figures must be interpreted with extreme care. Nevertheless, a basic transformation has occurred in the global landscape of SME platforms in with wide striking wide divergence among regions. The main global trends can be summarized as
1. Significant contraction in North America 2. Moderate expansion in Europe and 3. Moderate to very strong growth in selected Asian countries.
Figure 2: Domestic Market Capitalization of SME markets ($Billions)
[ערך] 120
100
80
60
40
20 [ערך] 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Americas Asia-Pacific EMEA
3 EMEA overwhelmingly represents European markets. There are a few medium-sized markets in South Africa that do not affect anything said in this text.
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Sources: World Federation of Exchanges
In fact, the United States total market capitalization has tended to remain steady or to decline somewhat in the past few years and to rise gradually in Europe. During this same period while market capitation has exploded in Asia, but the figure for Asia is badly distorted by developments in China.
An additional insight into global use of public capital markets by SMEs can be obtained by examining trends in IPOs which can be seen in Table 1 below. Although these figures show the number of IPOs, rather than the values, they still are revealing.
Table 1: Total number of small IPOs (< $50 Million USD), Domestic Listings
Country 1996-2000 2001-2005 2008-2012 Canada 102 524 513 Poland 105 54 403 Australia 223 423 306 South Korea 137 512 229 Japan 486 666 148 India 12 84 132 China 213 202 117 United Kingdom 469 541 80 Malaysia 156 273 73 France 222 34 71 Singapore 146 167 62 Hong Kong 157 196 58 Indonesia 8 66 58 United States 1,121 151 58 Thailand 6 149 54 Turkey 14 7 41 Israel 1 0 22 Spain 8 0 18 Germany 264 36 17 Italy 40 18 16 Saudi Arabia 0 0 13 Taiwan 119 229 13 Norway 6 32 8 Chile 2 3 5
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Brazil 2 3 1 Mexico 4 1 0 Source: Weild, Kim and Newport (2013)
In the first place, the data show that activity on public markets in SME securities is not identical with activity on a special SME exchange. Thus, there has been a substantial number of IPOs of less than $50 equivalent taking place in Australia for the last fifteen years, but Australia does not have a dedicated SME market. Apparently, the structure of the main exchange is flexible enough to permit SMEs to maintain access to the main exchange. Hence, when considering reform aimed at broader public listing of SMEs, it may be more useful to consider expanding use of the main board rather than creating a dedicated platform for SMEs. It also reminds us that in some countries, securities of SMEs are traded on the main exchange as well as the specialized SME platform. For example, under Euronext Growth’s Enternext platform, SMEs that are candidates for listing may consider several possibilities, including some sections of the main exchange.
In the United States, IPOs were fairly strong in the period 1996-2000 but have fallen off drastically in later periods. In countries that had growth exchanges prior to 2000, (e.g. Germany and France) IPOs dropped preciously after the bubble burst, but increased somewhat with the formation of new markets after 2005. In most countries the number of IPOs declined after the GFC. This includes countries such as Japan, Korea and the United Kingdom, which survived the bursting of the dotcom bubble., but have nevertheless experienced a contraction since 2007.
IV. Developments in Major World Regions
The following sections will summarize major developments on SME markets in each major geographic region. In order to keep the analysis within manageable proportions, the discussion will focus on larger markets in advanced economies.
a. North America
United States
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The dominant trend in the United States is that the entire market in listed companies is contracting rapidly, with the market in smaller capitalization stocks falling even faster.4 It is noteworthy that the experience of the United States runs counter to the experience of other developed areas of the world where public listings continue to rise. The number of listed companies has been declining steadily in the ensuing two decades-- from its peak of 7322 in 1996 to 3671 at the end of 2016. At the same time share of smaller firms (i.e. with capitalization of less than $50 million) has fallen precipitously. (See Figure 3). In most years since 1996, the number of de-listings for both larger and smaller firms exceeded the number of new listings by substantial margins.
The withdrawal from public markets is more pronounced among smaller companies than among larger companies. (See Figure 3.) Thus, Hambrecht (2013) notes that the decline in SME IPOs has accelerated after the 2007 GFC. Before 2007 IPOs by companies with capitalization of less than $100 million usually accounted for 20-30% of total issuance. Since that time there have been fewer than 10 new issues per year by companies in that range and their issuance accounts for less than 15% of total deals,
Even as companies have been de-listing on a large scale, the market capitalization of equities increased from $12.3 trillion (105 % of GDP) trillion to $25.3 trillion in 1996 (136% of GDP) in 2016. The average size of listed companies rose significantly, with average market capitalization increasing from $1.6 billion to $6.8 billion while the average age of listed companies rose from 11 years to 18 years.
There are many explanations why the corporate sector in the United States is using the public market less frequently.5 Rates of new company formation have fallen off and the average corporate age has been increasing. On balance, the most plausible explanation is that most companies perceive there to be fewer gains in public listing than in the past while the private capital markets have proven increasingly capable of meeting the needs of companies. Some of the more obvious explanations are 1) the development of private equity markets as a substitute for public markets and) 2 the increased costs of remaining public such as exposure to investor activism and legal action. The costs of compliance with federal regulations clearly increased because of legislative attempts to bring public companies under control. The most striking
4 For a good recent summary of the phenomenon of exit from public market, see, Mauboussin, Callahan and Majd (2017) and Ritholtz (2105). For a more academic discussion, see Doidge, Karolyi, and Stulz, (2016). 5 For example, see Soloman and Rose (2015).
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example is the Sarbanes Oxley Law of 2002 which tightened controls on public companies following wave of corporate scandals around the year 2000. Additional restrictions are placed on companies by state laws known as Blue Sky laws. The proliferation of such laws makes it easier for shareholders to sue public companies.
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Figure 3: Trends in IPOs in the United States, 1995-2016
Small IPOs (<$50M Market Cap) 1991-2014 600 90% 500 75% 400 60% 300 45%
200 30% No. small of IPOs 100 15%
- 0%
2001 2003 2005 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014
No of small IPOs Small IPOs (% of Total IPOs)
Source: Nassr and Wehinger (2016) based upon data from Thomson Reuters and OECD
The American authorities have recognized the possibility that excessively rigid regulation has encouraged firms to the withdraw from the IPO market. The Unites States Treasury created an IPO Task Force under supervision by the SEC in 2011 which examined the declining use of the public markets and solicited recommendations. The most common recommendations that emerged from enquires since 2011 included a) an “On-Ramp” under which companies would have up to five years before being subjected to full regulatory compliance, b) measures to improve flows of research and information to investors, c) more favorable taxation of capital gains for investments in IPOs of smaller companies and d) efforts to improve public education about the benefits of public listing.6 Many of the recommendations of the Task Force were included in the JOBS Act7of 2012. One further outcome of the enhanced federal effort to promote more use of public markets was the formation of the SEC Advisory Committee on Small and Emerging Companies, composed of industry and independent experts, which meets several times per year and supports analysis and research on related questions and issues recommendations. The results of the Committee’s work are available on the SEC website.
The main concrete action that has been taken to reverse the long-term decline in IPOs by small companies is the Enactment by the SEC under the JOBS Act in March 2015
6 SEC (2011). 7 Jumpstart Our Business Startups (JOBS) Act
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of a revised Regulation A (sometimes known as “Regulation A+”)8 Essentially, the ruling authorizes issuance of equity to the general public of securities with somewhat easier requirements than for larger IPOs. The possibility of making such issues was open previously (under rule A) but only through a private offering. A private offering is limited to “accredited investors”, generally, persons with income of more than $200,000 or more for two most recent years, or with a net worth of $1 million.
Under the new A + procedures, companies may make such offerings to the general public. Each company chooses “Tier 1” (for up to $20 million in a 12-month period) or “Tier 2 (Up to $50 million in a 12-month period). Under Tier 1, Audited financial statements are not required, but companies must comply with state securities laws (Blue Sky laws) in each state where they offer securities. Tier 2 allows offerings up to $50 million and audited financial statements are required, and Tier 2 offerings are not reviewed and registered at the state level. With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors or be subject to certain limitations on the size of their investment. Tier 2 companies must file ongoing disclosure documents with the SEC, but Tier 1 companies do not have ongoing reporting requirements.
There has been a slight uptick in offerings by new companies, which some analysts interpret to mean that these measures will led to a resurgence of issues by SMEs.9 However, it is too early to see whether this measure will fundamentally change the situation.10
Summing up, the United States, one of the world’s leading public equity markets, is experiencing a sharp contraction in new issues, especially for smaller companies, and the number of listed companies on that market is declining while many public and private entities are seeking means to halt the decline. Private market participants are experimenting with techniques such as building special exchanges to trade securities of SMEs in markets that are only open to restricted groups of investors. Such experience may be relevant to Israel if they decide to use techniques other than public markets to
bring the securities of smaller companies to wider groups of investors. Trends in the United States are often an indication of future global trends, and therefore should be
8 SEC (2015.) 9 For example, see Ernst& Young (2016.) Also see Dealogic (2017) 10 See Knyazeva (2016) and Koning (2017.)
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carefully watched. However, the present experience of the United States markets is not directly relevant regarding the development of public SME markets in Israel. Canada
TSX Venture Exchange (TSXV)
The main public marketplace for SME equities in Canada is the TSX Venture (TSXV.) This exchange arose out of a merger of two exchanges in Western Canada which formed the Canadian Venture Exchange (CDNX.) Other Canadian small companies’ exchanges merged to form the present entity. In 2001 the Toronto Stock Exchange purchased CDNX and renamed it TSX Venture Exchange (TSXV.) TSXV is headquartered in Vancouver BC.
Table 2: Key Data on the TSE Venture, 2000-17
No. of Listed Issuers Total Market Cap Average Market
(Billions, C$) Cap (C$)
2000 2,598 14.9 5,723,249 2001 2,688 10.6 3,939,310 2002 2,504 11.1 4,438,777 2003 1,991 20.9 10,507,346 2004 1,948 23.9 12,264,499 2005 2,091 33.3 15,946,166 2006 2,139 54.9 25,657,187 2007 2,176 58.1 26,714,121 2008 2,262 17.0 7,505,989 2009 2,178 35.8 16,448,577 2010 2,154 71.5 33,178,737 2011 2,250 48.7 21,625,333 2012 2,258 40.3 17,840,337
2013 2,141 33.1 15,466,534 2014 1,971 26.6 13,519,221 2015 1,791 23.2 12,935,185 2016 1,648 38.1 23,134,197 2017 1,648 41.0 24,896,675 (YTD) July
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At the end of 2015, more than 1,600 companies were listed on TSXV, the highest numbers of listed companies on any SME market in the world. (See Table 2). Listed Companies are small on average and are primarily mining (53%) and traditional energy (15%) companies. Until recently the TSXV was often singled out as a “success story” for listing a large number of small companies. Thus, IPOs rose after the year 2000 and remained strong through 2012. (See Table 3 below).
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Table 3: Equity Capital Raised on TSE Venture, 2000-17
Number of Financings Equity Capital Raised (C$) Average Financing Size (C$)
Public Private Public Private Public Private Year IPOs Offerings Placements IPOs Offerings Placements IPOs Offerings Placements 2000 155 32 1,829 126,972,168 51,746,922 2,191,568,017 819,175 1,617,091 1,198,233 2001 132 21 1,387 101,236,000 80,394,248 899,836,090 766,939 3,828,298 648,764 2002 72 70 1,769 72,071,801 115,376,829 1,253,120,704 1,000,997 1,648,240 708,378 2003 57 87 2,132 120,335,559 132,071,274 2,123,785,318 2,111,150 1,518,061 996,147 2004 117 54 2,035 194,249,268 270,080,182 3,685,484,775 1,660,250 5,001,485 1,811,049 2005 135 55 2,140 257,487,328 197,299,584 5,608,010,433 1,907,314 3,587,265 2,620,566 2006 160 38 2,393 369,678,782 446,244,252 7,059,612,918 2,310,492 11,743,270 2,950,110 2007 239 46 2,316 532,706,116 854,744,850 9,754,245,773 2,228,896 18,581,410 4,211,678 2008 197 41 1,630 225,073,714 608,542,362 4,666,930,887 1,142,506 14,842,497 2,863,148 2009 72 50 2,051 90,299,582 936,732,315 3,816,686,090 1,254,161 18,734,646 1,860,890 2010 142 100 2,361 332,572,254 3,106,749,596 6,392,425,365 2,342,058 31,067,496 2,707,508 2011 159 101 1,992 291,109,802 2,985,363,909 6,819,701,300 1,830,879 29,558,059 3,423,545 2012 125 65 1,654 149,928,084 1,826,017,162 3,984,856,265 1,199,425 28,092,572 2,409,224 2013 52 57 1,473 118,718,584 865,955,007 2,779,572,824 2,283,050 15,192,193 1,887,015 2014 29 74 1,469 118,997,511 1,376,051,884 3,736,819,436 4,103,362 18,595,296 2,543,785 2015 18 37 1,224 43,683,476 744,153,265 2,557,441,624 2,426,860 20,112,250 2,089,413 2016 18 51 1,480 33,482,580 976,964,828 3,397,915,002 1,860,143 19,156,173 2,295,889 2017 (YTD) July 23 45 852 79,777,740 1,512,602,347 2,600,815,356 3,468,597 33,613,385 3,052,600
Enhancement of the Business Environment in the Southern Mediterranean 20
The TSX Venture permits private placement as well as public offerings. In fact, in most years the volume of private placements exceeds public offering by a wide margin. TSXV performed well through the pre-2007 commodity boom but has not fared well since that time. The decline has come despite generally buoyant conditions in global equity markets in recent years.
Activity in both the public and private offering sectors was robust from the end of the dotcom bubble until about 2010-12. New issues diminished thereafter, and the number of listed companies began to decline. The overall price index of the market measured by the benchmark (S&P/TSX Venture composite index) performed well through 2006 but has subsequently undergone a secular decline. (See Figure 4) In addition, liquidity on the exchange has dried up, with many companies seldom or ever trading. The volume of shares traded on the market has also been steadily slipping. In 2015, 32.4 billion shares were traded on the Venture Exchange, down more than 25 % from 2008.
Figure 4: S&P/TSX Venture Composite Index (TSX V) - Index Value, 2001-17
3500
3000
2500
2000
1500
1000
500
0
Source: TSX V
In 2015, rising complaints led the parent Toronto Stock Exchange (TSX) to launch an inquiry into the operations of the TSX Venture Exchange and to begin a series of consultations with stakeholders. The leadership team at TSXV met with more than
Enhancement of the Business Environment in the Southern Mediterranean 21
130 clients and other stakeholders to discuss key current issues impacting Canada's public venture market and to instigate progressive solutions. During the consultation process, many stakeholders complained of excessive costs at the exchange, ascribed by many to the business models of the banks that control the parent TSX. Excessive regulation was another persisted theme. Other complaints included lack of investor interest and large numbers of inactive companies.
In December 2015, the TSX published a White Paper in which it acknowledged most of the complaints and promised remedial action.11 As a first step in its new evolutionary phase, TSVX in December 2015 issued a White Paper (Revitalizing TSX Venture Exchange: Canada's Public Venture Market) summarizing complaints and promising to take remedial action, while focusing on three important objectives:
Meaningful reductions in administrative and compliance costs. Some of the proposed initiatives include eliminating the sponsorship and shareholder approval requirements for inactive companies completing arm’s length transactions. The interval to renew a personal information form will be extended from three to five years and recognized active and proven directors and officers of TSXV-listed companies will have their ongoing requirements minimized. There are also proposed measures to reduce processing time, such as by providing automatic online filings and implementing a more responsive system for transaction processing. The TSXV’s current escrow requirements will be replaced by the Canadian Securities Administrator’s national policy on escrow.
Attracting new investors and enhancing liquidity, the TSXV aims to facilitate more direct interaction between investors and issuers to expand sources of capital. An action team of industry experts as formed to make trading easier for U.S. investors, and strengthen business development and capital markets education to increase awareness of the TSXV. The new programs scheduled to be introduced include new investor analytics program to foster better investor understanding of the operations of companies and a simplification of liquidity agreements between issuers and market makers. Other proposed reforms include the simplification of the TSXV’s Continued Listing Requirements and the promotion of additional prospectus exemptions, such as the existing security holder exemption and proposed dealer exemption.
Diversification away from resource-heavy sectors and increases in the number of list listings.
11 TSX (2015).
Enhancement of the Business Environment in the Southern Mediterranean 22
The TSXV has proposed changes to further diversify the stock list to increase the exchange’s resilience to sector-specific market cycles. To attract new issuers, a SME Sales Team will seek to bring new companies to the exchange and policies, such as the capital pool company policy, will be amended to seek to attract more non-resource companies.
There will be more effort to demonstrate to private equity firms, venture capitalists and angel investors the potential value of the TSXV as an effective exit vehicle for early-stage companies. The TSXV will advocate for early-stage public companies to be eligible for the refundable investment tax credit under the (somewhat controversial) Federal Scientific Research and Experimental Development Tax Incentive program. The TSXV will also explore forming partnerships with other exchanges that could lead to increased access to capital and liquidity and work with exchange traded fund firms to develop more investment products that include baskets of TSXV-listed companies to interest more investors.
At present TSXV is still in the early stage of implementing its structural reform and it is too early to judge whether present or future reforms can rescue the market.
b. Europe
Regional Overview
In contrast to the situation in North America, there has been a sustained expansion of activity of all kinds in Europe. The number of markets for listing and trading SME securities has increased, the number of listed companies has been growing and market capitalization has been rising steadily. Most European exchanges have followed an organizational and business model that resembles the post-1995 AIM system to a considerable degree. A summary of all SME platforms in Europe is presented in Table 4 below.
These figures should be interpreted carefully. The numbers for the Entry Standard Market (Germany) are uncertain and discrepant figures are being investigated. Using its present level of capitalization, Entry Standard has a very high average capitalization for each company and a very low level of liquidity. The WSE has shown Luxembourg-based EuroMTF as alternative SME market, but it does not appear to be in this category. Additionally, the MAB Expansion in Spain lists some instruments as well as SME equity and thus the reported figure on total market capitalization overstates its significance as an SME vehicle.
Enhancement of the Business Environment in the Southern Mediterranean 23
Table 4: Major SME Markets in Europe at end of 2016
Market No. of Capitalizati Listed Of which Average Year Legal on (€ Companies domestic Capitalization Liquidity* Main Exchange Name of Market Established Form million) Athens Stock ATHEX Alternative Market Exchange (EN.A)(2008) 2008 MTF 104 14 14 7 0 BME Spanish Exchanges MAB Expansion (2009) 2009 MTF 2,155 39 38 55 0 Cyprus Stock Emerging Companies Market9 Exchange 2007) 2007 MTF 1,042 33 26 32 0 Borsa Italiana AIM ITALIA (2012) 2012 MTF 2,925 74 40 26 Deutsche Börse AG Entry Standard(2005) 2005 MTF 70,179 138 123 509 9 Euronext Euronext Growth (2005) 2005 MTF 13,739 197 187 70 43 Irish Stock Exchange Enterprise Securities Market MTF 4,600 25 19 184 9 London AIM (1995) 1995 MTF 103,600 982 809 53 43 Nasdaq Nordic Exchanges First North (2006) 2006 MTF 12,460 258 244 48 48 Exch Oslo Børs Oslo Axess ange 1,111 31 24 36 75 Warsaw NewConnect (2007) 2007 MTF 2,263 406 398 6 23 * Liquidity = Turnover/ Capitalization Sources: Federation of European Stock Exchanges (FESE), WFE and individual exchanges
Enhancement of the Business Environment in the Southern Mediterranean 24
As noted earlier, many European countries unsuccessfully attempted to launch special “boards” or dedicated exchanges for SMEs. In the late 1990s reforms focused on tech- heavy growth companies, and most of the new exchanges perished during the dotcom crash. On the positive side, the decisive event was clearly the launch in 1995 of the Alternative Investment Market (AIM) by the London Stock Exchange (LSE), which proved capable of attracting new listings of companies before 2000. Even more important, despite a sharp drop in the index AIM escaped the post-2000 crash that led to the demise of growth exchanges everywhere else in Europe while the number of listed companies continued to grow.
Since 2005, several platforms have been established in European countries that follow the organizational structure and business model of AIM to a considerable degree. These markets are organized as Multilateral Trading Facilities (MTFs)12 rather than as an exchange or a component of an existing exchange. The concept of the MTF as distinct from a regulated market was pioneered by AIM in 1995. The legal form of an MTF for listing and trading SMEs was recognized by the EU in the original MIFID of 2004, which took effect in 2007.13 The MTF was later recognized by IOSCO.14 While the MTF is now well established in the EU, countries outside of Europe that seek to utilize the MTF structure probably will have to change their laws.
The key feature of the MTF structure reflects the consensus among analysts and market participants that the traditional formalized structures that are applicable for larger listed companies must be adapted to enable smaller companies to thrive. Each platform sets its own listing and trading rules and its own means of enforcing those rules without being subject to full oversight by the securities regulators. In most countries a simplified offering document rather than a prospectus is required. In some
12 In some earlierdiscussions the term Alternative Trading Platforms (ATFs) was used to describe this kind of facility. For example, see Harwood and Konidaris (2015.)
13 Markets in Financial Instruments Directive 2004/39/EC (known as "MiFID") as subsequently amended is a European Union law that provides harmonized regulation for investment services across the member states of the European Economic Area (the EU member states plus Iceland, Norway and Liechtenstein. In EU terminology, a multilateral trading facility (MTF) is a trading system that facilitates the exchange of financial instruments between multiple parties. Multilateral trading facilities allow eligible contract participants to gather and transfer a variety of securities, especially instruments that may not have an official market. These facilities are often electronic systems controlled by approved market operators or larger investment banks. Traders will usually submit orders electronically, where a matching software engine is used to match buyers with sellers. Other trading facilities such as electronic “crossing networks” may also be designated as MTFs. 14 See IOSCO (2013a) and (2013b.)
Enhancement of the Business Environment in the Southern Mediterranean 25
cases, issuers may dispense with the offering document entirely. In comparison to regulated markets, MTFs impose less restrictive rules about minimum numbers of shareholders, free float, minimum time required for offering, the periodicity of audited accounts and records and the company’s record of profitability. In most cases, reports may be delivered electronically. Regulations covering corporate governance are also less prescriptive than for listed companies. Rather than relying on strict rules that are set by regulators with the power to impose legal sanctions, these markets rely on accepted market practice in which exchanges and investors agree informally on levels of disclosure and compliance that are adequate to satisfy concerns about investor protection.
The system relies far less on the formal sanctions and legal recourse that characterize public markets and proportionately more on the reputation of the platform and the intermediaries. 15In order to create a successful market, the SME platform must establish a reputation as a market system with the capacity to offer investors an opportunity to discover good companies in relatively early stages of their development.
One factor that determines whether future issues will be successfully placed with investors is the reputation of the sponsor/adviser for integrity and his track record in supporting good companies. In effect, the perception of the sponsor/adviser is critical in attracting investors into the market. If the intermediary is negligent in executing the oversight function, he would suffer can suffer a loss of reputation which would impair the adviser/ sponsor’s franchise value. Likewise, if the market has a history of neglect of the interests of investors it will lose credibility.
This situation can be contrasted with the that of “blue chip” companies which are subject to strict rules of disclosure. Investors are usually indifferent concerning the intermediaries managing the primary offering or accepting orders for secondary trading. In fact, “blue chip” companies are frequently traded on a variety of platforms that compete for order flow. In the MTF system, by contrast the credibility of the company as an investment prospect is intimately linked to investor confidence in the MTF.
15 For a discussion of highly directive versus light regulation, see Mendoza (2008.) For a discussion of the impact of reputation on the market see Espenlaub, Khurshed, and Mohamed (2012.)
Enhancement of the Business Environment in the Southern Mediterranean 26
This report will only discuss in detail three markets, AIM in the United Kingdom, Euronext Growth and NewConnect in Poland. However, most of the characteristics of these markets are shared by MTFs in Europe.
Each of the European marketplaces organized as MTFs have created special categories of institutions to perform defined functions inside their own ecosystems for SME finance. The following sections describe general characteristics of all platforms in Europe, using the MTF system. In subsequent sections, the experience of a few markets will be discussed in more detail.
Ownership Structure. In all cases the SME platform is owned by the major stock exchange in the jurisdiction and uses the trading system of the parent exchanges. Thus, AIM uses the quote-driven system of the LSE while Euronext Growth uses the order-driven Euronext system. Price and other information is available to all investors with access to the price information of the parent exchange. In fact, since many individuals now having screen-based access to prices from their computers, trading information is directly available to millions of potential investors.
The parent exchanges consider these platforms to be a mechanism to develop new listing for the main exchange. It is expected once the company has grown in size and its shares are sufficiently known in the market and have adequate liquidity, it will move to the senior exchange. The SME trading platform may be used as part of a larger range of choices for companies that include one or more special SME boards of the main exchange.
Target companies. All MTFs in Europe seek to list fast-growing companies. Investors will accept lesser liquidity in exchange for the potential to achieve better than average gains and to diversify their portfolios. In order to qualify for listing, companies should have an established market position and track record as well as a strong management team. Later stage venture companies are possible candidates, as are established firms that offer expansion opportunities. Unlike the growth exchanges of the 1900s, most European MTFs do not target tech companies. Listed Companies are distributed across a range of sectors and activities.
Companies do not necessarily have to be profitable, but they should have a credible business plan to achieve growth and management/governance structure that has the capability to formulate and execute a plan for rapid growth and a clear path to profitability. Companies frequently launch more than one equity issue. Following the IPO, they will often have additional rounds of financing. In both AIM and Euronext
Enhancement of the Business Environment in the Southern Mediterranean 27
Growth secondary offerings by companies that are already listed often account for a larger share of issuance than IPOs. Several markets permit the issuance of debt as well as equity, but few if any permit the issuance of debt alone. In fact, since many companies are short on cash and may be contemplating more than one round of equity issuance, they may not be in a position to service large amounts of debt.
Some MTFs in Europe allow companies to choose between a) private placements which means that only qualified investors may purchase securities on the primary market, but all investors may trade on the secondary market, and public offerings which are open to all investors at all times.
Dedicated adviser/ Sponsor.in all MTFs, companies wishing to list are required to engage an intermediary to act as their adviser/sponsor (e.g. a Nomad on AIM, a “Listing Sponsor” on Euronext Growth and similar intermediaries on other platforms) who performs functions of those of an investment banker and an advisor in bringing the company to market but also is the main de facto regulator of the listed company.
The same firm may act as both investment banker and an adviser/sponsor, but the issuing company may decide to hire two different firms. Unlike an investment bank on the main board, the adviser/sponsor remains with the company as long as it is listed. When the companies first seek to list, the adviser/sponsor determines whether the company satisfies the criteria for listing. Once listed, the adviser has primary responsibility for ensuring that the company is complying with regulations of the platform while advising on required announcements and provide advice on business strategies and general market conditions.
Liquidity and Research. Recognizing that equities of SMEs are typically less liquid than larger companies, the company is required to designate a market intermediary to enhance liquidity in the trading. The exact nature of the intermediary providing liquidity will differ depending upon the structure of the market. Most institutions (mainly brokers) that would usually undertake investment research about listed companies are not inclined to devote many resources to companies that do not trade frequently and generate brokerage income. Therefore, the MTF requires companies to designate an entity to provide investors with necessary research.
Investors/Tax incentives. In most markets (except Poland) the investors are predominantly institutional. Some categories of institutional investments such pension funds, sovereign wealth funds, and family offices, earmark part of their portfolios for
Enhancement of the Business Environment in the Southern Mediterranean 28
investment in small growth companies. In addition, there are a few collective investment schemes that target this market segment.
Individual investors (mainly high net worth individuals and family offices) typically account for some 30% of the market. Some countries (e.g. France and the United Kingdom as described below) offer tax incentives to individuals who invest in various categories of SME-related assets, including equities traded on SME platforms.
Key Exchanges in Europe
AIM
The Alternative Investment Market (AIM), owned by the London Stock Exchange (LSE), had an aggregate capitalization of £96 billion in mid-2017. Key data can be found in Table 5 below. AIM primarily caters for equity securities of small and medium sized growth companies that may have less diversified business models than larger companies or may not yet have the track record to qualify for the Main Market. The ideal company for AIM would be one that is pursuing a strategy of aggressive growth, particularly focused on the U.K. and/or Continental Europe, with a solid executive management team and board of directors and well thought out operational and financial plans. AIM has no system for listing bonds or preferred shares and has no system for private placement.
In the case of AIM, the nominated adviser (NOMAD) is a key player in the market. The LSE currently has about 40 registered NOMADs on its register. While fulfilling some functions similar to those of investment bankers in IPOs, the NOMAD remains with the company as long as it is listed on AIM. The NOMAD also acts as the effective regulator, ensuring that the company is complying with AIM Rules, reviews and advises on required announcements and provides advice on business strategies. The AIM Rulebooks are designed to be tailored to the needs of such growth companies, while providing adequate standards of disclosure, enabling investors to understand the businesses in which they are investing and the relevant risks attached to such investments.16
16 AIM (2017.)
Enhancement of the Business Environment in the Southern Mediterranean 29
Table 5: Basic Data on AIM, 1995-2017
Year Number of Companies Market Value Number of New Issues Money Raised (£m) UK International Total (£m) UK International Total New Further Total 19/06/1995 10 0 10 82.2 1995 118 3 121 2,382 118 3 121 71.2 25.3 96.5 1996 235 17 252 5,299 129 14 143 522.1 297.1 819.2 1997 286 22 308 5,655 94 13 107 344.1 350.1 694.2 1998 291 21 312 4,438 68 7 75 267.5 317.7 585.2 1999 325 22 347 13,469 96 6 102 333.7 600.2 933.9 2000 493 31 524 14,935 265 12 277 1,754.10 1,338.30 3,092 2001 587 42 629 11,607 163 14 177 593.1 535.3 1,128 2002 654 50 704 10,252 147 13 160 490.1 485.8 976 2003 694 60 754 18,359 146 16 162 1,095.40 999.7 2,095 2004 905 116 1,021 31,753 294 61 355 2,775.90 1,879.50 4,655 2005 1,179 220 1,399 56,619 399 120 519 6,461.20 2,481.20 8,942 2006 1,330 304 1,634 90,666 338 124 462 9,943.80 5,734.30 15,678 2007 1,347 347 1,694 97,561 197 87 284 6,581.10 9,602.00 16,183 2008 1,233 317 1,550 37,732 87 27 114 1,107.80 3,214.50 4,322 2009 1,052 241 1,293 56,632 30 6 36 740. 4,831.1 5,602 2010 967 228 1,195 79,419 75 27 102 1,200.8 5,649.0 6,850 2011 918 225 1,143 62,213 68 22 90 613.9 3,680.8 4,295 2012 870 226 1,096 61,748 49 24 73 712.1 2,451.3 3,163 2013 861 226 1,087 75,929 78 21 99 1,190.9 2,715.7 3,907 2014 885 219 1,104 71,414 94 24 118 2,604.3 3,122.4 5,727 2015 845 199 1,044 73,077 47 14 61 1,240.0 4,216.0 5,456 2016 809 173 982 80,814 55 9 64 1,103.7 3,661.9 4,766 2017 805 159 964 96,296 34 6 40 816.4 2,204 3,020 Launch to date 3,071 670 3,741 42,563.6 60,423.3 102,986.9
Enhancement of the Business Environment in the Southern Mediterranean 30
The NOMAD is selected and compensated by the-listed company but owes its sole duty to the LSE (AIM). Prior to listing, the NOMAD is responsible for determining the suitability of companies seeking a listing on London’s AIM, regardless of whether or not an IPO will occur in connection with listing, and guiding the company through the AIM IPO process. In terms of suitability, the NOMAD is mandated to consider:
Whether the company qualifies as a “growth company”; The track record of executive management and suitability for an AIM-listed company; The depth and experience of the company’s board of directors; Goals of the business; and The company’s financial, operating and capital raising history;
Most Nominated Advisers focus on certain industries (sectors) of the market in which they have developed particular expertise and/or Nominated Advisers focus by size of company in terms of current or expected market capitalization. Rules regarding disclosure and corporate governance are stated in general terms (i.e. whether the NOMAD believes that the company’s practices are broadly consistent with AIM standards) rather than setting hard regulations. A corporate governance code for AIM- listed companies has been published. The listed company is expected to comply explicitly with the Code or explain why their practices deviate from the Code.
Every AIM-listed firm must engage a broker to assist in the primary offering perform advisory services as long as the company is listed. The broker also prepares research on the company for investors. Each firm must also engage a market maker which will be responsible for quoting bid and asked prices for the listed company.
AIM began operations in 1995. New issues continued at a steady pace and no decline in new issues occurred after the 2000 crisis. Expansion continued through 2007. In that year some 1,300 companies made new orderings. The number of IPOs has declined somewhat and has averaged about 800 annually in recent years. Meanwhile, since 2007 secondary offering through additional listing by already-listed firms has exceeded IPOs by a substantial margin. By July 2017, total funds raised on AIM (IPOS and follow-on issues) amounted to £103 billion. The AIM Index from 1996- 2017 can be seen below.
Enhancement of the Business Environment in the Southern Mediterranean 31
Figure 5: FTSE AIM All Share Index, 1996-17
1400
1200
1000
800
600
400
200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
AIM will accept companies of various sizes, but the trend has been for companies to become larger, with 53% of companies now having a market capitalization above £25m, compared to 33% in 2006. There is also discussion about raising the informal minimum level for new firms, but still about 25% of listed firms have a capitalization of £ 10 million or less.
Initial Listings on AIM cost about £ 400000 on average and in succeeding years the cost of remaining listed range from £ 15000 to £ 100000. The costs of listing smaller firms are believed to be prohibitive. As Figure 6 shows, new issues tend to be expensive with the average issue consuming more than 7% of the proceeds of the issue. At times the costs have risen to over 10%. The subsequent decline in the share of listing costs in proceeds is mostly due to the rising average size of new issues.
The experience of AIM with respect to the minimum viable scale for listing is similar to that of other SME markets, indicating that there are problems in reducing costs and enlarging the investor base to suit smaller companies. At the same time, Nex Exchange, a London-based MTF, which is linked to a firm offering automated trading and information technology, appears poised to compete with AIM based upon its ability to reduce costs. (See Box 1) NASDAQ First North an MTF that has until now
Enhancement of the Business Environment in the Southern Mediterranean 32
operated in Nordic countries also indicates that it intends to compete on AIM’s home grounds.17
12.0%
10.0% 10.6%
9.5% 8.0% 8.4% 7.7% 7.3% 7.4% 7% 7.2% 6.0% 6.7% 6.1% 6.2%
4.0%
2.0%
0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Figure 6: Costs of Listing on AIM as Share of Funds Raised
Source: UHY Hacker Young
Well known investment management, pension and insurance funds dominate the list of top 30 investors in London's AIM. The investor base consists of mostly of institutional investors but with a sizable following among retail investors as well. AIM has well defined procedures through which companies regularly make structured presentations to groups of investors thereby enabling investor community to examine a large number of potentially attractive deals.
Individual investors can obtain significant tax relief for investment in AIM. There are two tax relief provisions that are especially relevant for British investors. The Enterprise Investment Scheme (EIS) in which an investor receives a 30% reduction in income tax for purchase of a) unlisted shares in a growth company or b) shares on AIM. In addition, capital gains on the investment are exempted from tax if the shares are held at least three years. An individual can receive tax benefits from investments of £1 million during the year and a married couple can receive twice that amount. Individuals can also receive tax benefits for investing through Venture Capital Trusts
17 See Nex Exchnage (2017a and 2017b) Turvill (2017) and Agini (2017.)
Enhancement of the Business Environment in the Southern Mediterranean 33
(VCTs), a collective investment vehicle that allows individuals to invest in portfolios of debt and equity cams on qualified assts. Securities listed on AIM are qualified assets. Investors obtain 30% deductions from income taxes, exemptions from taxes on dividends of the VCT and exemption from capital gains tax if the investment is held at least five years. An individual can to receive tax benefits from investments of £ 200,000 during each year. In addition, investors can receive other benefits such as relief from inheritance tax and transfer duties, which are available to other categories of investors as well.18
Box 1
Nex Exchange: A low-cost competitor for AIM?
In 2017, a new MTF for SMEs was established in London under the label of Nex Exchange. This platform is the third incarnation of an MTF, originally envisaged as a competitor of AIM and previously known as Interdealer Broker ICAP. In December 2016 a merger with Tullett Prebon resulted in the creation of Nex.com, a group offering a variety of information services and trading platforms for the OTC markets to a wide range of clients and products. Nex Exchange, which is part of that group, allows smaller companies to be listed and traded.
Since the merger, Nex Exchange has been operating as a specialized SME MTF. In addition to listing SME equity, Nex Exchange lists bonds and offers AIM-listed companies the opportunity to use its platform for bond issues. Issuers will also have a “private listing” option. Nex Exchange currently lists about around 85 companies and intends to focus is on smaller companies
Nex.com has listing requirements which are less onerous than those of AIM and claims it can reduce list costs by 75% compared to those of AIM. It will use the trading platform of NEX.com. Price information is transmitted through information vendors such as Bloomberg, Reuters, and Fidessa and Proqute.
Nex’s counterpart of the NOMAD is the Nex Exchange Corporate Adviser. The system now has 46 brokers many of whom also operate on AIM. Each listed company must have s commitment from a market to maintain liquidity in the company’s shares.
18 For an overview of tax benefits, see AIM/RSM (2013). For a discussion of VCTs, see OCED (2017)
Enhancement of the Business Environment in the Southern Mediterranean 34
NEX intends to target retail investors, meaning high net worth individuals and family offices. Nex believes that it has a network of investors who are ready to consider investing using the Nex Exchange platform and a methodology for reaching out to the targeted investor group is being developed.
Euronext Growth (previously Alternext)
Euronext Growth, an MTF owned by NYSE Euronext, was established in 2007. This market was originally known as Alternext, but in June 2017 it was re-named and re- organized. (See below.) Euronext Growth had 198 listed companies with a capitalization of € 16 billion in mid-2017. Euronext covers four countries, France, Belgium, the Netherlands and Portugal, but the Euronext Growth platform is no longer active in Netherlands, and most activity occurs in France with tiny amount in Belgium. Euronext Growth uses the information and trading technology of Euronext, including its highly transparent order-matching system.
Euronext Growth deals in primary and secondary equity offerings and well as bonds. In the past few years, money rose from secondary equity issues and bonds have exceeded new offerings by considerable margins. Since 2013, there have been €448 million raised in new equity offerings, €12.2 billon from follow-on offerings and €1.5 billion from bond issues. (See Figure 7 below) The average size of new offerings has been comparatively small averaging from €3-10 million (see Figure 8 below).19 In the first half of 2017, issuance soared to record levels, due almost entirely too secondary equity issues.
Listed companies cover a variety of sectors, such as industrials, health care, consumer goods and technology sectors. The benchmark Euronext Growth All Share index has risen 81% since 2012 which compares favorably with other equity benchmarks. Firms listing on Euronext Growth can opt to begin as a private placement which is restricted to authorized investors in the primary market, but open to the public for secondary trading.
19 Euronext Growth (2017.)
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The designated adviser in the Euronext Growth system is the Listing Sponsor who is responsible for making sure that the company fulfills all its obligations prior to listing and that it continues to meet all requirements for disclosure and transparency while listed. The Listing Sponsor is usually an investment bank, but it can also be an advisory firm, an accountant or corporate finance boutique. Euronext maintains a list of authorized Listing Sponsors. Failure to perform adequately can lead to a public announcement that the firm has been derelict in its duties. In cases of continued or serious infractions, the firm can be removed from the list of authorized Listing Sponsors
The Listing Sponsor works with the investment bankers and brokers, auditors, lawyers, auditors and the company. The Listing Sponsors must prepare a strategic plan for the company, explaining the company’s long-term plans and the uses to be made of funds to be raised in the market. Under recently changed rules, Listing Sponsors will be responsible for advising and assisting the listed company in their interactions with the market, in particular through investor meetings.
Each listed company must appoint a broker that manages the primary market issue and is responsible for trading the company’s shares. In addition, each company must appoint a liquidity provider who engages in a contract to intervene in the market and deal in the shares of the company to assure that trading takes place in reasonably liquid markets. Under the order matching system of Euronext, imbalances can occur for equities that trade infrequently, and hence the liquidity provider is acts to assure that trading takes place in reasonably deep markets. The company must also appoint an agent to provide research and information of the company to investors. In some cases, all of these functions (Listing Sponsor, broker, liquidity provider and researcher) may be exercised by a single brokerage firm, but in others several firms may be engaged to fulfill these functions.
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Figure 7: Euronext Growth: Total Capital Raised 2013-17
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Figure 8: Euronext Growth: Breakdown of Issuers by Market Capitalization
100 90 92 80
70 60 50
40 49 No. Issuers of 30 20 24 22 10 9 2 0 0-25 25-50 50-100 100-250 250-750 >750 Millions, Euros
The preceding paragraphs described the basic features of Euronext growth since its establishment, but a few additional features that are unique to Euronext Growth have been added in recent years. In May 2013 a special facility called EnterNext was created to maintain contacts with firms with market capitalizations under €1 billion, focusing on companies that are considered strong candidates for public listing. EnterNext is an educational, networking and mentoring program. EnterNext has a strong local orientation, with five regional offices in France and one each in Belgium, the Netherlands and Portugal. In 2016 the staff of EnterNext took part in 200 events to communicate with enterprises, informing candidates of the potential benefits of listing and supporting companies that are considering listing.
In 2015, EuroNext created TechShare a dedicated facility designed to meet the needs of tech companies. TechShare utilizes its network of entrepreneurs, lawyers, academics, investor relations experts and communications specialists. TechShare works with CEOs of Tech Companies that may be interested in listing. Among its activities are campus seminars at leading business schools, evening workshops on financial markets and coaching.
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Restructuring and Rebranding in 2017. In June 2017, Euronext announced a change in names of important components of its system for SMEs, as well as some organizational and functional changes. 20 The main regulated Euronext market was not changed. Alternext became Euronext Growth, an MTF dedicated to mid-caps with listing requirements adapted to their specific needs. The existing Free Market (Marché Libre) was renamed Euronext Access, a facility designed for companies seeking simplified access to listing. Euronext Access is seen as a springboard to listing for start-ups and fast-growing SMEs.
A new compartment was created called Euronext Access+, which would be the segment of the market with the least rigorous requirements for listing and where applicants receive the most support with the most support. Designed for both start-ups and functioning SMEs, Euronext Access+ will help them make a smooth transition and acclimatization to other Euronext markets, notably in terms of investor communications and transparency. Companies admitted to trading on Euronext Access+ receive additional coaching and other support. Companies can apply for listing on this new compartment as long as they comply with the following criteria: a) financial statements covering at least two years, including audited accounts for the previous year, b) €1 million minimum float, c) obligation to have a Listing Sponsor and d) a commitment to communicate regularly with the market. Listing Requirements for the various components of the Euronext system are shown in Table 6.
Like AIM the investor base for Euronext Growth is predominantly institutional, with major French, European and global investment houses all represented. About 1/3 of investors are retail. (See Annex 2)
French investors receive sizable tax on benefits for investment on Euronext Growth. At the time of investment, investors are eligible for deductions on income or wealth taxes either for investment in a plan for Equity Investment (Plan d’Épargne en
20 Euronext (2017).
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Actions or PEA). Alternatively, investment can take place through collective investment schemes that specialize in local or innovative companies.21
Table 6: Requirements for SME Listing on Euronext
NewConnect (Poland)
NewConnect, launched by the Warsaw Stock Exchange (WSE) 22in 2007, operates as an MTN under rules set by the WSE management board. The WSE is widely
21 These instruments are known as Fonds Communs de Placement en Innovation (FCPI) or Fonds Communs de Placement de Proximité (FCPP), respectively. For a discussion of these instruments and associated tax benefits see OECD (2017.)
22 GPW using Polish initials.
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considered to be the most successful traditional exchange among central European transition economies. Figure 9 shows key data on the New Connect Market.
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Figure 8: Poland’s New Connect Market, 2007-16
Poland's New Connect 2007-2016 500 3,000 2,602 2,588 2,141 2,042 2,213 2,500 400 1,992 2,000 300
1,206 1,500 445 431 200 172 429 418 406 351 1,000 599 86 89 100 278 61 337 185 500 42 36 32 24 24 26 107 26 22 19 0 1 84 3 8 6 11 0 12 0 - 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Number of IPOs Number of delistings (including transfers to Main Market) number of companies at the year's end capitalisation at the year's end (EUR min)
Source: NewConnect
NewConnect targets small growth companies with high potential and a clear growth strategy. Companies that are specifically targeted are those in innovative sectors, mainly with intangible assets (e.g., IT, electronic media, telecommunication, biotechnology, environmental protection, alternative energy, modern services). NewConnect is seen as a gateway to eventual listing on the main board of the WSE. At the end of 2015, 50 companies had graduated from NewConnect to the main board.
Companies seeking to list may choose a) private placement (limited to 149 investors,) or b) public offerings. Admission to trading as a private placement is based on a short and simple information document prepared and approved by an Authorized Advisor. In a public offering, the issuer must comply with the same admission procedure as the regulated market with a prospectus approved by the Financial Supervision Commission (KNF). In the case of public offerings up to EUR 2.5 million, the admission may be based on an information memorandum subject to scrutiny by the KNF.
As in other MTF systems, Poland uses a designated intermediary, known as the Authorized Advisor who determines whether the company is a suitable candidate for
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listing and prepares the issuer for the list to NewConnect, including the preparation of the relevant admission document. In addition, the Authorized Advisor advises the company on its trading in NewConnect and supports the issuer in complying with the information requirements in the period of trading (at least for 3 years). The WSE maintains a list of Authorized Advisors (currently about 80) and periodically inspects these entities to assure that they are in compliance with WSE rules. Most Authorized Advisors are consulting firms or brokerage house, while a few are lawyers, accountants or auditors. Companies are also required to engage a broker to maintain a market in the company’s shares.
One of the unique features of NewConnect is that it has been able to list companies that are much smaller than in other European SME markets.23 Thus, the average company listed on this system is about € 5.3 million equivalent compared to €70 million on Euronext Growth and € 61 million equivalent on AIM. Similarly, the average size of IPO on NewConnect was about € 1.1 million equivalent with the median company having a capitalization of € 1.1 million equivalent.
NewConnect has scored some notable successes in mobilizing funds from retail investors. Domestic individual investors accounted for 92% of holdings at the straw of NewConnect in 2007 and in 2015 still accounted for 75% with domestic institutional investors holding 19% and foreign investors 6%. Polish intermediaries such as brokerage houses and finance boutiques have developed networks of retail investors and have been able to use their marketing skills to maintain an investor base for new companies.
NewConnect registered some noteworthy successes in its earlier years, with IPOs reaching a peak in 2010-11, and market capitalization peaking in 2012. At about that time complaints began to appear about the low quality of disclosure of companies and lax practices of Authorized Advisors. Allegations were also made about insider trading and bankruptcies. In many new private placements, the number of investors was very low, often less than 20 individuals. Moreover, according to some analysts, disclosure quality was rather low.24
23 Data from the platforms mentioned or from Harwood, and Konidaris, (2015.) 24 Fijałkowska, Muszyński and Pauka (2014). Also see Małecka (2017).
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Trading volumes and offerings fell during 2012 and 2013. In 2013, the WSE in response to allegedly lax procedures on the part of Authorized Advisors and late or inadequate filings of required information, tightened regulations covering disclosure and the accountability of Authorized Advisors.25
Authorized Advisors were subjected to tighter supervision by the WSE. Supervision included
1. On-going supervision including monitoring of Authorized Advisors and imposing sanctions for any identified breach of the applicable regulations; 2. Regular periodic supervision including annual assessments of Authorized Advisors. Authorized Advisors are assessed on the basis to qualitative criteria including the quality of introduced companies, the quality of documents prepared and compliance issuers with the disclosure.
Following the tightening of oversight, the requirements for companies offered to the public were made essentially the same for companies listing on the Main Exchange. Subsequently, work was begun on a Code of Conduct for companies listed on NewConnect and for Authorized Advisors. Regulations were tightened further in 2016 with the EU’s Market Abuse Regulation which is applied in all EU member states.
The NewConnect market has been in a phase of readjustment since probably due both to a) the excesses observed during the expansion phase of the market and b) the corrective measures which have increased the cost of compliance reduced some of the attractions of the market. In any case the number of new issues has fallen off since the peak in 2013 and none were registered in 2016. At the same time, the benchmark indexes have remained fairly strong and market liquidity remains reasonably good.
On balance, NewConnect, which was initially hailed as a clear “success story,” is now in phase of determining whether it can thrive by striking an appropriate balance between adequate investor protection and sufficient flexibility to enable smaller companies to access finance on competitive terms.
25 Cienski (2013).
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c. Asia
As noted earlier in this report, data presented by the WFE indicate that Asian SME markets are among the fastest growing in the world and that their capitalization exceeds all others in the world by wide margins. While certain Asian SME markets are clearly large and dynamic, this assertion must be seriously qualified. In particular, the data on China produce major distortions in interpreting the overall picture.
According to WFE data, by far the two largest SME markets in the world are the two SME platforms of the Shenzhen Stock Exchange. The SME Board of Shenzhen has a market capitalization of $1.6 trillion equivalent for and ChiNext $862 billion equivalent. However, it is questionable whether either of these markets should be characterized as SME platforms, because the size of listed companies is so huge. With respect to the SME Board, the smaller of the two platforms, the average market capitalization is over $2 billion, with smallest company listed having a market capitalization of $122 billion.26 The ChiNext market, which is designed to be a market in high growth technology stocks, is somewhat smaller. Nevertheless, in 2014, the smallest company had a capitalization of $188 million the median capitalization was $180 million. On balance, it is difficult to draw many lessons about SME markets from the two Shenzhen markets.
Figure 10 shows the benchmark indexes for Asian small cap markets (excluding the Chinese markets) since 2007. The Japanese and Korean markets both fell during the GFC but have been since recovering. The Hong Kong GEM market initially rebounded after the GFC but has since begun to fall rather sharply, with an accelerated correction occurring in 2017.
On balance, the market with most relevance for Israel is the KOSDAQ market in Korea.
26 Shenzhen Stock Exchange (2014).
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Figure 10: Indexes of Asian Small Capitalization Stocks.
Indexes of Asian Small Cap Stocks 2006 =100 180
160
[ערך] 140
120 [ערך] 100
80
60 [ערך] 40
20
0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Korea KOSDAQ Japan Small Cap 250 Hong Kong GEM
Japan
All SME markets in Japan (as well as the main exchange) are operated by the Japan Exchange Group. Three markets specializing in SMEs are open to all investors a) JASDAQ with 792 listed companies b) JASDAQ growth with 42 companies and c) Mothers with 221 listed companies27 (See Table 7 below.) A fourth market, Tokyo Pro, is limited to qualified investors.
Listing requirements for each of these components are somewhat different as can be seen in Table 8. Data on long term trends in IPOs (Table 1 in section III) indicate that a steady flow of IPOs took place the Japanese market between 1995 and 2006. However, in recent years, the number of IPOs has been diminishing, especially on JASDAQ which has by far the largest number of listed companies. Simultaneously many companies are de-listing.
27 Yoshii, Ando, Nemoto and Shiokoshi (2017), and Hayase, and Goto (2015).
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Table 7: Basic Data on Japanese SME Markets, 2013-2017
Mothers No. of listed Newly Market Cap Market Cap Turnover ratio companies listed (based on value, %) (USD, millions) (Yen, Millions) 2013 191 33 34,151 3,594,363 1,179.40 2014 205 44 27,406 3,284,628 1,016.69 2015 220 62 27,189 3,269,996 703.60 2016 228 55 30,211 3,533,509 871.32 2017 (first 240 4 42,937 4,704,124 73.94 half) JASDAQ No. of listed Newly Market Cap Market Cap Turnover ratio Standard companies listed (based on value, %) (USD, millions) (Yen, Millions)
2013 828 6 89,892 9,461,129 100.83 2014 798 11 76,058 9,115,611 232.55 2015 747 15 67,016 8,060,000 192.91 2016 713 15 66,958 7,831,418 132.70 2017 (first 710 2 94,220 10,322,705 18.54 half) JASDAQ No. of listed Newly Market Cap Market Cap Turnover ratio companies listed (based on value, %) Growth (USD, millions) (Yen, Millions)
2013 48 0 4,044 425,617 270.57 2014 45 0 2,713 325,199 605.25 2015 44 0 2,282 274,496 517.20 2016 43 0 2,608 304,992 549.39 2017 (first 42 0 4,914 538,378 51.70 half) Tokyo Pro No. of listed Newly Market Cap Market Cap Turnover ratio companies listed (based on value, %) (USD, millions) (Yen, Millions)
2013 6 No 47 4,914 No data data 2014 9 No 54 6,415 No data data 2015 14 No 94 11,316 No data data 2016 16 No 318 37,164 No data data 2017 (first 18 No 351 38,444 No data half) data
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Table 8: Listing Requirements on Japanese Junior Markets
Markets Mothers JASDAQ TOKYO (The number of listed (208 cos) Standard Growth PRO companies as of year- (799 cos) (45 cos) Market end 2014) (9 cos) No. of shareholders 200 or more 200 or more - No. of tradable shares 2,000 units or more - - - Market cap of JPY 500 million or more JPY 500 million or more - tradable shares ($4.14 million or more) ($4.14 million or more) Ratio of tradable 25% or more - - - shares to listed shares Public offering At least 500 units through Public offering at least 1,000 - IPO units or 10% of listed shares through IPO Market Cap of Listed JPY 1 million or more - - - Shares ($8,290 or more) No. of consecutive 1 year or more - - - years of conducting business Amount of net assets - JPY 200 million or Not - more negative ($1.66 million or more) Amount of profits or - Ordinary profits of - - market cap JPY 100 million or more last year ($829,000 or more) or Market cap of JPY 5 billion or more ($41.45 million or more) False statement or "Unqualified Opinion" or "Qualified Opinion" in last 2 years "Unqualifie adverse opinion, etc. and "Unqualified Opinion" last year d Opinion" last year Others "Audit by a Listed Company Audit Firm", "Establishment of a Shareholder Services Agent", "Share Unit", "Handling by the Designated Book-entry Transfer Institution" and etc.
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Partly due to its low listing costs, Japan has an active market in small IPOs. For example, it is estimated that in 2014 some 40% of IPOs in Japan were for less than $10 million equivalent and 70% for less than $30 million equivalent. However, the total number of companies undertaking IPOs only amounted to 55 in that year.
The country has a fairly large pool of retail investors who invest on the stock exchange and liquidity on the market is high. Trading and prices remained fairly buoyant through the 2007-08 global financial crisis but subsequently suffered a major correction. After hitting a post-GFC low point in 2009, the index has been recovering.
A new market TOKYO PRO (originally TOKYO AIM) a joint venture between Tokyo Stock Exchange Group and the London Stock Exchange (LSE) was established in June 2009.28TOKYO PRO is not open to the general public but is limited to designated professional investors and certain non-residents. The basic objective of TOKYO PRO is to create a more flexible market using the J-Adviser System, which in turn is based on the NOMAD System of AIM. The J-Adviser investigates and confirms the listing eligibility of a company it supervises before listing, provides advice and guidance concerning timely disclosure after listing, and examines the status of compliance with requirements to maintain a listing. The J-Adviser system does not exempt a company listed on TOKYO PRO Market and its directors from obligations as a listed company. As of mid-2017, only 18 companies with a market capitalization of about $300 million equivalent were listed on TOKYO PRO.
Growth Enterprise Market of Hong Kong
The Growth Enterprise Market (GEM) of the Hong Kong Stock Exchange was established as an alternative market to the Main Board in November 1999. Its goal was to provide funding for growth companies, and at the time, it was probably believed that GEM would benefit from listing mainland Chinese tech companies. However, since the markets in mainland China showed unexpected dynamism, this has not proven to be a major spur to development.
In any case, GEM experienced a steady rise in new listings and rising market capitalization through 2007 (see Table 9). Between 2007 and 2008 a massive correction occurred with the index losing half of its value. In the wake of the correction, many regulations were tightened. Meanwhile, streamlined procedure for GEM listed companies to transfer to the Main Board were introduced, thus reinforcing GEM’s identity as a stepping stone to the main board.
28 Tokyo Stock Exchange (2017.)
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Under current regulations, a GEM applicant is required to have a positive cash flow of HK$20 million (US$2.6 million) in aggregate for the 2 financial years immediately preceding the issue of the listing document. Applicants must have a trading record of at least 2 financial years with management continuity. This requirement may be waived for newly-formed “project” companies (for example a company formed for the purposes of a major infrastructure project) or natural resource exploitation companies. The free float must be equal to 25% of shares, which may also be lowered at the discretion of the Exchange.
An applicant must appoint one or more sponsors, who are licensed by the Hong Kong Securities and Futures Commission. Sponsors are required to conduct reasonable due diligence inquiries in order to put themselves in a position to give the Sponsor’s certification that the company is suitable. The sponsor’s main responsibilities are: a) to be closely involved in the preparation of the applicant’s listing documents; b) to conduct reasonable due diligence inquiries to put itself in a position to give the Sponsor’s Declaration required by the exchange, c) to submit the listing application and all supporting documents on behalf of the applicant; and d) to accompany the applicant to meetings with the Exchange unless otherwise requested by the Exchange. The company is not obliged to maintain a sponsor after being listed.
Although the GEM reform seemed to be modeled on AIM to some degree, companies tended to grow in size with the average capitalization of about $155 million in 2016. In effect the GEM was losing its identity as a platform for small new companies to enter the market. Transparency issues with small and midsize companies have dogged the Growth Enterprise Market for some time. Many analysts believe that companies with substandard corporate governance structures to use loopholes in GEM listing regulations to obtain listing on the main board. In early 2017, many brokerage houses identified shell companies with small amounts of fee float and opaque cross shareholding as good candidates for de-listing.
Unlike other Asian markets which recovered soon after the GFC, the GEM index has been on a distinct downward trend since 2010. After rising in the early months of 2017, the GEM market began a serious correction after midyear. Rumors were circulating that Hong Kong Exchange had submitted a proposal several days earlier to delist many GEM companies and that it would tighten rules on GEM. A very sharp drop took place in mid-2017.
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On 6 June 2017, the Hong Kong Stock Exchange announced a consultation on a series of proposals to broaden the accessibility of Hong Kong’s capital markets and strengthen the listing regime. The proposals are contained in two separate papers:
• The New Board Concept Paper; and
• The Consultation Paper on the Review of the GEM and Changes to the GEM and Main Board Listing Rules.
The proposals in the New Board Concept Paper are designed to enhance Hong Kong’s ability to attract companies from the ‘new economy’ sectors with characteristics that would prohibit them from a listing under the current regime: such as
• Pre-profit companies;
• Companies with non-standard governance structures; and
• Mainland Chinese companies seeking a secondary listing in Hong Kong.
The New Board would have two segments, a) New Board PRO and b) New Board PREMIUM. Both segments would allow non-standard governance structures (e.g. dual class shareholding) and impose no restrictions for secondary listings by Mainland Chinese companies. The New Board would have an accelerated delisting mechanism for companies that failed to meet its ongoing listing requirements.
New Board PRO is designed for early stage, pre-profit technology or new economy companies that do not meet the financial or track record criteria for GEM or the Main Board although applicants are subject to a minimum market capitalization of HK$200 million (UD$ 26 million) at the time of listing. No specific financial or track record requirements would be imposed. New Board PRO applicants are required to have a minimum of 100 investors at the time of listing and a minimum public float of 25 percent, as under GEM. New Board PRO, which would only be open to professional investors, would allow a ‘light-touch’ approach to the vetting process. It is proposed that a New Board PRO applicant should appoint a financial adviser (instead of a sponsor) and carry out the necessary investigations to ensure the accuracy and sufficiency of information in the listing document to enable professional investors to make an informed investment decision.
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Table 9: Hong Kong GEM Annual Market Cap
Year No. of Market Cap. Market Cap Turnover Turnover Listed (HK$ Billions) ($USD (Average (Average Companies Billions) Daily, HK$ Daily, $USD Millions) Millions)
1999 7 7.2 0.9 144 18.6
2000 54 67.3 8.6 341 43.8
2001 111 61 7.8 162 20.8
2002 166 52.2 6.7 178 22.8
2003 185 70.2 9.0 154 19.8
2004 204 66.7 8.6 103 13.2
2005 201 66.6 8.6 90 11.6
2006 198 88.9 11.4 177 22.8
2007 193 161.1 20.6 657 84.2
2008 174 45.2 5.8 213 27.4
2009 174 105 13.5 304 39.2
2010 169 134.7 17.3 537 69.1
2011 170 84.6 10.9 256 32.9
2012 179 78.4 10.1 136 17.5
2013 192 134 17.3 323 41.6
2014 204 179.4 23.1 670 86.4
2015 222 258.2 33.3 1,031 133.0
2016 260 310.9 40.1 475 61.2
1st half 2017 288 267.7 34.4 n.a. n.a.
Source: Hong Kong Securities and Futures Commission
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New Board PREMIUM will target technology or ‘new economy’ companies that meet the existing financial and track record requirements of the Main Board, with the exception of having non-‘standard’ governance structures. For example, structures other than ‘one-share, one-vote’. This market would be open to both retail and professional investors similar to the Main Board.
The proposed rules would tighten up rules on GEM to the point that they would be nearly the same as those of the main board. In brief, the Hong Kong Exchange seems to have concluded that the GEM has not successfully carved out an identity as a growth platform and that newer platforms that are more closely patterned on growth exchanges in other markets should be launched. It is uncertain whether GEM can be maintained as a profitable entity under these circumstances.
KOSDAQ (Korea)
One of the world’s foremost markets for listing and trading SME securities is Korea’s KOSDAQ (Korean Securities Dealers Automated Quotations), established in 1996, an electronic stock market modeled on NASDAQ. Like NASDAQ, KOSDAQ was seen as a market specialized in innovative and high technology companies. When originally launched, KOSDAQ was independent of -- and to some degree a competitor of-- the main stock exchange, but in 2005 it was acquired by the Korea Exchange (KRX), the main market for larger companies. The KRX has supported the development of KOSDAQ as a specialized growth market and allowed it to operate with considerable autonomy.
Unlike many other SME platforms, KOSDAQ is not explicitly designed to be a gateway to listing on the main exchange. Many mature companies remain on KOSDAQ as their primary place of listing. Partly as a result, it has the highest market capitalization of any SME market, except for the Shenzhen markets.
Table 10 provides basic data on KOSDAQ. The number of listed companies has been rising steadily. The average market capitalization of companies on KOSDAQ is about $120 million equivalent. Moreover, a recent study showed that less than 1% of KOSDAQ IPOs were for less than $ 5 million equivalent, as compared to 9% on Euronext Growth.29 Still, KOSDAQ maintains a steady flow of companies with capitalization in the range of $10 and 20 million equivalent . Moreover, as will be explained below, the KRX is building a network of facilities for smaller companies designed to bring them into the KOSDAQ system.
29 WFE (2016a.)
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When initially formed KOSDAQ was highly concentrated in the IT sector, and more than 400 IT corporations are still listed. As recently as 2005, 57% of listed companies were in IT. The share of IT has declined to 37% in early 2017, while the share of bio tech companies has risen to 20%. Many observers expect the biotech sector to become a key driver of the Korean economy and government support is being marshaled to improve Korea’s position in research and in the commercialization of biotech products and companies. Overall, high tech companies of various descriptions still account for 60% of listings. The remaining 40% consists of “traditional” activities, such as manufacturing, trade or finance30 With respect to new listings 2012-15 tech companies accounted for 70-75%, but in 2016 this share declined to 40%.
Table 10: Key Indicators of the KOSDAQ Market, 2007-2016
Year No. of Market Cap Market Cap Turnover KOSDAQ listed (Trillions, (Billions, Ratio (Based Index companies KRW) USD) on Market (year-end) Cap.)
2007 1,023 100.0 106 545.94 704 2008 1,038 46.2 35.1 419.39 332 2009 1,028 86.1 73.2 737.30 514 2010 1,029 98.0 85.2 533.36 511 2011 1,031 106.0 91.2 550.23 500 2012 1,005 109.1 101.5 482.85 496 2013 1,009 119.3 113.3 371.21 500 2014 1,061 143.1 130.2 358.84 543 2015 1,152 201.6 171.4 470.03 682 2016 1,208 201.5 167.3 407.28 631
Like other “growth markets,” KOSDAQ experienced a boom of new listings and rising prices during the dotcom bubble, but subsequently fell sharply. Since 2005, major reforms have transformed KOSDAQ. The government’s policies to support access to finance for companies in high growth /tech sectors as well as the KRX’s efforts to improve the investing environment, have resulted in the re-emergence of KOSDAQ as one of the world’s major markets for emerging tech companies. It has become a platform for companies from other Asian countries as well. The president of
30 KOSDAQ (2017.)
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KOSDAQ recently said that they are targeting foreign as well as domestic growth companies.31
Since 2005, an ecosystem to identify and support emerging growth companies has been under construction. Even prior to the IT boom, Korea already had a system whereby companies are screened and assessed for growth potential and technology content. In 2005 the infrastructure to identify and support companies with high growth potential and technology content was streamlined. The existing network of Technology Appraisal Agencies was reduced from 22 professional institutions to 11 TCBs (Technology Credit Bureau designated by the Financial Supervisory Commission). In March 2005, a technology assessment system was introduced to identify companies meeting targeted criteria and drastically ease the listing requirements in order to attract listings from companies with those characteristics.
Table 11 below shows listing criteria for a) companies in general, b) designated “venture companies” and c) those with a strong technology orientation. Corporations designated as technology intensive by TCBs are exempted from some requirements including minimum equity capital of KRW 1 billion, non-impairment of capital stock and quantitative conditions.
In order to strengthen KOSDAQ’s brand as a growth/technology market by soliciting more promising enterprises, at home and abroad, to the KOSDAQ market is pursuing proactive marketing and educational activities. The KRX has created a dedicated task force on listings promotion, developed a network of contacts with candidate companies and accelerated marketing activities
The investor base of KOSDAQ is heavily retail. Some 89% of all trading was done by domestic individuals in 2016 while foreign individuals accounted for another 4%. Korea has a large network of individuals who invest on a substantial scale in the equity market and the brokerage houses have developed skills at marketing to retail investors. The KRX is developing some collective investment products and ETFs to encourage further retail investment.
Some tax measures have been implemented to encourage equity ownership. Effective January 30, 2015, the withholding tax rate on dividend income earned on stocks held in listed corporations was lowered from 14% to 9%. At the same time, investors can request that dividend income from investment in KOSDAQ shares be lowered from
31 Song (2017.)
Enhancement of the Business Environment in the Southern Mediterranean 55
general rate of up to 38%, can apply for selective separate taxation at the rate of 25% on income, instead of the rate of 38% for most dividends.
One of KOSDAQ’s priorities is to develop an active market in high tech and emerging companies and to bring a stream of new companies into the market. Nevertheless, the companies that are listed and those under active consideration for listing still tend to be comparatively large. Realizing the importance of maintaining contracts with and developing a flow of new companies, efforts have expanded to reach smaller and riskier companies. One major step in that direction was the establishment on July 1, 2013 of KONEX, a new platform for start-up small and medium-enterprises (SMEs) and venture companies. The government and KRX established the KONEX market as a means to enable private and venture capital investors to exit their investment and to enable investors to invest in smaller, riskier and more innovative companies. The KONEX market is limited to designated qualified investors, such as business angels, venture capitalists and institutional investors and high net worth individuals.
Table 11: Comparisons of Listing Requirements for the KOSDAQ Market
General Company Venture Company Technology Assessment Minimum 3 years NA NA Operation of Company Minimum KRW 3 Billion KRW 1. 5 Billion KRW 1 Billion Equity Capital ($2.7 Million) ($1.3 Million) ($0.9 Million) Financial a. ROE: 10% a. ROE: 5% NA Requirements (At least one b. Net income: KRW 2 b. Net income: KRW 1 from a-d) billion billion
c. Sales amount: KRW c. Sales amount: KRW 10 billion & Market 5 billion & Market capitalization: KRW 30 capitalization: KRW 30 billion billion
d. Sales amount: KRW d. Sales amount: KRW 5 billion & Sales 5 billion & Sales growth rate: 20% growth rate: 20% Source: KOSDAQ (2017)
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KONEX is partly conceived as a gateway to the KOSDAQ market. Corporations that can be listed in the KONEX market are limited to SMEs falling under “Framework Act on Small and Medium Enterprises” and listing criteria are minimized to support listing for SMEs with technology capacity. At the end of 2016, KONEX had 113 listed companies with a market capitalization of KRW 4 trillion ($3.6 billion). Of those companies 35 (31%), are in IT and 25 (22%) in biotech. Some 86% of KONEX companies were categorized as innovative.
Disclosure requirements obligations in the KONEX market were significantly lessened in both periodic disclosure (exemption of semi-annual and quarterly reports) and timely disclosure. In addition, requirements of corporate governance such as the appointment of outside directors and full-time auditor were loosened. The regulatory burden is even lower than under the special provisions for tech and innovative companies under KOSDAQ.
The KONEX market uses a system of designated advisors, broadly similar to those found in MTFs under which the company to be listed in which an outside form assists the company in preparing the document necessary for listing and in maintaining flows of information to investors. The designated advisor also acts as liquidity provider/ market maker.
KOSDAQ is seeking to build an integrated system of engagement with targeted companies that encompasses various forms of support to guide companies at all stages of the growth cycle and to provide financing at relevant forms at each stage. The objective is to create a “pipeline “of companies that will move though phases of the growth process. The continuum would begin with crowdfunding and culminate in a KOSDAQ listing. KOSDAQ’s view of a stylized progression through the funding cycle is presented in Figure 10.
The latest addition to the range of funding options occurred in November 2016 when KRX opened the Korea Start-Up Market (KSM). KSM is an OTC trading platform for unlisted stocks, to support fund raising and improve investment exit function before listings in the stock market for startup companies. Corporations eligible for KSM are those that a) have raised funds through crowdfunding or b) those recommended by financial institutions actively involved in implementing the government’s industrial policy. Among the government agencies involved in certifying company’s suitability are Korea Technology Finance Corporation (KIBO), Korea Credit Guarantee Fund (KODIT), Korea Development Bank (KDB), IBK, Korea Growth Investment Corp, Seoul Business Agency (SBA), Korea Creative Content Agency (kocca), National IT
Enhancement of the Business Environment in the Southern Mediterranean 57
Industry Promotion Agency, Small- and mid-businesses specialized security firms, and the Creative Economy Innovation Center.
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Figure 10: KOSDAQ Introduction to the Start-Up Support Center
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In addition, KOSDAQ is building an M&A network. The numbers of network member (339 companies) and M&A target companies (118) on the market are continuously increasing as information is circulated through the M&A network. In mid-2017 KSM had 42 listed companies with half originating through crowdfunding and the remainder through recommendations of the designated financial institutions.
One element of support consists of education, coaching and consulting services for corporations considering listing. Counseling, customized training and consulting services for are provided to explain fund raising and exit from used through KSM and M&A at various stages in the growth of the corporation. The executive education courses and practical professional courses are held 5 times a year.
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V. Conclusions
Having reviewed the experience of a broad range of countries that have created specialized SME exchanges or platforms, it is now appropriate to draw some conclusions and to specify the range of options for policy makers and private market participants in Israel32
A. Summarizing Experience and Drawing Policy Implications
Reducing costs and easing listing requirements
All exchanges and platforms discussed in this report have concluded that in order for an SME trading system to flourish the rules regarding disclosure, corporate governance, legal liability and investor protection must be applied more flexibly for SMEs than for larger companies
There is a strong consensus among all SME markets that disclosure requirements should be eased for listed SMEs. Even with reduced listing requirements, the cost of listing smaller companies in most markets is rather high. In general, the lowest cost of launching an IPO in most SME markets in the world is on the order of $400,000 equivalent. Thus, if an issue raises $4 million, 10% of the proceeds must be used to defray the costs of listing. As a result, the perceived minimum sizes of an economically viable listing are already fairly high and on a rising trend.
In most cases, simplified listing documents are permitted instead of prospectuses. Most market participants agree that the content of required disclosure should not be diluted but that companies should be permitted to provide information less frequently, i.e. semi-annually or even annually, rather than quarterly. There is also a consensus that required reports should be simplified and that electronic reporting should be accepted. In the case of the most lenient market segments (typically those for new and high technology companies seeking initial listing) disclosure requirements, are reduced to a bare minimum. Even in the United States, which generally remains
32 In addition to the information contained in earlier parts of this report, the WFE undertook an inquiry into the functioning of SME market based on intensive discussion with selected SME markets (Euronext Growth, Shenzhen, KOSDAQ and the Bombay Stock Exchange.) WFE (2016a). This section incorporates observations made in that exercise.
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committed to the concept of strong disclosure requirements and legal accountability, recently enacted changes would sharply reduce disclosure requirements for a limited time.
The norms of corporate governance that are applied to larger companies are probably too restrictive for newer companies that are evolving rapidly. One alternative approach is that of AIM where one responsibility of the NOMAD is to determine that the company has a governance structure that is consistent with the listing requirements of AIM and that provides adequate protection to minority investors.
Product Range.
Most SME markets offer a mix of IPOs and secondary offerings. It is understood that growing company will be making more than one round of financing and in many markets secondary offering account for a larger share of capital raised than IPOs. Some offer bonds along with equity, but none permit only bonds to be issued. Some markets offer private as well as public placements and some exchanges have developed ETFs that enable individuals to purchase portfolios of equites listed on the market rather than individual stocks.
Legal and Institutional Structure of the Market.
Traditional stock exchanges depend upon a strong regulatory body that can set regulations for a) fair trading practices, b) adequate disclosure, c) corporate governance and d) other issues related to investor protection. These systems assume strong legal accountability and a separation of functions among the exchange, the intermediaries and the listed companies. It is further assumed that an established official regulator with extensive legal power is available to enforce rule. Attempting to impose very precise regulation on SMEs markets is likely to stifle the development of an SME market.
The MTF as it has evolved in Europe assumes that a more accommodating approach to investor protection is needed in order to enlarge access to capital for SMEs. Instead of a strict delineation of functions among the market participants supported by legal sanctions, the MTF systems in Europe depend on a consensus among market participants in the viability of the market as functioning entity. More specifically, issuers must be convinced that the market is a reliable source of capital that justifies the costs of public listing and that the market will remain a viable system for raising
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new capital in the future and that liquidity will be maintained for securities already issued. The investors must be convinced that the market as a whole has developed a process for the discovery of attractive companies, for guiding companies through the intermediate stages of the growth cycle and for assuring investors that companies are respecting the rights of minority investors at each step of the way. The ultimate sanction is loss of reputation by a) the issuing company, b) the designated adviser if the company is not adequately monitored and c) finally in the marketplace itself. If investors and issuers lose trust in the marketplace, it will no longer function.
In Europe all MTFs have decided that a special kind of intermediary is needed to assist with SME-specific problems such as the lack of transparency and heterodox systems of corporate governance by relying on a system of designated advisers (NOMADS on AIM and Listing Sponsors on Euronext Growth.) The function of these advisers is to vet companies to make sure that they meet the criteria as attractive growth companies with reasonable business plans and appropriate corporate governance, and they continue to provide investors with necessary information. Several MTFs have sanctioned designated advisers who were lax in their duties. The MTF also has the responsibility for assuring that the securities have some level of liquidity and that information is provided to investors.
It is also worth mentioning that some markets that are not organized as MTFs are adopting some variations of the designated adviser and liquidity provider model for smaller and newer companies. Thus, in the KOSDAQ system, those parts of the system that work with companies in the early post-crowd funding stages or post- venture capital phases (i.e., KRX Start-up and KONEX) have adopted institutional features (designated advisers and liquidity providers) that are fairly close to the MTF system with minimal formal requirements. At the risk of exaggeration, it is probably fair to say that if the objective is to reach very small companies, the system must be prepared to be rather accommodating in permitting mechanisms based upon semi- formal agreements among market participants instead of strictly applied formal requirements.
The decision to allow some form of the MTF model poses a choice for securities regulators. On the one hand permitting a marketplace to operate as an MTF without supervision by the securities supervisor would appear to open the way for a considerable share of investment business to occur outside the recognized framework for securities regulation which could conceivably encourage migration of operations away from the public market. This problem has been resolved on the EU level by the MIFID Directive but counties outside the EU have to decide how far they are willing
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to adapt their own legal regimes in order to permit the introducing of this mechanism into their own markets.
One possible compromise is to allow the MTF to operate as a private market. Thus, as mentioned above parts of the KOSDAQ system are private markets and some European MTFs (e.g. Euronext Growth and NewConnect) divide their markets into public and private sections. Each country thinking about launching a new market, including Israel, must weigh the costs and benefits of limiting all or part of its SME platform to qualified investors.
Targeted Companies.
SME markets in all countries aim to list-fast growing companies. In markets where a Nomad or Listing Sponsor has a defined role, that adviser is specifically charged to make sure that companies meet the criteria of high growth potential as a condition for listing. In some cases (e.g. GEM and TSXV) the prevalence of companies lacking the attributes of growth companies with inactive trading may have aggravated recent structural difficulties. This problem is particularly important since most growth markets accept companies that do not show a profit. One related challenge is to find a way to make sure that companies that no longer conform to the markets criteria are promptly de-listed.
While SME markets in Europe basically seek growing companies in a wide sampling of sectors, KOSDAQ seeks a) seeking fast growing companies and b) within that group specially targeting firms in designated high-tech fields. In some cases, a dedicated infrastructure to identify and screen targeted companies and to provide them with special assistance has been developed. Euronext Growth and KOSDAQ have institutional infrastructure and programs designed to seek out companies that are candidates for listing and provide support in several forms to smooth the company’s path to listing.
In general, markets seek out larger companies. In practical terms, this means that in most companies with capitalization of $ 20 million equivalent or more are the smallest viable entities and those with less than $ 10 million equivalent in capitalization have difficulty in tapping the market. Discussions at the TASE confirmed that market participants in Israel see the situation in approximately the same terms. A few markets (Japanese markets and NewConnect) have had some success in bring smaller companies to the market consistently. KOSDAQ has a special program designed to reach companies with smaller capitalization. At the same time, it seems fair to say the
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lower the targeted company, the more flexibility is needed on issues such as disclosure and corporate governance.
Targeted Investor Base.
All SME markets in Europe, except NewConnect, target institutional investors. In effect the market has developed relations with a number of leading asset managers who manage portfolios for institutional clients such as pension funds and insurance companies. European MTFs have developed procedures whereby institutions meet regularly with new companies and their advisers and in this way, have access to a continuing flow of new opportunities in this asset class. It is the consensus among market participants in many countries that institutional investors are not interested in companies with capitalization of less than $15-20 million equivalent.
Many brokerage houses have networks of individual investors who regularly hold this category of asset. Most retail investors that invest in SME securities (except through CIS) are probably eligible for designation as qualified investors. Nex Exchange in London is basing its business model on its ability to market SME securities to high net worth individuals and family offices. In Asia most markets are dominated by retail investors. The domestic investment industry has identified many potential buyers of small company equity and market regularly to this group
As Israel considers introduction of an SME market it will have to evaluate the prospect of building a community of investors (either institutional or retail) that will find this category of asset to be attractive. Investors with experience as venture capitalists or business angels, who are well represented in Israel, may find this to be an attractive avenue for new investment.
In several countries, there are collective investment schemes (CIS) that invest in SME-related assets. One successful example consists of Business Development Companies (BDCs) in the United States. The TASE has expressed interest in the BDC model as a possible way of making investments in SMEs available to a wider spectrum of investors A few other countries have comparable instruments. In most cases companies, SME-oriented CIS are permitted to invest in unlisted securities or in securities listed on specialized SME platforms. In most cases, investments on specialized SME markets qualify the investor for fiscal and other incentives as investing in unlisted securities.33
33 OECD (2017.)
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Relations with Main Exchange.
Most SME markets work closely with a main exchange. There are slight nuances of this general pattern. KOSDAQ was initially an independent exchange that competed to some degree with the main exchange, but has since been acquired by that exchange. The TSX Venture began as an independent exchange that joined with other independent exchange and was than acquired by the country’s main exchange.
In most cases the SME market is tasked with finding new companies that are candidates for eventual public listing on the main exchange and nurturing those companies until they are ready for listing on the big board. Because of the close relations between the SME market and the main exchange, a substantial degree of support from the main exchange is essential for the success of the SME market. Thus, if Israel decides to go forward with a project to construct an SME market, collaboration with the TASE is crucial.
Education, Public Relations and Brand Building.
All SME markets agree that it is important to develop a distinct “brand”. The effort should include companies that are thinking about listing as well as possible investors and the general public. The objective should be to identify clearly as a place where companies with the desired characteristics are listed and where the right mix of institutions is present to enable investors to operate in a fair and transparent marketplace.
B. Scope for Public Intervention
As the foregoing discussion has made clear, most of the effort to develop special exchanges and platform for SME has originated with private market participants, especially the main exchanges which have seen these new facilities as developing a reserve of companies from which future candidates for listing on main exchange can be developed.
This being said, there are several ways in which public agencies and/or public funding can be used to spur development of the exchanges.
Enhanced Support Networks for SMEs.
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In the text certain markets such as the support infrastructure for newer companies of KOSDAQ and the Enternext program of Euronext have programs to support companies that may eventually want to seek listing to prepare the company and to explain the benefits of public listing. There is some parallel between support mechanisms of this kind and support offered to SMEs in the venture capital sector through mechanisms such as incubators and accelerators. While Enternext is mainly an initiative of the main exchange, Korean program already has significant support from the official side.
There may be some scope to involve some public agencies in the process. Since both Korea and Israel have developed framework for public/private collaboration in developing new technology companies through venture capital, KOSDAQ may have some experience that is relevant for Israel.
Subsidies/ Grants for Smaller Companies.
In most markets, there is consensus that it is economically difficult for companies with capitalization of less than $ 15-20 million equivalent to list on an SME platform. Costs of preparing documents for IPOs and for engaging designated advisers, liquidity providers and researchers may be a serious impediment for companies below that level. Additionally, investors may not be interested in companies with very small capitalization. One solution that may be envisaged is to provide block grants or subsides for companies that are not quite large enough (for example companies with capitalization in the range of $5-10 million equivalent) with financing for a limited period in order to defray the costs of initial listing as well as the expenses for of liquidity providers and researchers. This form of support could be coordinated with a program of enhanced engagement.
Tax Relief.
Several countries offer investors in smaller company’s substantial tax benefits. In France and the United Kingdom investors in SME through collective investment schemes, unlisted securities on listed securities on an SME platform receive a tax deduction at the time of investment and no tax on any capital gains, provided that the investment is held for a specified time. In Korea, investors qualify for reduced capital gains taxation. Particularly with respect to scheme that provide very benefits, it is well to consider whether it is sound public policy to direct resources into activities mainly to gain tax benefits.
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In any case, as with other tax relief schemes it is important to draw a balance between the revenue that is forgone and the net social benefits of the tax relief policy.
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