New Markets for Innovative SMEs --The Cases of UK, Korea, Canada Yibin Mu, CFA Senior Capital Market Specialist The World Bank June 2008, Shanghai

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

Yibin Mu, CFASenior Capital Market Specialist

The World BankJune 2008, Shanghai

2@Yibin Mu 2008, [email protected]

Outline

1. Reason of introducing new Markets

2. Features of new markets3. Good practice of new

markets4. Policy implications


Reasons for new markets

Debt finance is not suitable for innovative SMEsLack of cashflowLack of revenue recordLack of collateral

Innovative SMEs need equity financeVC needs an exit channelSMEs are too small for main marketsInnovative SMEs are too big for

informal investors


What is new market

Alternative investment market

Two modelsSecond boardJunior stock exchange


Snapshot of new markets New market Main market Economy Name Name United States Nasdaq 1971 New York Stock Exchange (NYSE) 1792 Finland Helsinki New Market List 1999 OMX 1912 United Kingdom Alternative Investment Market (AIM) 1995 London Stock Exchange (LSE) 1801 Canada TSX Venture (TSX-V) 1999 TSX Group 1878 Spain Nuevo Mercado 1999 BME Spanish Exchanges 1831 Ireland Irish Enterprise Exchange (IEX) 2005 Irish Stock Exchange (ISEQ) 1793

Mothers 1999 Tokyo Stock Exchange (TSE) 1878 Japan Hercules 2000 Osaka Stock Exchange (OSE) 1949

Italy Mercato Expandi 2003 Borsa Italiana 1997 Austria Semi-Official Market/Third Market 1999 Wiener Börse 1771 France Nouveau Marché (now Alternext) 2000 Euronext 1801 New Zealand Alternative Market (NZAX) 2003 New Zealand Exchange 1870 Greece NEXA 2001 Athens Stock Exchange 1876 Slovenia Free Market 2000 Ljubljana Stock Exchange 1989 Malaysia Mesdaq Market 1997 Bursa Malaysia 1964 Poland Sitech 2000 Warsaw Stock Exchange 1991 China SME board 2004 Shenzhen Stock Exchange 1990 Hong Kong Growth Enterprise Market (GEM) 1999 Stock Exchange of Hong Kong 1986 Korea KOSDAQ 1996 Korea Exchange 1956 Singapore Sesdaq 1994 Singapore Exchange 1999 Brazil Novo Mercado 1999 São Paulo Stock Exchange 1890 Turkey Second National Market 1998 Istanbul Stock Exchange 1986 Philippines SME Board 1998 Philippine Stock Exchange 1992 Thailand Market Alternative Investment (MAI) 1999 Thailand Stock Exchange 1974 South Africa Alternative Exchange (AltX) 2003 Johannesburg Stock Exchange 1887


Outline





Corporate governance

AIMOwned wholly by LSEOperated as a separate entity

TSX-VAcquired by TSX groupOperated as a separate entity

KosdoqOriginally, established as a separate entityLater, merged with KSEOperated as a separate department with

decision-making processNasdoq

Existed as a separate entity


Relationship with main marketsTSX-V

Cooperative Encourage best listed firms to move to TSX

Kosdaq Competitor to KSE Retain large firms

AIM Mixed

Nasdaq When established in 1971, Nasdaq viewed as a market

for small-cap firms from the OTC marketplace When firms grew too big, they naturally moved from

Nasdaq to the NYSE However, as Nasdaq itself grew, it began to retain firms Competitor to NYSE


Market operations

Overall, adopt relaxed listing and maintenance requirements

Example: AIMRelinquished EU “regulated mkt status”No need to follow strict EU standards of

listing and disclosureLess prescriptive rules typically include

operating history, minimum number of shareholders, past financial performance, number of free-float shares


Trading system

Types Countries of new markets

Order-driven

Korea, Canada, Italy, Ireland, Finland, Austria, Japan, Greece, New Zealand, Singapore, Malaysia, Thailand, Philippines, Turkey, Poland, Brazil, Slovakia, Russian, Hong Kong (China)

Quota driven

UK, France

Hybrid UK, Spain


Relative Market Size

Relative Market Sizes (New Market to Main Market)

1% 0.2%

36%

2%

73%

3%

22%

2%6%

2%0%

20%

40%

60%

80%

Majority Mkts Canada U.K. Korea Nasdaq

Prop

ortio

n

Share Trading ($ value)

Market Capitalization


Liquidity

Overall mixed The turnover ratio of Kosdaq is

exceptional 690%The top 100 firms, which account for 10 percent

of total listed firms, provide more than 55 percent of the market’s trading volume.

AIM, TSX-V: Rather low liquidity Solutions

Concentrate on selected liquid sharesProviding liquidity-enhancing mechanisms such

as a market maker for illiquid shares


Market dynamics

High entry and high exit of firms: reflecting the market orientation toward high-growth SMEs

Kosdaq AIM TSX-V

New listing ratio

6% 9.3% 2.8%

Delisting ratio

2.4% 4% 6.4%


Outline





Good practice

A. Reduce costs of accessing new markets

B. Maintain new market integrityC. Provide effective supportive

services for current and potential listing firms

D. Link the new market operations with strong industrial policies


A.1. Flexible and tailored listing rules

UKAIM: formulates and monitors the rules for

nominated advisers and companiesLSE: UK Listing Authority (UKLA), a division of

the market regulator Financial Services Authority (FSA), formulates and enforces the rules

Korea and CanadaTSX-V, Kosdaq: Offer much lax listing rules for

VC firms than the main markets

A.Cost of access


A.2. Relatively light coproate govanance AIM

Does not prescribe CG requirements for AIM companies;

The companys’ mentor” (Nomad) and investors ensure that AIM companies adopt appropriate CG standards

TSX-V also applies flexible CG rules, fewer rules than the main market, for example, TSX-V companies: only a majority of the members of

the audit committee must be independent, and there are no financial literacy requirements

TSX companies: all committee members must be independent and financially literate

Kosdaq companies, if their total assets are below KRW 2 trillion Exempt from having an audit committee, a minimum

number of outside directors, and an external executive search committee

Venture firms listed in Kosdaq are not required to have at least one-quarter of their directors to be external

A. Cost of access


A.3. Relatively lower direct costs

KoreaKosdaq: A flat KRW 50,000 for VCKSE: listing fees start at 0.04 percent of the

firm’s capital stock.UK

AIM: A flat annual fee of £4,535 for all its listed firms

LSE: Graduated fee according to listing capitalization (maximum £272,400).

CanadaTSX-V: A listing fee that ranges from C$5,000

to C$15,000Main market: C$10,000, along with 0.13

percent of listing capitalization.

A. Cost of access


A.4. Similar disclosure rules

Listed firms are required to comply with almost the same level of disclosure as in the main market, with only a few exceptions.

Example Firms listed on TSX-V are given 120 and 60

days to submit annual and interim financial statements, respectively, instead of 90 and 45 days on TSX.

For firms listed on AIM, financial statement reporting is required on a half-yearly basis rather than quarterly.

A.Cost of access


B.1.Institutional supporting arrangment (1)

AIM:Mentorship plays a critical role in institutional

arrangements. In AIM, the Nomad system is designed to ensure that companies receive ongoing support

The prospective firm appoints an adviser (Nomad) from a list of LSE-accredited advisers

A Nomad works with the issuer to ensure that the issuer is suitable for admission to AIM and, once admitted, complies with AIM rules

Nomads must maintain a ongoing relationship with the firm, assisting its functions of disclosure and corporate governance

B.Market integrity


B.1 Institutional supporting arrangment (2)

Kosqaq Underwriters of KOSDAQ-listed firms must have at

least a one-year business consulting contract before submitting a registration statement and prospectus to the regulator.

TSX-V The regulator operates annual workshops to train listed

issuers Each year, more than 500 directors and officers of listed

venture capital companies attend these events Mentors often have a different perspective than venture

capitalists, as the latter seek exit after listing, while the former remain accountable for the company’s performance for a certain period of time even after listing. Mentors are responsible for maintaining the reputation of the market.

B.Market integrity


B.3. Lock-up requirement

AIM: Applies related-party lock-up rules for new listed firm with a two-year track record or revenue

KOSDAQ: imposes a one-year lock-up for major shareholders and related persons

TSX-V: Securities of major shoareholders are escrowed for three years

B.Market integrity


B.4. Timely and strict delisting of unqualified firms

WhySupport the market’s reputation as a

high-risk, high-return market Maintain a high level of market integrity Establishing a reputation for disciplined

management

To do so, a market surveillance system is needed to support effective enforcement.

B.Market integrity


B.4. Delisitng criteriaB.Market integrity

Delisting criteria

Kosdaq False statements or material omissions in the listing application Merger with another company Unfaithful disclosure Inactive trading for two quartersImpaired capital ratio Negative certified public accountant audit given on financial statementsOrdinary loss of more than 50 percent of paid-in capital for three consecutive years or market capitalization of less than KRW 2 billion for a specified period

TSX-V Failure to meet “tier maintenance requirements” or exchange requirements in a timely manner Failure to pay its annual sustaining fee, filing fees, or any other charge due to the exchangeSuspension of listed shares for 12 monthsFailure to proceed with a reactivation plan after suspensionNo longer an operating company, discontinuation of a substantial portion of its operations or business, or sale or disposal of its principal operating assets

AIM Suspension of trading (for reasons including failure to meet the AIM’s rules or the exchange’s trading rules, investor protection at risk, and harm to market integrity or reputation) for six monthsFailure to appoint a replacement Nomad within a month following suspension for ceasing to retain a Nomada

a. New rulebook for Nomads introduced in February 2007.


C.1. Promoting institutional investment

The rules barring institutional investors from participating in new markets or allowing them only to participate in the main markets need to be eased.

AIM: Rlies largely on institutional investorsThe share of institutional investors is growing: from

38.3 percent in 2004 to 40.9 percent in 2005 Korea:

KOSDAQ is driven predominantly by retail investors, which explains the high turnover compared to other markets

Guidelines for institutional investors have been revised since 1998

By 2005, institutional investors accounted for 9.0 percent of KOSDAQ investors

C.Supportive service


C.1. Promoting instituional investment #2

While TSX is also dominated by retail investors, TSX-V provides a unique way for SMEs to go public through its hallmark Capital Pool Company (CPC) initiative. Unlike a traditional public offering, TSX-V enables

experienced managers to form a CPC (with no commercial operations and no assets but cash), to list on its market, and to raise capital.

The CPC then invests the funds raised in a growing business.

Once the CPC has completed its qualifying transaction and acquired an operating company , its shares continue trading as a regular listing on TSX-V. In 2005, 85 CPCs were listed on TSX-V, raising C$60.1 million,

More than 200 former CPCs had graduated to the main market. Since 1987, the CPC program has enabled more than 1,350 firms to list on TSX-V.

Supportive service


C.2. Facilitating daily liquidity AIM

It has market makers (members of the exchange) that provide liquidity for AIM securities

Each AIM-listed company is required to appoint a broker—a securities house that is an LSE member—to promote the company to investors by connecting buyers and sellers and providing research coverage.

The broker can be the same firm as the Nomad as long as a Chinese wall exists between the two functions. As of the end of 2005, there were 85 Nomads and 89 nominated brokers.

KOSDAQ Planning to introduce market makers to provide

liquidity, as in the main market. KOSDAQ Star, KOSDAQ IT, and KOSDAQ Venture cover different sector shares listed on KOSDAQ

TSX-V does not have market makers

Supportive service


C.3. Enhance the visibility of listed firms

New markets provide more proactive information services to investors compared to the main markets.

KOSDAQ supports a program called KRP (Korea Exchange Research project), KPP provides analyst reports for small firms to bridge the

information gap between listed firms and investors.

TSX-V has two programs that help small issuers to gain visibility: Company Showcase, a program offered in Canada’s

main cities throughout the year TSX Venture 50, a ranking of the top 10 companies on

TSX Venture in five industry sectors. This ranking was first launched in December 2005

Supportive service


C.4. Raising public awareness of alternative investment

TSX-V runs a Public Venture Capital Campaign to foster public awareness of venture financing.

Kosdaq organizes regular road shows for investment relations both in and out of the country for small listed firms every year.

Supportive service


Linking with industrial policies Having a large supply of good-quality

equities from the SME sector is a key to creating successful new markets.

To ensure a stable flow of new equities into new markets, the governments offer industry policies to support SMEs1. Inroduce a flexible stock compensation

system, 2. Promoting venture capitalism and skills 3. Provide tax incentives for new market listing

and investment 4. Provide funding support 5. Promoting networking of angel investors

D.Linking with industrial policies


D.4. Provide funding support to innovative SMEs UK

UK has shifted its focus from regulatory and tax policies to bridging the “equity gap” for SMEs

Has established technology funds and regional venture capital funds to support invonative SMEs

Enterprise Capital Funds offers a matching fund scheme in which the government provides a loan to the venture capitalist

US U.S. Small Business Administration offers public-private

financing for innovative SMEs Canada

Business Development Bank of Canada is the federal government’s main venture capital funding institution

Korea A public mother fund (a fund-of-funds) provide matching

funds to venture and innovative SMEs Public and private matching funds for information

technology SMEs Two government policy banks provide active support to

innovative SMEs

D.Linking with industrial policies


D.5. Promoting networking of angel investors

Angel investors are encouraged to invest directly in business start-ups

Canada The National Angel Organization (NAO) is the primary

organization for angel investors at the national level. The NAO has two main mandates: (a) lobby on behalf of

angel investors and (b) provide professional development to angel investors through a national conference.

Europe European Business Angel Network (EBAN)

Korea Established in 2003, Korea Business Angel Network

(KBAN) is to promote the dissemination of information on venture business and investment opportunities

Linking with industrial policies


Outline

1. Reasons of introducing new markets

2. Features of new markets3. Good practices of new



Policy implications

New markets (NM) contribute to inovative SME development

Not a panacea for all countriesEnvironment for NM

Large number of inovative businessFinancially sustanaible

Policy support necessaryLight costs of regulations, transactions and

complianceAppropraite institutional and policy framework

for NM

Documents

New Markets for Innovative SMEs --The Cases of UK, Korea, Canada Yibin Mu, CFA Senior Capital Market Specialist The World Bank June 2008, Shanghai