New Markets for Innovative SMEs
--The Cases of UK, Korea, Canada
Yibin Mu, CFA
Senior Capital Market Specialist
The World Bank
June 2008, Shanghai
Outline
1. Reason of introducing new
Markets
2. Features of new markets
3. Good practice of new
markets
4. Policy implications
@Yibin Mu 2008, ymu@worldbank.org
2
Reasons for new markets
Debt finance is not suitable for
innovative SMEs
Lack of cashflow
Lack of revenue record
Lack of collateral
Innovative SMEs need equity finance
VC needs an exit channel
SMEs are too small for main markets
Innovative SMEs are too big for
informal investors
@Yibin Mu 2008, ymu@worldbank.org
3
What is new market
Alternative investment
market
Two models
Second board
Junior stock exchange
@Yibin Mu 2008, ymu@worldbank.org
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Snapshot of new markets
Economy
United States
Finland
United Kingdom
Canada
Spain
Ireland
Japan
Italy
Austria
France
New Zealand
Greece
Slovenia
Malaysia
Poland
China
Hong Kong
Korea
Singapore
Brazil
Turkey
Philippines
Thailand
South Africa
New market
Name
Nasdaq
Helsinki New Market List
Alternative Investment Market (AIM)
TSX Venture (TSX-V)
Nuevo Mercado
Irish Enterprise Exchange (IEX)
Mothers
Hercules
Mercato Expandi
Semi-Official Market/Third Market
Nouveau Marché (now Alternext)
Alternative Market (NZAX)
NEXA
Free Market
Mesdaq Market
Sitech
SME board
Growth Enterprise Market (GEM)
KOSDAQ
Sesdaq
Novo Mercado
Second National Market
SME Board
Market Alternative Investment (MAI)
Alternative Exchange (AltX)
@Yibin Mu 2008, ymu@worldbank.org
1971
1999
1995
1999
1999
2005
1999
2000
2003
1999
2000
2003
2001
2000
1997
2000
2004
1999
1996
1994
1999
1998
1998
1999
2003
Main market
Name
New York Stock Exchange (NYSE)
OMX
London Stock Exchange (LSE)
TSX Group
BME Spanish Exchanges
Irish Stock Exchange (ISEQ)
Tokyo Stock Exchange (TSE)
Osaka Stock Exchange (OSE)
Borsa Italiana
Wiener Börse
Euronext
New Zealand Exchange
Athens Stock Exchange
Ljubljana Stock Exchange
Bursa Malaysia
Warsaw Stock Exchange
Shenzhen Stock Exchange
Stock Exchange of Hong Kong
Korea Exchange
Singapore Exchange
São Paulo Stock Exchange
Istanbul Stock Exchange
Philippine Stock Exchange
Thailand Stock Exchange
Johannesburg Stock Exchange
1792
1912
1801
1878
1831
1793
1878
1949
1997
1771
1801
1870
1876
1989
1964
1991
1990
1986
1956
1999
1890
1986
1992
1974
1887
5
Outline
1. Reason of introducing new
Markets
2. Features of new markets
3. Good practice of new
markets
4. Policy implications
@Yibin Mu 2008, ymu@worldbank.org
6
Corporate governance
AIM
Owned wholly by LSE
Operated as a separate entity
TSX-V
Acquired by TSX group
Operated as a separate entity
Kosdoq
Originally, established as a separate entity
Later, merged with KSE
Operated as a separate department with
decision-making process
Nasdoq
Existed as a separate entity
@Yibin Mu 2008, ymu@worldbank.org
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Relationship with main markets
 TSX-V
 Cooperative
 Encourage best listed firms to move to TSX
 Kosdaq
 Competitor to KSE
 Retain large firms
 AIM
 Mixed
 Nasdaq
 When established in 1971, Nasdaq viewed as a market
for small-cap firms from the OTC marketplace
 When firms grew too big, they naturally moved from
Nasdaq to the NYSE
 However, as Nasdaq itself grew, it began to retain firms
 Competitor to NYSE
@Yibin Mu 2008, ymu@worldbank.org
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Market operations
Overall, adopt relaxed listing and
maintenance requirements
Example: AIM
Relinquished EU “regulated mkt status”
No need to follow strict EU standards of
listing and disclosure
Less prescriptive rules typically include
operating history, minimum number of
shareholders, past financial performance,
number of free-float shares
@Yibin Mu 2008, ymu@worldbank.org
9
Trading system
Types
Countries of new markets
Order- Korea, Canada, Italy, Ireland, Finland,
driven Austria, Japan, Greece, New Zealand,
Singapore, Malaysia, Thailand,
Philippines, Turkey, Poland, Brazil,
Slovakia, Russian, Hong Kong (China)
UK, France
Quota
driven
Hybrid UK, Spain
@Yibin Mu 2008, ymu@worldbank.org
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Relative Market Size
80%
Relative Market Sizes (New Market to Main Market)
73%
Share Trading ($ value)
M arket Capitalization
Proportion
60%
40%
36%
22%
20%
6%
3%
2%
1%
2%
0%
Majority Mkts
@Yibin Mu 2008, ymu@worldbank.org
Canada
0.2%
2%
U.K.
Korea
Nasdaq
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Liquidity
Overall mixed
The turnover ratio of Kosdaq is
exceptional 690%
The top 100 firms, which account for 10 percent
of total listed firms, provide more than 55
percent of the market’s trading volume.
AIM, TSX-V: Rather low liquidity
Solutions
Concentrate on selected liquid shares
Providing liquidity-enhancing mechanisms such
as a market maker for illiquid shares
@Yibin Mu 2008, ymu@worldbank.org
12
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%
@Yibin Mu 2008, ymu@worldbank.org
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Outline
1. Reason of introducing new
Markets
2. Features of new markets
3. Good practice of new
markets
4. Policy implications
@Yibin Mu 2008, ymu@worldbank.org
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Good practice
A. Reduce costs of accessing new
markets
B. Maintain new market integrity
C. Provide effective supportive
services for current and
potential listing firms
D. Link the new market operations
with strong industrial policies
@Yibin Mu 2008, ymu@worldbank.org
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A.Cost of access
A.1. Flexible and tailored listing rules
UK
AIM: formulates and monitors the rules for
nominated advisers and companies
LSE: UK Listing Authority (UKLA), a division of
the market regulator Financial Services
Authority (FSA), formulates and enforces the
rules
Korea and Canada
TSX-V, Kosdaq: Offer much lax listing rules for
VC firms than the main markets
@Yibin Mu 2008, ymu@worldbank.org
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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
@Yibin Mu 2008, ymu@worldbank.org
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A. Cost of access
A.3. Relatively lower direct costs
Korea
Kosdaq: A flat KRW 50,000 for VC
KSE: 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).
Canada
TSX-V: A listing fee that ranges from C$5,000
to C$15,000
Main market: C$10,000, along with 0.13
percent of listing capitalization.
@Yibin Mu 2008, ymu@worldbank.org
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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.
@Yibin Mu 2008, ymu@worldbank.org
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B.Market integrity
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
@Yibin Mu 2008, ymu@worldbank.org
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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.
@Yibin Mu 2008, ymu@worldbank.org
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B.Market integrity
B.3. Lock-up requirement
AIM: Applies related-party lockup 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
@Yibin Mu 2008, ymu@worldbank.org
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B.Market integrity
B.4. Timely and strict delisting of
unqualified firms
Why
Support 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.
@Yibin Mu 2008, ymu@worldbank.org
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B.Market integrity
B.4. Delisitng criteria
Delisting criteria
Kosdaq
False statements or material omissions in the listing application
Merger with another company
Unfaithful disclosure
Inactive trading for two quarters
Impaired capital ratio
Negative certified public accountant audit given on financial statements
Ordinary 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
exchange
Suspension of listed shares for 12 months
Failure to proceed with a reactivation plan after suspension
No 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 months
Failure to appoint a replacement Nomad within a month following suspension for
ceasing to retain a Nomada
@Yibin Mu 2008, ymu@worldbank.org
a. New rulebook for Nomads introduced in February 2007.
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C.Supportive service
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 investors
 The share of institutional investors is growing: from
38.3 percent in 2004 to 40.9 percent in 2005
 Korea:
 KOSDAQ is driven predominantly by retail investors,
which explains the high turnover compared to other
markets
 Guidelines for institutional investors have been
revised since 1998
 By 2005, institutional investors accounted for 9.0
percent of KOSDAQ investors
@Yibin Mu 2008, ymu@worldbank.org
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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.
@Yibin Mu 2008, ymu@worldbank.org
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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
@Yibin Mu 2008, ymu@worldbank.org
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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
@Yibin Mu 2008, ymu@worldbank.org
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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.
@Yibin Mu 2008, ymu@worldbank.org
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D.Linking with industrial policies
Linking with industrial policies
 Having a large supply of good-
quality equities from the SME sector
is a key to creating successful new
markets.
 To ensure a stable flow of new
equities into new markets, the
governments offer industry policies
to support SMEs
1. Inroduce a flexible stock compensation
2.
3.
4.
5.
system,
Promoting venture capitalism and skills
Provide tax incentives for new market listing
and investment
Provide funding support
Promoting networking of angel investors
@Yibin Mu 2008, ymu@worldbank.org
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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
@Yibin Mu 2008, ymu@worldbank.org
innovative SMEs
31
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
@Yibin Mu 2008, ymu@worldbank.org
32
Outline
1. Reasons of introducing
new markets
2. Features of new markets
3. Good practices of new
markets
4. Policy implications
@Yibin Mu 2008, ymu@worldbank.org
33
Policy implications
New markets (NM) contribute to
inovative SME development
Not a panacea for all countries
Environment for NM
Large number of inovative business
Financially sustanaible
Policy support necessary
Light costs of regulations, transactions and
compliance
Appropraite institutional and policy framework
for NM
@Yibin Mu 2008, ymu@worldbank.org
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