Rousing times

By Roger Armstrong

Sunday 1st December 2002

Here's a wee puzzle to lighten up your day. Take one young, enthusiastic but ineffectual financial market (we'll call it the NCM). Add one old, occasionally dodgy, "get your best under-the-table deals here" market (lets call it the USM). Mix them together, and try to end up with a nifty, kosher, but not-too-expensive market (we'll call it the AX).

And the answer? Ask Geoff Brown. He's the guy at the New Zealand Stock Exchange charged with disbanding the failing, 10-company New Capital Market and the 62-company Unlisted Securities Market (also referred to as the informal, grey or secondary market) and producing a new popular, workable alternative market - codenamed AX - as early as possible next year. In discussions with existing and prospective listed companies over the next couple of months, Brown needs to find a way to replace the unsuccessful NCM (expensive and bureaucratic with a complicated listing process and restrictive capital structure) and clean up the Unlisted Securities Market, the New Zealand stock market's Dodge City branch.

The unlisted market isn't all bad. In some ways it has done a good job of marrying clever people with new money relatively cheaply, which is after all what share markets are supposedly about. For example, it has allowed entrepreneurs like Dunedin money-magnet Howard Patterson inexpensive (around $50,000) method of listing companies without jumping through too many regulatory hoops. It has been a way for solid companies such as Pyne Gould Corporation, Rangatira and Smith's City to provide liquidity to shareholders without having to tie busy management teams up with dealing with NZSE disclosure rules and the exchange's exacting officials.

But in other ways, New Zealand's grey market has been frontier capitalism at its worst - little information and no regulations. For the stock exchange, this informal market is old dynamite in the basement - as new NZSE head Mark Weldon has realised. Historically, the NZSE has distanced itself from this market, pointing out that all it has done is allow its broker-to-broker screens to put up the quotes of these unlisted securities so they may be traded efficiently.

True, kinda, but the placing of these companies on the NZSE technology platform implicitly sanctions them - to the extent that many people refer (wrongly) to this facility as the "secondary board" of the NZSE. If a collection of companies in this so-called market were to explode, the NZSE would undoubtedly end up with considerable debris.

Look at collapsed investment group and serial nonpayer Wilson Neill, which called the USM market home. Wilson Neill, like all other companies on the unlisted board, didn't have to publicly announce anything, not even an annual result. So it didn't, except for occasionally issuing optimistic and inaccurate statements to the exchange. If it hadn't been for the press rounding on Wilson Neill as a form of blood sport, the investing public may have been buying shares off directors at five cents apiece the day before the company stopped trading. Did I mention insider trading is not a crime on the unlisted market?

Luckily New Zealand business people are generally honest sorts. They mostly haven't availed themselves of the opportunity to scam the unlisted market big time. One potential trick lay in the opportunity for companies to change the number of shares on issue and not tell anyone about it.

For example, if a shifty company split its shares 100:1 the value of each share would fall by 99%, but if the market didn't know about the split - which it probably wouldn't - then new investors could be taken for a mint, buying shares at around the pre-split price.

Brown's unenviable task is to tighten up security so that investors feel safe, while at the same time allowing small companies a low-cost, low-worry, pragmatic listing facility.

In small companies, managing directors do everything: there is no full-time company secretary or legal counsel. Legal costs can quickly get out of hand if the company is continually needing advice on complex regulations. And in fast-growing companies and start-ups, which the NZSE is trying to encourage into the AX market, key management is probably too busy to be focusing on complex NZSE requirements.

The NZSE has talked generally of putting less stringent controls on new AX companies than on those on the main board. It has also talked of providing legal advice at a good rate for the companies listed. Good stuff, but the test will be in the detail.

Roger Armstrong is an independent financial analyst and a company director. He is a shareholder of USM company Estaronline and will be nominated to the board at the AGM.

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