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NZX plans new market with fewer rules to attract smaller companies, replacing NZAX

NZX [NZX: NZX] , New Zealand's stock market operator, plans a new market with less disclosure obligations to attract smaller companies, eventually replacing the New Zealand Alternative Market, the NZAX.

Wellington-based NZX launched the alternative index in November 2003 to target small to mid-size growth companies. It has 18 stocks with a market cap of $479.8 million and has declined 9.8 percent the past year, lagging an 18 percent gain in the benchmark NZX 50 Index over the same period.

"AX didn't work as well as we would have hoped it would do," Aaron Jenkins, head of markets at NZX, told BusinessDesk. "The short-term plan is to grow a successful new market but over time, assuming we do a good job of it, we'd expect to retire the AX."

Rules for the new market would be more lenient to reduce costs and attract companies with a market cap between $10 million to $100 million to list. Companies will be able to use key operating metrics to outline their business performance instead of more onerous prospective financial information requirements in their projections, and will be required to disclose information to investors periodically rather than continuously, according to draft rules released for consultation by NZX.

"The intent behind the two markets is similar in that they're targeting growth companies," Jenkins said. "The big difference with this market, which is intended to properly differentiate itself from the main board, is that it will reduce the obligations at IPO times and the requirement of prospective financial information, which we expect would be a significant cost reduction in terms of advisory fees."

Wool Equities, which is in the process of de-listing from the alternative market, cited the significant cost of maintaining a share register under the listing rules as one of the reasons for its departure. Once the new market is established NZX would expect NZAX listed companies to migrate to the new market.

The new market will have a different website with distinct branding from the NZX and a risk warning where investors "acknowledge difference between the new market and other NZX markets".

"The reality with the AX was that it never properly differentiated itself from the main board," Jenkins said. "Investors in this market will be aware that they're investing in a stock that is potentially going to be higher risk and therefore need a health check or a health warning to do that."

NZX's capital markets business accounts for half of the company's revenue. Last year it benefited from 10 new listings worth $7.5 billion as the government partially privatised energy companies and privately owned businesses such as Z Energy, SLI Systems and Synlait Milk also publicly listed. The boom is unlikely to be repeated in 2014 as the government has just one smaller asset, Genesis Energy, slated for listing this April and the remaining offerings are expected to be much smaller.

Shares in NZX recently traded at $1.26 and have gained 1.6 percent this year.

Submissions on the new market draft rules are due by April 4.

(BusinessDesk)

More by Suze Metherell

Comments and questions
14

Less disclosure in markets... just what we need (sarcasm).

Ah well, I guess it will make it easier for the snakes of this world to profit from those who can't do their own research.

Anon, you need a reality check.

1. Continuous disclosure is killing the market, and making good directors reduce their willingness to serve on up and coming growth companies, that this economy desperately needs. So this intent is absolutely right. the question should be were the shareholders in Nuplex best served by having the company having to announce problems in their banking which was being sorted out. The answer was no they werent.

2. Good directors must be able to believe that if they always act appropriately they arent opening themselves up to liability. Ask around - but what I am hearing is the number of directors putting their names forward for small companies is minimal. Why - the risk (high) vs the reward (low).

3. The new market will fail (like the AX and NCM before it) if it doesnt have Nomad equivalents to ensure support, research, and / or market making.

Tumbler, my understanding of the market is that the company will effectively finance independent research and market makers organised by the NZSX so that will make sure there is research coverage and some liquidity.

So the NZX thinks the NZAX is struggling because there are too many regulations??

What about the dodgy businessmen in there who are already stringing investors along, you're about to build them a new play centre with fewer rules.

What a shambles!

lower costs and on going fees has to be a benefit for small kiwi businesses looking to leverage exposure and raise capital via the market

How does anyone make any money serving a list of companies with no research and practically no liquidity.

Seems like the market is too small to be viable.

Bring on more Plus SMS!

Bring on more backdoor listings!

What an absolute disgrace the NZX is - protection of investors last, NZX and promotors and scammers profits first, second the third.

Lets assume they'll lean towards the lower end of the spectrum, ie 10-20M market cap. In a high growth stock they'll only be a couple of years in, and that's not a whole lot of revenue (or burn rate) when mkt cap is based on revenue multiples in the 10x - 55x range.

Anyone with a market cap in that realm will more likely use the new (01 April) provisions to crowd fund upto 2M of equity/quasi-equity. Maybe crowd funding will be the new "pre AX" book build?

Weirdness ahead....

Crowd funding has been over hyped, it will in my view struggle in NZ because too much of NZ is risk adverse. Have a look at the make up of kiwisaver funds - predominantly bonds and cash.

But if people want to see the wildwest they should look at the total lack of control around that. I understand that bringing in controls was dismissed because investors would not get carried away and invest too much in any one deal or in the asset class ------- yeah right. Remember finance companies. Companies that over hype their potential will get some really dumb money investing, companies that are being honest about the risks and returns may struggle.

I am not sure how the new exchange would be different from the NZAX. I haven't seen anything that differentiates them so in my view, it is just a remarketing exercise.

Maybe they could call the new exchange Spark* to reignite debate and interest ;)

An exchange for small cap companies is a good idea.

I doubt NZX will be able to do this successfully. They have the wrong skil sets and wrong culture. Similar to Telecom's efforts at starting a niche mobile company. Was that Skinny?

Will take an entrepreneur to set up. But anyone so inclined will have to battle Wellington bureaucrats and NZX, in order to get out of starting gates. Interesting how an equity exchange can be a hindrance, not a help, to small cap companies.

The NZX is itself a small cap market. - "Nano cap" stocks - those under $50m- and woeful revenues are extremely risky investments and perhaps should come with dire warnings and extensive restrictions/ prohibitions on insider transactions.

This seems to come up every 5 years or so. We already have a trading platform - Unlisted - for low-cap stocks, and NZX hasn't been able to find a way to match it (despite various attempts to get it shut down).

As for those bleating about fewer regulations etc, note that all countries have markets of this kind. Their very reason for existing is to provide risk exposures (to willing investors) unavailable on highly regulated main boards. They all come (like Unlisted) with major health warnings - anybody who invests in them knows precisely what they're getting.

the wild west returns...