Whether it is the TSX Venture Listings, TMX Listings, ALTX, AIM, Plus Listed, ASX, Frankfurt, or Small Cap stock exchange, are you mentally prepared?
With the growing scepticism of the capital markets with the transparency, compliance, and over zealous financial product market that went bust in the US and therefore globally in 2008, investors are weary. However, even within the second quarter 2009 respective technology stocks hold up markets and currency forex trading has an exciting appeal to it once again. For the most part, big board companies have underperformed with looming crisis talks in all board rooms across all boards and stock exchanges.
Many who are listed ask themselves how can they overcome these barriers and burdens to the investment market and meeting their goals and success. As a Director of these types of companies, looking in the mirror in the morning is much different than being a private sector company, as the greatest mindset challenge as a Director is you are publicly accountable. The business stability, survivability, results, salaries, share dealings such as option plans and warrants, acquisitions and takeover bids or lack thereof, regulatory requirements and costs, are just a few considerations of those mindset challenges. More than any time before in the history of public markets this is a true statement about who is leading our economy, our markets, and our investments as individuals.
There is no doubt that transparency that goes with listing is a complicated set of values that often successful, quality companies don’t have a problem with. Transparency however is complicated based on the stage of a business, and thus, the more early stage a company is the more difficult it is due to the lack of resources, the fast pace of which things occur, and the lack of or skeletal level of reporting mechanism’s built into the fibre of the company and management. In general, as companies progress through stages of business development, these mechanisms, such as committees and tracking, all become part of the corporatized listing. In some cases, such as in the case of the United States Pinksheets or the US over the counter bulletin board, reporting requirements are less stringent for the purpose of recognizing the burden on these new entrepreneurs and directors in order to facilitate small business development. In places such as South Africa, the ALTX was developed by the JSE as an exchange of which companies could benefit from becoming public and later some have migrated to the JSE. In order to list on the ALTX, one of three requirements of the Directors is to attend an induction course which outlines the levels of transparency required and business practices. A company should be run successfully whether it is a listed or unlisted business, especially where capital needs require the solicitation of individual investors. Therefore, listing on any stock exchange in the world requires the preparedness mentally of directors and not just the abilities or experience. One such requirement is to be mentally prepared for the stage of the business the directors are managing (as many directors are taken from mature companies who cannot manage a development stage company due to the lack of controls as discussed prior), the entrepreneurial spirit of which a founder often holds and motivates the staff and investors into the venture due to the state of mind, and the ability to accept a certain level of humility as the open book management requires all the mistakes to be disclosed which is embarrassing for those running the company. However, one of the greatest signs of a leader is humility, the ability to fail and drudge on to success.
The smaller exchange’s play an important role for businesses who are not prepared for the costs of being on a big board listing or do not meet the requirements but still want to reap the benefits of going public such as:
– Access to capital
– Ability to acquire companies by funding through the sale of shares or the issue of new shares versus cash payment
– Negotiating strength with financiers or the later corporate buy-out options
– The opportunity for founders, especially family based, to realise capital gains
– The expansion of the business
– Prestige, such as the status among stakeholders, customers, and competitors
– Share pricing mechanism and capitalization based on regulated standards of doing so and models for the liquidity of equity in the business for attracting new investment post IPO
– The ability to compensate staff with compensation that is based on their performance
An ongoing trend in this decade was the acceleration towards risky money preferences by the creation and birth of Small Cap and lower Board or quotation systems globally. This was complemented by the improvement in the perception of venture businesses, the viable exit strategy for venture capitalists who financed between $100,000 and $50,000,000, and subsequently the jump in IPO’s and listings globally. The positive outlook and small cap gains reaped during 2001 to the present time is directly related to the stage of the business and amount of equity invested, the preparedness of management, and the viability of the business. Many people would like to suggest it is related to economic factors, which does take a major role, but nothing compares to the actual business itself. The responsibility of an exchange is to provide a platform for companies to raise capital needed for the positive attributes mentioned prior and taking them to the next level. (Which could be migrating to a larger exchange, continued success and payout of dividends to shareholders, acquisition due to the easy to measure value due to disclosure requirements.) Sometimes going public could be the worst option for management and family businesses with the almost manic experiences with the ups and downs of capital markets and investor sentiment, especially in the often thinly traded and volatile small board listings. Many companies have gone public on the whims and promises of capital raising, however, if this is not something you are prepared to do yourself, going public with the wrong group of financers could cost you your reputation and possibly even more daunting would be sanctions by regulators which restrict your god given talent of building businesses. Over the last decade and since the beginning of lower board listings and otherwise referred to penny stocks, a flood of rubbish was listed on the boards globally. The majority fall into regulatory or accounting problems, the inability to deliver due to lack of capital, management, or viability of the business. Many of us have struggled with the lack of capital and viability of the business in various management consultant roles.
The reality however for the young exchanges or the lower board exchanges is the ability to motivate companies and investors with an act of faith that listing will work for them. However, I do like the ALTX requirement of mental preparedness prior to making such an act of faith.
The level of optimism of the founders and directors is often an indication of its early stage as a business, otherwise the listing company is applying as a last resort for a turbulent but growing company. The job of a stock exchange selling the ideas of listing to early stage companies and or businesses in a turbulent but growing phase is therefore easier. New companies or companies with immediate capital requirements to expand and grow are attractive to retail investors due to potentially immediate and long term gains. Therefore, the nature of the small cap market attracts the retail investor who understandably knows the volatility of the market but is willing to step into a penny stock situation with the ambition of making a dollar off optimism.
It is rather graceful of companies and humbling to watch management such as Google to be comfortable with their success and let a rising share price do all the talking. Leadership style such as that of Google and Apple are carbon copies of the mature stage of a business, and what one can aspire to become going public. A good exercise for companies wishing to go public, is to look at businesses that are public in your area of business, and look at the best. The public filings and disclosures will help assist in identifying the benefits related to going public, the approach which has been successful in going to the market, and the capacity of production and cost of success. Many people read filings and identify mistakes made by management and verbally or silently say to themselves, well I would never do that if I were public. It may even be a method of raising financing which is mentioning what the competitor has done in error and how you will capitalize on this weakness. However, I also suggest you look at the errors and try to visualize how you could have made the same mistake and what you would have learned from it internally and via the public humility of having to disclose it to the world. If you can understand this, the lesson is learned.
There are several professionals in the public markets who act as advisors, in some markets, such as the Plus Exchange in the UK and ALTX / JSE advisors submit the application to the exchange with the requirement of assessing how appropriate it is to list, method of listing, capital requirements, milestones, documents to support viability including detailed models and performance factors. Within the OTC markets, management prepares the documentation with an auditor and then goes to a market maker who acts the role of an advisor. Market Makers and advisors have to sometimes argue on behalf of the company the merits of the company and value to the exchange to an advisory committee/regulatory body. For example, FINRA within the United States is the group who inevitably decides whether the company is to get a symbol, and the process of getting one is often a series of comments and responses between the committee and the company lawyers and advisor/market makers. The value of an advisor or market maker is often decided by their success in the commenting stage of going public, but also, in identifying the appropriate time to submit the application on behalf of a company. The reality is that going public has a skeletal infrastructure of advisors, broker sponsors such as in the TSX, professionals, regulators, and mechanisms for investment, which are designed to realise companies goals but it is up to management and the system in place to decide if there are more suitable routes to take or if this is the route for you. The reality is, when you are mentally prepared to go public, have the viable business and are assessed to be worthy and ready, and are willing to have faith and optimism at the expense of humility to reach these goals while remaining transparent, with the understanding that you have to do much of it yourself, such as capital raising and share structuring, then you are ready to consider the process of going public. In this process of consideration, even if you have been a director of a public company in the past and understandably have experience, it is advisable to attend some the of training courses and events held by the potential exchange you would like to list on to further prepare yourself mentally.
If you have read this blog and are considering still going public, and would like to know which exchange globally would be suitable for a business venture of your nature, I suggest contacting us at firstname.lastname@example.org it is likely we know of advisors in your market or have dialogue with exchange representatives or advisors.