Ghost of failed predecessor hangs over latest venture

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The Independent Online
THE spectre confronting the embryonic AIM is the short- lived Third Market.

Launched, like AIM, to provide equity finance for young and growing companies, the Third Market was conceived in the heady months leading up to the Big Bang deregulation of 1986. It began in 1987 and was less than four years old when it died at the end of 1990, having never lived up to initial expectations.

The Third Market never captured investors' imaginations and failed to attract enough companies. Only 92 joined, of which about 24 were still being traded at the death.

The Third Market was killed, in effect, by the Stock Exchange in February 1990, when its trading requirements for UK primary and secondary markets were reformed to conform with European Community directives. Those requirements conveniently excluded the new market, but it was already dying.

The Third Market embraced start-up projects, Business Expansion Scheme companies and venture capital concerns considered too small and too speculative for the full market or USM.

The accountants KPMG Peat Marwick envisaged the typical entrant as capitalised at pounds 3m, with profits of less than pounds 500,000 - eerily similar to predictions of the likely size of AIM's entrants.

In April 1986, Michael Howard, now Home Secretary but then the corporate and consumer affairs minister, said the Government had been concerned to see fuller market facilities developed to enable shares of smaller and less well established companies to be more tradeable. 'I very much welcome the Stock Exchange's decision,' he said.

Mr Howard had reason to be grateful, as it seemed the Exchange was getting the Government off the nasty little hook of sorting out the burgeoning over-the-counter market, where licensed but ill-regulated dealers sold stocks over the phone to gullible punters. But in the end, the 1987 stock market crash smothered both the Third Market and many of the licensed dealers.

When the USM was introduced in 1980, the Stock Exchange intended it to be the official forum for dealing in the shares of small companies. But as the roaring 1980s unfolded, the venture capital industry poured billions of pounds into creating small businesses.

Such companies needed access to a securities market to raise development capital - and for the original investors to cash in - but many fell short of even the USM's light regulations. To the horror of the Exchange authorities, some of these young businesses turned to the OTC as an outlet.

The Securities and Investments Board said that OTC markets should be organised through a Recognised Investment Exchange. The licensed dealers' body, Nasdim, was asked to draw up proposals. But it turned out to be too expensive to establish a new electronic market that met the SIB's requirements. So Nasdim handed the project over to the Stock Exchange, which promptly limited access to the new market to its own member firms.

Responsibility for vetting prospectuses and supervising companies was given to sponsoring member firms. In an attempt to keep costs down, the Stock Exchange's quotations department was not involved: that proved a fatal flaw, as the sponsors' word was not a strong enough assurance to investors.

In another echo of the claims being made for AIM, Third Market sponsors argued that the need to protect their reputations would act as the most effective form of regulation.

Green-field projects and companies with as little as one year's trading record were eligible. USM companies then needed a three-year record, and the Official List five years.

The rules conceded that young companies traded on the new market would constitute significantly riskier investments than listed or USM quoted enterprises.

It may have been ominous that Tom Wilmot, chairman of Harvard Securities, the biggest dealer in the then flourishing over-the-counter market, welcomed the proposals for the Third Market.

Robin Hodgson, chairman of Granville, another leading OTC market maker that belonged to the Stock Exchange, anticipated a key problem when he warned that lack of liquidity might be a problem in the new market.

The introduction of the new market was originally intended for 27 October, the day of Big Bang. But in October, the Stock Exchange postponed the Third Market until early 1987.

After the stock market crash in October 1987, the USM and the Third Market faced a struggle for survival as trading in small-company shares slumped. The OTC rapidly shrivelled. It was then a question of whether the USM would be squeezed between the Official List and the Third Market, or whether the Third Market would be squeezed between the USM and the Stock Exchange's more limited matched-bargain facility under what is now known as Rule 4.2.

One commentator fretted: 'There is a very real risk that the smaller, younger ventures that would otherwise have contemplated flotation on the USM will opt for the less rigorously regulated environment of the Third Market, at the same time as larger USM candidates are plumping for the main market.' But the Third Market was the one to be squeezed out.

'The Third Market didn't have room to breathe,' said a Stock Exchange spokesman. 'Sandwiched between the Official List and USM on one side and the matched-bargain facility on the other. AIM will have more room.'

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