Time is running out for the Unlisted Securities Market: Neil Thapar reports on the demise of the second tier

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The Independent Online
YET another symbol of the 1980s boom is about to bite the dust. The Unlisted Securities Market, which spawned many of the glamour stocks of the decade and transformed hundreds of entrepreneurs into paper millionaires overnight, is likely to be abolished early next year.

There are more than 300 USM companies and many are expected to graduate to the main market after its abolition. Although few are likely to bemoan the USM's departure, it could provoke the re- emergence of a capital gap and unregulated financial bucket shops for raising equity for small companies.

Most City advisers agree that the USM has become obsolete and its demise has looked a strong possibility for more than a year, although the Stock Exchange has not yet made a final decision on its future.

A review was launched almost a year ago after a sharp fall in the number of flotations on the USM.

The flow of companies to the second tier peaked at 103 in 1988, and subsequent years have seen a steady drop.

This year just two companies have joined the USM.

One factor is that the recession has made it tougher for newcomers to go public because they need a sound financial record to ensure a successful launch.

But a second and more crucial reason is that the distinction between a USM quotation and a full listing on the main market has been eroded by the adoption of an EC directive two years ago.

Under the new rules, companies seeking a full listing require a three-year record instead of five- year one previously.

At the same time, the requirements for the USM have been lowered from three to two years.

But some key differences between the two remain: whereas a USM company needs to offer only 10 per cent of its equity to the market on flotation, the minimum for fully-quoted companies is 25 per cent.

A flotation on the second tier is also cheaper.

USM companies making acquisitions may benefit from less onerous paperwork and entrepreneurs who hold large stakes in their USM companies also enjoy better treatment under inheritance tax rules.

Despite these differences, most City advisers believe the USM offers few benefits compared with the main market.

And by waiting another year the USM companies could opt for the more prestigious Official List.

The status conferred by a full quote can also help to attract institutional investors, some of whom dislike the junior market or are prevented by their in-house rules from investing in USM stocks.

Robert Swannell, corporate finance director at Schroders, said: 'There is little difference between the two markets. If anything, the USM might be a disadvantage. It may be that some companies will be better served to stay private for a few more years before flotation.'

Some experts also discount fears that the USM's demise could lead to small companies being denied access to equity capital.

The past 10 years have seen the development of a strong venture capital industry that is regarded by some in the City as capable of providing an alternative. But venture capitalists often require a higher rate of return than the stock market.

The USM's importance as a source of funding has also been waning.

In 1988 USM companies raised pounds 308m from investors - by last year the figure had fallen to about pounds 12m.

'I do not see a funding crisis being caused by the disappearance of the USM,' said Graham Cole, a partner at accountants Coopers & Lybrand Deloitte.

Mr Cole argued that the exchange needs to find a way of providing small companies with continued access to equity finance. 'There is a danger that bucket shops could spring up to satisfy the vacuum left by the USM. The stock market should recognise the need for new capital in a safeguarded way,' he said.

The biggest danger from the USM's death is that it could deny small companies an identity. One of USM's successes was that it enabled many small companies to establish a high profile relative to their size.

These companies are now likely to struggle for recognition from the market. As a result, many professionals believe that the exchange may need to provide a new forum to help small companies find a distinctive label.

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