View From City Road: Sensible ideas on son of USM

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The Independent Online
What a relief to see the Stock Exchange has spurned some of the nuttier proposals for a virtually unregulated smaller companies market.

Earlier drafts of a plan for an alternative market to replace the much- maligned USM appeared to free companies from basic obligations such as reporting directors' dealings, producing half-year figures and ensuring that at least one broker will handle trading in the shares.

A market like that would have given a blank cheque to cheats and quickly brought the whole enterprise into disrepute. The game would not have been worth the candle.

The new version makes a sensible distinction between entry requirements, where the hurdles for listing are much lower and cheaper than in the USM, and the regulation of secondary market trading, where the differences from existing practice will not be so great. Indeed, in some areas - such as disclosure of directors' dealings - the rules will be tougher than in the USM.

There is no point in setting up the new market if it restricts investors' freedom to take calculated risks. But caveat emptor has its limits.

Only addicted gamblers and insider traders are likely to touch a market in small illiquid stocks, most of which are likely to be held by the directors, without some reassurance that trading is being conducted with some honesty. The alternative is something like the Vancouver exchange in its heyday.

The Stock Exchange is to be congratulated for insisting in the consultative document that standards of supervision and surveillance of trading are similar to the main market.

The hardest balancing act the exchange has to achieve is on the publishing of information to shareholders. At the point of entry to the market this is deliberately limited, of course.

There would be a prospectus, but there would be no restrictions on market capitalisation, length of trading record or the percentage of shares in public hands.

Sponsorship would be unnecessary, and the directors would be entirely responsible for the accuracy of the prospectus. Companies would, however, have to arrange for a stock exchange member to support trading in shares.

This provides some reassurance of honesty and accuracy, since any broker that does get involved is likely to want an oversight of the prospectus, even if it does not put its name to it.

The exchange has decided there would be no sense forcing tiny companies - perhaps even hi-tech start-ups - to push out circulars and hold shareholders' meetings whenever they make a significant move after they have joined the market.

The main mechanism for informing shareholders of price-sensitive developments would be an obligation to publish information promptly.

With trading planned from next June, there is little more than a month for consultation. However, Michael Lawrence, the new chief executive, seems to have made up for the exchange's earlier vacillations over a small company market. This is a sensible proposal.