Originally published in Business Brief, 2011
There are many considerations to explore before deciding whether a listing is the best route to market, says Tamara Menteshvili, Founding Director and Chief Executive of the Channel Islands Stock Exchange (CISX).
The post financial crisis environment has created a change in market expectations. Not only is there an increasing focus on transparency, but also a flight to quality in which Issuers seek to secure a listing on a recognised market in order to gain a competitive edge and attract the appropriate investors. More than ever, particularly within the retail sector, consideration is being given to listing a product in addition to or rather than competing through the financial intermediary markets or by some other method.
This article, the first in a series of three, examines the factors that financial institutions and other intermediaries should consider when making decisions about whether listing is the right course of action and, if so, the implications of choosing one exchange over another and the regulatory obligations that will arise for the issuer.
First, we should consider why the Issuer wants to list and the advantages of doing so.
Most often, the main reasons financial institutions wish to list is to create a market value, to provide investors with an exit route, to extend their product's visibility, to secure a kite mark which demonstrates they have met rigorous disclosure requirements or to attract certain types of investors. A listing is sometimes an essential aspect. A UK REIT, for example, cannot be eligible for that status unless it is listed on a recognised stock exchange.
At this pre-listing stage consideration should be given as to the types of investors an Issuer is aiming to attract and the geographic location of those investors.
We advise an Issuer considering a listing to endeavour to understand local company laws and to ensure those who will be involved with the listing are fully aware of the obligations they will be expected to fulfil. Generally and in particular within the UK and the Channel Islands, Directors of a listed company must have knowledge of the listing rules of the Exchange in which the security they are a Director of is listed and must understand their initial and ongoing obligations.
When it has been decided that listing is desirable, the next consideration is ensuring the right exchange is chosen for that particular listing. Questions to consider include the identity of the target market, type of investors and where they are located, advantages of the jurisdiction and its regulatory requirements and whether it is intended to trade the security. Also worth researching are the differentiating features of exchanges, particularly their fee structure and facilities.
Not all exchanges accept all structures. For example some may not list limited partnership interests or they may not accept trading of partly paid shares. There may be certain accounting standards to be met which differ from the preferred option of the Issuer. Some will have a listing facility but not a trading capacity; the variations will make some exchanges more attractive to certain Issuers.
No two markets operate the same way. For example, if you are listing a commercial trading vehicle, the CISX stipulates that you must demonstrate a minimum three-year track record while other exchanges might have a lesser standard. There are stipulations on the number of directors and their expertise, and restraints put upon them in respect of meeting their corporate governance obligations. Some markets will have listing rules which are less onerous for their domestic funds and different rules for non domiciled funds.
The time zone in which the exchange is based is an important issue. Naturally if the Asian market is being targeted, a listing in that region may be more appropriate. Similarly, if the intention is to encourage investors from the EU or UK, an exchange in this time zone is likely to fulfil that objective more easily.
Exchanges though are by no means exclusive to the jurisdictions
in which they operate and the CISX attracts around 50% of its
listings from outside the Channel Islands due to the range of
benefits that makes it attractive to overseas issuers.
There will be other pressures on choosing where to list simply based on costs and value for money. Most investment funds launch their product and bring their shares to market through a private placement. In many cases, investors of closed-ended investment funds are institutional and buy to hold. An examination of the costs of an inter-dealer market (where the shares are admitted to trading only, meaning that the shares are not admitted to the Official List of a recognised stock exchange) may show it to be more expensive. This is owing to the upfront costs of the inter-dealer market, required in order to establish a market in the shares post launch, when in reality there may be little post launch liquidity in the shares.
One of the roles of any stock exchange is to ensure public confidence in the securities admitted to listing by maintaining high standards for the conditions of listing and public disclosure of information. The professional investment community needs to be aware of the issues of transparency and the commitments involved when they consider the benefits of listing and the Market Authority at the CISX will assist in all possible ways during the process.
Listing on an exchange is a commitment with ongoing rules and regulations and this is something that we stress heavily to potential listed Issuers, particularly in the current financial climate where transparency is a fundamental consideration. The Market Authority at the CISX has to ensure that members and directors of CISX listed issuers understand the requirements and expectations of listing on the CISX and these will be explored in greater detail in the next article in the series.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.