Will the concept of the market or platform for unlisted securities work?

Thursday May 30, 2013

DETAILS of the workings of the market or platform for unlisted securities are finally out, but will such a concept work?

Critics are quick to point out that there are a few reasons why it won't: firstly, the unlisted market, or ULM in short, will likely have limited amount of trades, considering that it involves the trading of equity in smaller and early stage companies. For example, how many trades will a venture capitalist make in a company it is investing in? Probably once a year, and that too after a thorough due diligence.

(Only high net-worth individuals and institutions such as venture capitalists (VCs) are supposed to trade in the ULM.)

With the limited liquidity, how can the operator of the exchange earn sufficient trading fees, the argument goes.

Secondly, there's the concern that these early stage companies and their funders will prefer to continue life doing their deals in the way they had been doing them, which is in an offline, face-to-face way.

After all, funders like VCs will prefer to keep their investments private.

In addition, there are a number of parties who already play this so-called matching role, bringing companies to meet with VCs and angel investors. So, why the need for a new electronic platform for that?

To be noted is the fact that the Securities Commission (SC) is merely going to regulate this platform while it will be owned and run by a third party. The request for the proposal to build and run the platform has gone out. Hence, the party running the exchange will be left to figure out how to make it a profitable venture, and one of the first things they are likely to look at is whether the market will generate sufficient trading fees.

These points about the challenges are indeed valid. It is likely that these are part of the reasons why some unlisted markets have failed in other countries.

However, the plan presented by the SC is cognizant of these challenges. What the SC is proposing, though, entails a much bigger picture, the creation of an eco-system, or a “social corporate network” if you like.

The ULM presentation by the SC on its website says that the idea is to create an eco-system of players in the space of small and medium-sized companies, the service providers linked to them and all the various funding sources that seek to fund this type of ventures.

What this also means is that it is not solely about the trading of shares. For example, an idea or product could have been developed by a bunch of university students and their professor. But they've no idea how to market it. However, a marketing expert who has built successful brands in that space could be part of this ULM system. The two could find each other and a deal could be struck. That could be considered as a transaction as well.

And aside from the trading of shares, the ULM is also envisaged to be a trading platform for other company-related products and services such as intellectual property rights, junk bonds and interest schemes. It could also be the platform for socially responsible investments.

The plan also talks about making this platform robust and successful so that players from around the world would become members, either selling their services and ideas or bringing their funds to it.

The ideas sound great on paper, but lest we forget, another idea in the same vein had been conceptualised and executed in the past, but ran out of money and had to be rescued. I'm talking about Mesdaq or the Malaysian Exchange of Securities Dealing and Automated Quotation, which was eventually consumed by Bursa Malaysia.

Then again, when Mesdaq was launched, the world was a different place. Social media was at its nascent stage. There wasn't President Barack Obama and his Jumpstart Our Business Startups initiative. And the concept of crowdfunding didn't exist. Sceptics of the ULM should read up about these developments. They both point to this fact that the ULM is hitting the market at the right time.

News editor Risen Jayaseelan is happy to note that another advantage of the ULM is that it should increase the transparency of Government funding mechanisms in the country for SMEs and start-ups.