Venture capital market


The Venture Capital Market (VCM), according to the JSE, was formed in 1989 "To assist companies specializing in venture capital projects (venture capital conglomerates) or single venture companies .. ." The record of the success of companies listed on the VCM has not been respectable. Consequently the requirements are relatively onerous.

Pre-application submission

The JSE requires that companies desirous of listing on the VCM submit a memorandum prior to the submission of an application for listing. The memorandum is required to contain details on the following:

• A synopsis of the nature of business of the company

• The modus operandi of the company

• The company's business plans and prospects

The company may only make a formal application for a listing if the executive committee of the JSE approves the memorandum.

A single venture company, in addition to the above, is required to provide an analysis of its prospects, based on its market segment growth, an analysis of the competitive environment in which it operates and its estimated market share. It is required to present a three-year business plan, including forecast balance sheets, profit and loss accounts and cash flows.

A venture capital conglomerate must satisfy the JSE that it has as its dominant business the professional operation of a company that holds and will continue to hold a portfolio of investments in ventures, each of which is characterised by the fact that the venture capital conglomerate:

• Has an investment in each underlying venture which is substantially an equity investment

• Is able to add value to each of its underlying venture projects through providing support services and proper financial disciplines.

• Has conducted adequate research into the management strength and commercial viability of each of its underlying ventures.

• Has drawn up a business plan for the next three years in respect of each underlying venture and of the combined portfolio, with forecast balance sheets, profit and loss accounts and cash flow statements.

Key requirements of a VCM listing

• The company must have a subscribed capital, excluding revaluations of assets, of at least R500 000, in the form of not less than one million shares in issue.

• The JSE will not list securities held by the entrepreneurs of the VCM company amounting to 75% of their shareholding/s (as held immediately prior to any marketing of securities in conjunction with the application for listing) for a period of at least two years subsequent to listing being granted. This is to ensure that the entrepreneurs to remain financially committed to the VCM company.

• A profit history is not required but the company should indicate credible returns on capital that on a time-weighted basis are above average in its analyses of future earnings.

• The public must hold a minimum of 5% of each class of equity shares.

• The company must have a minimum of 75 public shareholders.

• The minimum initial price of the shares must be not less than 50 cents per share.

• The majority of directors and managers must have had successful records of achievement in their respective rules.

• The company is required to have a warning of the speculative nature of investment in such a company at the beginning of its prospectus, or pre-listing statement.

Alternative exchange

Many countries have "Alternative Exchanges", which essentially are divisions of exchanges that have less-onerous listing requirements. We present the South African example: the Alternative Exchange (ALTX) was launched in August 2003 and started trading in October 2003. According to the launch brochure of the ALTX of the JSE:

"The Alternative Exchange, ALTX, is a division of the JSE...ALTX is the JSE's exciting 'parallel' market for small to medium and growing companies. It offers investors opportunities to invest in a myriad of companies and is designed for investors who understand the nature of the market and are prepared to accept the potential risk and rewards of investing in growing companies. Companies can join to issue new shares, raise funds, widen their investor base and have their shares traded on a regulated market. ALTX is designed to appeal to a diverse range of companies in all sectors including:

• Young and fast-growing businesses including start-ups

• Management buy-outs and buy-ins

• Family-owned businesses

• Black economic empowerment companies

• Junior mining companies."

As to "why and how ALTX has been developed", the JSE reports:

"Securities exchanges should be natural sources of capital at every stage of development and it is appropriate that they make provision for younger companies as well. In effect, ALTX neatly fills this gap, providing smaller companies access to much-needed capital and facilitating smoother growth than they could previously have expected. In a symbiotic process, the investment horizons for investors are proportionately expanded. The knock-on effect helps fuel the SME sector in particular and the economy in general. Another positive role of the Alternative Exchange is that of a breeding ground for vigorous younger companies - listed firms are the potential powerhouses of the future. Intensive research into global high growth securities exchanges was conducted - 'best practice' of the most successful is therefore built into from day one."

The Alternative Exchange has alternative listing requirements to those that apply to the main Board. The requirements include:

• Appointment of a Designated Adviser

• No profit history required (but not more than R8 million)

• A share capital of R2 million

• Appointment of a financial director

• At least 100 public shareholders, who must hold at least 10% of the issued shares

• Announcements must be made on SENS and the ALTX website (press advertising is encouraged but is not compulsory)

• At least 25% of the directors must be non-executive.

The Designated Advisors are the Sponsors that apply in the case of the Main Board, but they have additional responsibilities. According to the JSE:

"ALTX has created the role of the Designated Adviser. Going public is a fairly complex process and Designated Advisers will play a key role in ensuring companies comply with the listing requirements thereby providing reassurance to investors.. In addition, Designated Advisers is built on a culture of relationship management, which aims to enhance the quality of companies listed as well as ensuring maximum information dissemination for investors to make informed investment decisions."

Other relevant information on the ALTX:

• Listing fees are substantially lower compared with the main Board (R20 000 per annum).

• There is a focus on the enhancement of the skills of directors of companies through a compulsory education programme termed the "Director Induction Programme." This programme is presented by market practitioners and it covers corporate governance, listing requirements, the Companies Act, etc.

• Trading of shares is on the same system as the Main Board.

• Market surveillance is vigorous in order to eliminate irregularities.

• Settlement of securities through takes place through STRATE, (the authorized CSD for the electronic settlement of financial instruments in South Africa).

According to the JSE, it is envisaged that the Alternative Exchange will replace the DCM and the VCM in time.

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