Smaller companies get a look in
27 May 1997
The Developing Companies Market (DCM) was launched in Ireland at the beginning of this year by the Irish Stock Exchange. Comparable to the alternative Investment market (AIM) in the UK, the DCM offers small-to-medium-sized companies the opportunity to obtain public quotations for their shares.
The DCM follows in the footsteps of the AIM, which was launched by the London Stock Exchange in 1995. Since its beginnings the AIM has been regarded as relatively successful, with more than 250 companies quoted on it since its inauguration. The DCM can so far boast one recruit, the ITG Group, which came to the DCM and the AIM this month.
Smaller companies should find the DCM attractive for a number of reasons:
They need show only one year's trading to qualify as a DCM company. For a company on the Dublin Official List, this period is three years. The AIM rules contain no minimum trading period.
No minimum market capitalisation is required for a DCM facility, although in practice there are unlikely to be any DCM issues of less than IR£1m.
Only 10 per cent of the shares in a DCM company are required to be offered to the public, thus allowing significant control to be maintained by the existing shareholders with limited equity dilution.
DCM offers a facility for smaller companies to raise finance other than through venture capital, a business expansion scheme or debt.
The cost of flotation and the ongoing expense of maintaining a DCM quote are considerably less than those of the Official List.
The DCM rules are very similar to the AIM rules. However, a major difference is that the Irish Stock Exchange has taken on the role of pre-vetting DCM documents, whereas the London Stock Exchange has no such role. Under the AIM rules the responsibility for vetting the admission document lies with the nominated adviser, creating a high level of responsibility for that adviser.
Another important feature of the DCM rules is the setting of the transaction size thresholds at between 10 and 100 per cent, and 100 per cent and over, which constitutes a reverse takeover. This enables companies to expand by acquisition without the extra cost of issuing a stock exchange circular to shareholders, and without the delay of calling an EGM - unless, of course, the acquisition constitutes a reverse takeover. The DCM transaction sizes are the same as provided in the AIM rules.
A DCM prospectus must comply with stringent legal requirements laid down by the EC (Transferable Securities Stock Exchange) Act 1992. These are virtually identical to the UK Public Offers of Securities Regulations (POS) 1995.
As with POS, the Irish regulations require that a prospectus must contain all necessary information to enable investors to make an informed assessment of the company's financial position and of the rights attaching to the shares. It must also comply with certain requirements of the Irish Companies Acts.
As the directors of a DCM company must take responsibility for the prospectus in the same manner as for listing particulars, the directors are personally liable for any losses suffered by investors/share-holders from any negligent mis-statements or misrepresent- ations made in the prospectus. For this reason the obligations on the company's lawyers and on the sponsor's lawyers when verifying a DCM prospectus are no less onerous than they are in the case of a company being admitted to the Official List.
The Irish Stock Exchange is particularly interested in ensuring that the DCM gets off to a good start. It is anticipated that the first companies to be admitted to the DCM will be carefully scrutinised, as they will be the flagships for its future success. Investors are particularly interested to see that liquidity exists in their shares, which can only be achieved through investors' confidence in the companies on that market.
It is forecast in Ireland that many companies that apply to the DCM for admission will simultaneously seek a quotation on the AIM to attract UK investors (in particular, institutional investors). A dual listing on the DCM and on the AIM should work very well for smaller Irish companies and give investors liquidity together with a growth in share price necessary for increasing investors' confidence.
Similarly, UK companies with a primary listing on the AIM could usefully consider a parallel listing on Dublin's DCM, at limited extra cost. The DCM is, in a sense, a facility confined to Irish companies.
The Developing Companies Market offers an exciting opportunity for smaller companies, particularly at a time when the Celtic Tiger's economy is at its strongest.