New Capital Market offers another investment avenue venture firms worth

By BRIAN GAYNOR

The New Capital Market, which offers exciting prospects for individual investors, kicked into life this week when its first two companies released their prospectuses.

e-Opportunity is offering 1.2 million shares to the public at 50c each and will probably seek shareholder approval to acquire Selector Group, a human resources software developer, after listing.

Wellington firm Mowbray Collectables will also issue 1.2 million shares at 50c each and is expected to seek shareholder approval to acquire five stamp-dealing and one auctioning company now owned by John Mowbray.

The unique features of the New Capital Market, which has been developed by the New Zealand Stock Exchange, are the capital structure of its companies and the way they have to acquire their first business interest, or "key transaction."

Shares in all New Capital Market companies are issued to the public at 50c each and to directors at 25c. Anyone who receives shares at 25c has the following restrictions placed on their sale: one third will be released for sale on each of the first, second and third anniversaries of the completion of the key transaction.

The 25c issue price is a big attraction for directors, but the sale restriction is a big incentive for them to stick with a company and make sure it is successful. At least they have to buy their shares at a much lower discount than the directors of two recent main board listings, Beauty Direct and National Mail. The promoters of these two companies also had no restrictions placed on the sale of their heavily discounted shares.

e-Opportunity's directors are Ross Green (400,000 shares), Tony Bishop (200,000) and Jack Porus (200,000). Mr Green is joint managing director of Kiwi Income Property Trust, Mr Bishop is managing director of an Auckland merchant bank and chairman of Selector Group, and Mr Porus is the managing partner of lawyers Glaister Ennor.

The directors of Mowbray Collectables are John Mowbray (800,000 shares), Murray Radford (200,000) and Ian Halsted (100,000). Mr Mowbray is managing director of his stamp companies and Bethunes Rare Books, Mr Radford is chairman of Dorchester Pacific and Mr Halsted is managing director of a Parnell advertising and design company and a former managing director of Hallenstein Glasson.

The quality of directors is very important because New Capital Market companies are cash boxes on listing, and shareholders have to rely on the directors to identify sound, growth-oriented businesses that can be bought at a fair price.

e-Opportunity's directors have each been granted 100,000 non-transferable options, to be exercised at 50c within three years of listing. These options automatically expire 20 business days after an option-holder ceases to be a director.

Mowbray Collectables' directors have been granted 115,000 options each at the same exercise price and under the same conditions. These options are granted to directors in lieu of fees because e-Opportunity or Mowbray Collectables may not pay any remuneration (including directors' fees) or provide other benefits to directors for services rendered in connection with the key transaction.

The organising brokers, JB Were and Forsyth Barr, have been issued non-transferable options to buy 180,000 shares in e-Opportunity and Mowbray Collectables at 50c a share. JB Were and Forsyth Barr are charging fees of only $7500 (plus GST) and the options are part-consideration for preparing the two companies for listing.

The options cannot be exercised until the key transaction is completed - and they expire 18 months after listing.

It is particularly encouraging that JB Were, one of the largest brokers, has taken an active interest in the New Capital Market. Shareholders should welcome the willingness of brokers to share the risks instead of taking a fat up-front organising fee.

Once e-Opportunity and Mowbray Collectables are listed, the directors' main objective is to identify the key transaction. At least 70 per cent of the gross proceeds of all the shares issued by New Capital Market companies must be used in the identification, evaluation, negotiation and documentation of potential key transactions and payment of the organising broker's costs.

As far as e-Opportunity and Mowbray Collectables are concerned, both boards of directors have already identified the key transaction.

The beauty of this procedure is that the company must organise a shareholder meeting to approve the key transaction. The notice of meeting will contain all information material to the key transaction (including prospective financial information) and any offer of securities related to the key transaction.

None of the directors or any other related parties can vote on the key transaction motion.

Shareholders will usually ap- prove the key transaction because a New Capital Market company will quickly run out of money if key transactions are rejected. Nevertheless, the procedure provides a safeguard against directors who try to dump their assets on New Capital Market companies at inflated prices.

A New Capital Market company will migrate to the main board of the stock exchange when:

* the issued share capital of the company exceeds $10 million; or

* the company's sharemarket value exceeds $10 million for 20 consecutive trading days; or

* the exchange approves, at its discretion, an application by a New Capital Market company to move to the main board.

If a company does not complete a key transaction within 18 months of listing, the exchange may suspend its shares from trading or require shareholders to vote on a liquidation proposal at the next annual general meeting.

If a company is liquidated, shareholders will get only a small proportion of their money back.

The New Capital Market has a number of positive and negative features. The positive aspects are:

* It is based on the very successful Canadian model.

* It should attract new and exciting companies to the share-market.

* Many of these should migrate to the main board.

* Shareholders who get in early could be well-rewarded.

* It offers equity funding opportunities for successful entre-preneurs.

* Its rules are well-structured. In many situations, particularly the restrictions on the sale of dis- counted shares held by directors, its regulations are better than the existing main board rules.

Some of the negative features of the new market include:

* High risks are associated with New Capital Market companies because the prospectus contains limited information on the key transaction (to reduce the risk, no investor is allowed to buy more than 2 per cent of the shares issued to the public).

* Because shares are issued to directors at 25c, the net asset backing per share will immediately be below the public issue price of 50c.

* The key transaction may not be successful, or a key transaction may not be executed.

On balance, the positives far outweigh the negatives and shareholders and entrepreneurs would be well advised to make themselves familiar with the new market.

e-Opportunity and Mowbray Collectables' prospectuses are available on the New Capital Market website, or from stockbrokers.

Mowbray Collectables' issue closes on Tuesday and e-Opportu- nity's on May 5.


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New Capital Market