By BRIAN GAYNOR
Is the unlisted securities market an important source of new capital for growing companies or a haven for poor corporate governance and inadequate disclosure?
Many believe that this market offers a cheap way for entrepreneurs to raise funds. Others argue that the market is totally unregulated and has
been easily manipulated.
The debate over the role of this facility reignited on Wednesday when Pharma Zen, another unlisted company promoted by Dunedin entrepreneur Howard Paterson, traded for the first time.
The unlisted market was formed in 1995 when the Stock Exchange allowed unlisted securities to be traded through its electronic screen-based trading system.
Although these trade through the exchange's computer system they are not subject to its listing rules.
An exchange spokesman refused to disclose the names of the companies that have been approved for this facility.
This means the exchange lets unlisted securities be traded by members through its electronic system but does not want to be associated with or take any responsibility for these firms.
Good information on unlisted securities is found on Direct Broking's website (www.directbroking.co.nz). Under its sharemarkets section, Direct Broking lists 61 companies with securities traded through the unlisted facility.
These include Active Equities, Bridgecorp, Enza, Infinity Group, Kapiti Cheeses, Pyne Gould, Palliser Estate Wines, Turners & Growers, URBUS Properties (formerly Waltus) and Wilson Neill.
Activity on the unlisted market is relatively quiet. Just over 1.6 million shares were traded yesterday with a total value of $273,000. Pharma Zen accounted for 36 per cent of the value.
Pharma Zen is a Dunedin company incorporated last month with initial capital of 80 million shares. These were issued at a total cost of $1000, or .0000125c per share. Original shareholders received 80,000 shares for every $1 subscribed.
Most of these shares were issued to Pharma Zen's three directors - Howard Paterson, Dr Cheung-Tak Hung and Dr Max Shepherd.
Before this week's quotation, Pharma Zen raised $8 million through the issue of a further 80 million shares at 10c each to habitual investors.
It received cash applications of nearly $50 million and 16 million shares were issued to Lotus Capital, a European investment bank, and 10 million shares to Southern Capital, a listed NZ company associated with Mr Paterson. The remaining 54 million shares went to 360 investors.
Pharma Zen's ability to attract nearly $50 million is extraordinary because many well-established listed firms would struggle to attract even half that amount of new capital.
The $8 million raised will be used as follows:
* $2.35 million to buy animal remedy products from Zenith Technology. Dr Hung and Dr Shepherd, both former University of Otago academic staff members, are executive directors and shareholders of Zenith.
* $5.6 million for working capital.
* $50,000 for expenses associated with the $8 million capital raising.
The animal remedy products have been developed to enhance the immune system, for protection against infectious diseases and the treatment of calf scours.
The prospectus contains no information on the historical performance of these products or their state of development, but directors forecast operating revenue of $4.3 million and a net profit of $500,000 in a 12-month period to next October.
Pharma Zen and the unlisted securities market have features worth noting:
* Pharma Zen has no independent directors.
* Dr Hung and Dr Shepherd bought 25.3 million original shares each at .0000125c a share. Their company sold the animal product rights to Pharma Zen for $2.35 million and they will be paid $210 an hour for consulting services.
* Dr Shepherd wrote the expert statement included in the prospectus.
* There is no restriction on the sale of shares by the original shareholders.
* Unlisted securities are not subject to the listing rules and do not make any announcement to the stock exchange. As a result, it is difficult to obtain information on these companies.
* Analysts rarely cover unlisted companies and the media do not scrutinise their performance.
* Companies traded through the unlisted facility are not subject to any insider trading regulations.
Investors greeted Pharma Zen's quotation with enthusiasm. On Wednesday, 1.19 million shares were traded between 18c and 25c. On Thursday, 617,000 sold between 20c and 23c.
Pharma Zen closed yesterday at 23c on volume of 425,000 shares.
This gives the company a market value of $36.8 million. The original investors are sitting on a profit of $18.4 million and new shareholders on $10.4 million.
Pharma Zen is the fourth Paterson concern started on the unlisted facility.
A2 Corporation, which is attempting to introduce a new milk product, remains on the unlisted market but Blis Technologies has gone to the main board of the exchange.
Botry-Zen, the remaining Paterson company, is remarkably similar to Pharma Zen.
These similarities include:
* Mr Paterson, Dr Hung and Dr Shepherd are the only directors of Botry-Zen.
* Original shareholders, including the three directors, were issued 116.7 million shares at a total cost of $1000, or .00000857c per share.
* The company raised $5 million in August when 50 million new shares were issued at 10c each to habitual investors. The issue was 24 times oversubscribed and nearly $115 million was returned to investors.
* Dr Shepherd wrote the expert statement included in the prospectus.
* Botry-Zen's intellectual property, which is associated with a product for the control of Botrytis cinerea fungus in grapes, was bought from Zenith, a company associated with Dr Hung and Dr Shepherd, for $375,000.
* Dr Hung and Dr Shepherd will be paid $210 an hour for their consulting services.
* The prospectus contained no substantial historical information.
Botry-Zen began trading at 52c, fell below 20c but picked up again after bullish comments by a company spokesman at a broker-sponsored conference.
At yesterday's closing price of 43c, the company has a market value of $71.7 million. Original investors sit on a profit of $50.2 million and habitual investors are ahead by $16.5 million.
Time will tell whether A2, Blis Technologies, Botry-Zen and Pharma Zen will be successful.
David Parker, a spokesman for Mr Paterson, is incredibly optimistic about the future of Blis, Botry-Zen and Pharma Zen.
He believes all three are on the verge of a big commercial breakthrough and their market values are fully justified.
The other view is that Mr Paterson, Dr Hung and Dr Shepherd have become too greedy, especially in relation to Botry-Zen and Pharma Zen.
The distribution of securities to a select number of habitual investors makes it easy to talk up the share price.
The success of one Paterson company has fed on the others but the experience of the 1980s indicates that if one company fails to deliver then it can adversely affect the others.
The Government is keeping a close eye on the unlisted market and the Ministry of Economic Development will release a discussion document in the New Year on its regulation.
The Government's determination to improve investor protection and Mr Paterson's ability to attract nearly $170 million for Botry-Zen and Pharma Zen could mean that the days of the unregulated unlisted market are numbered.
* Disclosure of interest: none.
* bgaynor@xtra.co.nz
By BRIAN GAYNOR
Is the unlisted securities market an important source of new capital for growing companies or a haven for poor corporate governance and inadequate disclosure?
Many believe that this market offers a cheap way for entrepreneurs to raise funds. Others argue that the market is totally unregulated and has
AdvertisementAdvertise with NZME.