A new stock exchange designed for SMEs – small and medium-sized enterprises – will open for trading in late June. Here’s how it will work.
What’s all this then?
A new stock exchange designed to provide New Zealand SMEs with a portal to become publicly listed is launching on June 21. Called Catalist, it aims to connect retail and professional investors with companies that are too small to qualify for a listing on the NZX, or too big to gain much from crowdfunding or early stage investment.
The main selling point of the exchange seems to be about providing transparency and removing the transactional and research barriers that prevent people from investing in SMEs. Essentially, Catalist is aiming to provide another viable option for SMEs to attract investors, raise capital and expand, and for New Zealanders to participate in the growth of some interesting smaller businesses they connect with.
What kind of companies will be listed?
The exchange will target companies with an initial value of between $6 million and $60 million – “considerably lower than what would be expected for a traditional stock market listing”, according to Catalist.
Co-founder and CEO Colin Magee said it might include companies that are looking to raise $10 – $20 million for something like a physical expansion or new manufacturing processes, but are unable to attract investment due to the transactional barriers involved.
“There are a lot of businesses that need access to growth capital that can’t find it. And there are a lot of people in New Zealand who would like to be able to diversify their investments from larger businesses into perhaps some slightly more interesting smaller businesses.”
While Catalist is not aiming to solve all of the capital raising problems SMEs struggle with in New Zealand, Magee said it would give businesses another option and potentially help keep more of them in New Zealand rather than looking abroad for investors.
So how does it differ from a traditional exchange?
Like any exchange, businesses can become listed on Catalist’s board where investors can monitor the share price and their portfolio value. However, the key point of difference is that unlike the NZX and traditional exchanges, Catalist will use periodical auctions, rather than continuous trading.
Continuous trading on licensed markets isn’t ideal for SMEs, as the rules require a listed company to constantly disclose information to update investors – an expensive and time consuming process that just isn’t viable for smaller businesses.
Continuous trading also comes with an illiquidity risk: if there is low trading in a certain stock, it can disincentivise other investors from buying, therefore leading to a downward spiral of even lower trading volume.
As Catalist puts it: The low trading volume “further discourages investors, meaning until there is sufficient demand for regular trading, these businesses can suffer all the costs of being listed on a continuously traded market, without gaining many of the advantages.”
So why are auctions better?
Because at these auctions buyers and sellers all trade at the same time at a single price, the idea is that it will encourage more trading volume and liquidity for the business, which increases the desirability of the shares.
The single price feature also eliminates bid/offer spreads and the possibility of “front-running”, features of continuous trading markets that compromise fairness and discourage investors from participating.
When a company becomes listed on Catalist it will notify potential investors about the dates of its two-week auction period, mostly likely once a quarter or once a year. This will be the opportunity for investors to exit the investment if they wish or for new investors to get on board.
In the first week all the information about listed companies is provided to everyone at the same time – not to finance professionals and funds first though priority offers like in NZX IPOs. And then the trading opens in the second week.
Where did it come from?
Magee said the team had been planning the project for more than two years, and had started facilitating private trading with SMEs in mid-2020. It was given the green light to begin public trading after the “Financial Markets Conduct (Catalist Public Market) Regulations 2021” were passed late last month.
Which companies will be listed?
Magee couldn’t disclose the companies that will appear on the board, but he said their were 12 or so that are scheduled to be listed on Catalist once it opens. He aims to have 16 companies on board by the end of the year and 200 by the end of year five.
Will retail brokerages (Hatch, Sharsies) be involved?
Magee said he’s looking at connecting with other retail investment platforms to facilitate ways for people to trade, just like on the NZX.
This is also includes Kiwisaver fund managers. At the moment, it’s often not realistic for many Kiwisaver funds to include SMEs, as it takes a reasonable amount of money and time to complete due diligence. If the fund can only invest $1m in the SME, then it’s just not economical. By disclosing all the information and reducing due diligence costs, Catalist could potentially provide a gateway for more SMEs to be included in Kiwisavers.
What about fees?
Investors in the public market are charged a trading fee of $30 for each successful buy or sell transaction up to $12,000 plus 0.25% for amounts over $12,000.
The fees for businesses depend on the services provided and Catalist suggest interested SMEs should get in touch.