Capital Markets – EASDAQ grows

EASDAQ may be on the brink of becoming the preferred European exchange for fast-growing hi-tech companies contemplating a float – providing recent progress is sustained.

Although the Brussels-based exchange – which was launched in 1996 – experienced a slow start, it may now be reaching some form of critical mass.

The exchange currently has 42 companies from 12 different countries.

Recent profile-raising initiatives have improved awareness of the market and, with it, liquidity. So far, seven UK companies have been admitted and a further four expected by the end of 1999. A further boost has come from the Inland Revenue, which has decided EASDAQ is a recognised investment exchange so – unlike AIM – shares traded on it are eligible for inclusion in PEPs and ISAs.

The slow start may in part be down to the fact that European companies and their advisers have traditionally looked to their own national markets when considering a float. That could be set to change. As EMU progresses, companies and investors may become more prepared to explore opportunities beyond their national markets.

EASDAQ is an independent exchange which was set up under the umbrella of the European Association of Securities Dealers by financial intermediaries participating in the European and US securities markets. Unlike AIM, it is not a junior market of one of Europe’s primary exchanges. Nor is it an association of European exchanges like Euro NM, the network of four junior markets based in Paris, Amsterdam, Frankfurt and Brussels.

EASDAQ is managed by EASDAQ SA/NV, a Dutch private limited company. A division of that company, the Market Authority, is responsible for running EASDAQ on a day-to-day basis, with the key regulatory authority being the Belgian Commission of Banking and Finance.

Unlike other junior markets, EASDAQ does not consider itself a stepping stone to other primary exchanges. Many companies listed on EASDAQ are dual-listed on other exchanges. One of EASDAQ’s big selling points is that it is relatively easy to achieve a dual listing on NASDAQ, either at or following admission. As well as extending the trading hours in securities, a NASDAQ dual listing helps companies to target a wider range of investors.

EASDAQ is an entirely screen-based market with no trading floor. Each company has at least two market makers which must buy and sell its securities during business hours. They are required to maintain buy and sell prices in the company’s shares. These prices are quoted in the currency chosen by the company at the time of admission.

EASDAQ’s rule book is based on that of NASDAQ and the two organisations co-operate fairly closely with each other. EASDAQ is keen to emulate NASDAQ’s success in attracting fast-growing companies, particularly those in the hi-tech sectors, which are generally higher risk than those on the primary European exchanges.

The rules require companies to have assets of at least euro3.5m (£2.3m) and capital and reserves of at least euro2m (£1.3m), but EASDAQ will not normally admit companies unless their market capitalisation is at least euro40m (£27m). Smaller companies may be admitted if they are able to demonstrate a potential for high growth. Antisomer, the UK biotech company, was admitted with a market capitalisation of euro35m (£23m).

To qualify, companies must also have an adequate spread of shareholders, and an adequate percentage of shares – normally 20% – must be held in public hands. Directors must agree to hold onto any securities in the company for at least six months from admission. Holders of 10% of the company’s securities must agree not to sell more than 20% of their holding within a reasonable period following admission, usually six months.

Once listed, EASDAQ companies are required to observe similar obligations to those applying to companies listed on AIM and the full list. Like NASDAQ, EASDAQ requires quarterly reports and unaudited financial statements to be published within two months of the end of the first, second and third quarters. Audited annual accounts must also be published within three months of the year-end rather than within six months, as required under the Companies Act 1985. Financial information must comply with ISA or US GAAP.

EASDAQ companies are required to have at least two independent directors. Unlike UK non-executive directors, independent directors are prohibited from holding 5% or more of the company’s securities.

To date, EASDAQ has targeted relatively large companies. The average market capitalisation of companies on EASDAQ is currently £314m (£120m at admission) compared to an average of £18m on AIM (£16m at admission).

In going forward, EASDAQ faces competition from other European exchanges.

As well as competing with the primary national markets for larger hi-tech companies, EASDAQ has to contend with AIM and the Euro NM network for smaller companies. In the short term, this may mean EASDAQ has to admit smaller companies. In the longer term, there may be pressure on the junior European stock exchanges to consolidate; some form of link-up between EASDAQ and its competitors cannot be ruled out.

James Will is a partner and Walter Blake, a solicitor, both specialising in corporate finance law for technology companies with Shepherd & Wedderbur.

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