The share price of Protonex as at 4 October, 2007, was 88.5p as compared with 85p on admission, an increase of slightly more than 4%. This is against a 12-month sector increase of 22%, and an increase in the FTSE AIM all-share index of 14%.
This performance is neither a reflection on the quality of Protonex nor its technology; rather a demonstration of the negative impact of US securities law, in particular Regulation S on liquidity and market value.
The facts speak for themselves. Ceres Power, a
So, for two companies in the same sector, why is trading in one share relatively liquid as opposed to the other? The answer lies in the operation ‘on the ground’ of Regulation S.
The US Securities Act of 1933 prohibits all ‘offers’ of securities without filing a registration statement with the Securities and Exchange Commission (SEC). There are carve-outs known as ‘safe harbours’. One carve-out applies to an offer of securities outside the
Key to the operation of Regulation S is the requirement for the offer to be made ‘offshore’. This includes where the seller reasonably believes the buyer is outside the
Legal advice is sought regarding compliance with Regulation S. US counsel struggle to give a clear opinion in the context of electronic settlement and ‘reasonable belief’, although in this regard the efforts of Covington & Burling with the SIS settlement system are noted.
Without access to electronic share settlement, share bargains in US companies during an initial restricted period of up to two years settle by way of an old-fashioned paper-based system.
This settlement regime removes liquidity which has practical consequences:
l where bargains remain unsettled for an extended period, stockbrokers may need to provide additional regulatory capital to cover these positions. This has a cost beyond the trading commission received;
l funding alternatives for US companies become limited to the venture capital community. There is little opportunity to test valuations and terms;
l in the context of AIM, UK and other European pension funds are deprived of the opportunity to invest in ambitious US companies at the ‘earlier stage’ AIM valuations as compared with the later stage New York Stock Exchange/Nasdaq initial public offering; and
l a barrier is placed around the free flow of capital which increases its cost.
With the removal of liquidity goes a major benefit to US companies from raising capital in
Today, trading and settlement systems are sophisticated and there seems no reason for the Regulation S restraint to persist. Those who Regulation S seeks to defend can in this day and age be protected just as readily by technology as by pen and paper. For the reasons outlined, the SEC should support a regime that harmonises Regulation S with a robust trading system such as CREST.
The fact that both the London Stock Exchange and CREST are working with the SEC on this issue is to be applauded. If the onus for developing global equity markets can be lifted from the shoulders of a narrow legal interpretation of Regulation S and placed firmly with market practitioners then the applause will become a standing ovation. n
Tim Stocks is head of the international equity capital markets group at Taylor Wessing.
