Zaim highlights risks of going for standard listing

Word of warning. Last week, Zaim Credit Systems, a lossmaking Russian microfinance venture, launched itself on to the London stock market. It is a titch but a brave one. Zaim is one of the few new issues to join the London market this year. Floats across the City have halved since last year. But investors must be equally brave to invest in it.

The dangers are laid out in Zaim’s prospectus. It makes unsecured loans in Russia to people who it assumes will be “unable or unwilling to pay amounts in full when due”. And the company has already had a run in with the Russian authorities over data provision.

Perhaps more significantly, Zaim has opted for a standard, not premium, listing. That puts it in a main market niche that hides in plain view. The segment allows companies to list securities on a world-class stock exchange while only offering economy-fare shareholder safeguards.

There are hundreds of standard-listed bonds, preference shares and non-voting shares which are barred from the premium equity list.

But the standard listing comes into its chancy best as a home for small companies and cash shells, such as Fragrant Prosperity, a mini-British Virgin Islands acquisition vehicle that shares its finance director with Zaim.

The standard list is the last refuge of cash shells, which promise takeovers but have no assets other than a stock market quote and a few thousand pounds in the bank.

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Five years ago, the Alternative Investment Market worried these vehicles too often charged investors high fees for doing little over long periods. It doubled the amount that cash shells had to raise to £6m. Aim also insisted shells execute a deal within six months of their debuts.

But standard-listed cash shells proliferate.

S4 Capital, Sir Martin Sorrell’s deal-hungry digital marketing business, was created last year after reversing into Derriston Capital, a cash shell set up by Rodger Sargent in 2016. Mr Sargent is the financier behind Blockchain Worldwide, which was set up as a cash shell in 2017 and flirted with crypto-mining last year. In September, Entertainment AI, the media group, reversed into it and transferred the group to Aim.

Another bitcoin venture, Argo Blockchain, which started out renting computing capacity to cryptocurrency miners, illustrated the skimpier protections for investors in standard listings. Earlier this year, some shareholders objected to the way Argo changed strategy, planned to spend their money and without much warning swapped equity with a Canadian crypto-miner. But they had limited means of stopping the board.

Premium-listed companies must stick to the UK’s gold-plated corporate governance code or an equivalent, seek shareholder approval for big deals and protect investors against dilutive share issues.

Top-tier groups must have sponsors to guide them on the market and adhere to strict rules on related party transactions so that investors can veto deals that benefit controlling shareholders to the detriment of minority holders. 

However, being part of this premium club is pricey. Some bankers and lawyers reckon a premium listing isn’t cost-effective for companies with equity worth less than £500m.

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In contrast, standard-listed companies match Europe’s most basic listing rules. They don’t have to pay sponsors or abide by the UK’s governance bible. They don’t need shareholder approval for most deals, sales or acquisitions. Nor do they have to show a three-year record of revenues or hold votes on share issues, buybacks or related party transactions.

The quid pro quo for reducing shareholder awards is exclusion from investable indices such as the FTSE 100. That means passive and index tracker funds don’t back them. But as one standard-listed business points out, it would be too tiny to be included in a FTSE index anyway. 

Aim, for all the criticism as a lightly-supervised wild west market, is tougher in some ways. It doesn’t fret much about control by dominant investors, prospectuses or demand lengthy earnings track records. But junior market companies must employ nominated advisers, or Nomads, to ensure they abide by London Stock Exchange rules.

And Nomads charge a few thousand pounds a month, says one issuer. Every layer of protection adds to price. Holding a shareholder vote for deals costs more and takes time. The standard listing gives businesses more agility to do deals.

That doesn’t offset the risks for investors, though. For them, standard, as with train tickets, means second class.


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