RECOMMENDATIONS FOR A STRONGER
IPO CLIMATE FOR DENMARK’S GROWTH
ANALYSIS & CATALOGUE OF PROPOSED MEASURES
JUNE 2014
A
TABLE OF CONTENTS
How to benefit from a strong, Danish stock market?...........................................................1
IPO Task Force..............................................................................................................3
The stock market as political priority.............................................................................4
What is happening outside Denmark?...................................................................................5
Participants and contributors to the NASDAQ OMX Copenhagen IPO Task Force..........6
Problem, analysis and recommendations.............................................................................7
New best practice for IPOs and a guide to life as a listed company............................8
Incentives for improved investor focus on Small Cap companies.............................. 11
Incentive to improve equity research..........................................................................13
Incentives to increase liquidity....................................................................................15
Appendices..............................................................................................................................17
1. Proposal on a Danish Share Savings Account.......................................................17
2. Catalogue of measures and recommendations......................................................19
HOW TO BENEFIT FROM A STRONG,
DANISH STOCK MARKET?
The economy needs growth and that growth can only come from Danish business and industry,
which historically has helped create the wealth and prosperity our society enjoys today.
Over time, many Danish companies have grown their businesses via the Danish’s stock market,
which for more than 200 years has provided the framework for the meeting between investors
with risk capital and Danish businesses with growth and expansion on the agenda.
This meeting has enabled companies to raise capital for acquisitions, research and expansion,
and resulting in job creation and further investment in production.
But, this exchange between investor and businesses has also been instrumental in helping
ordinary citizens in Denmark to become co-owners of Danish companies: co-owners who, as
shareholders, have taken an ownership interest in Danish business and industry.
Denmark has a strong tradition for fostering small and medium-sized enterprises. However, it is
pivotal that far more companies have the opportunity to grow into large companies. Historically, the stock market has provided the platform that has enabled companies to source funding
bypassing the bank loan, where wealth is distributed and ownership placed in multiple hands.
The stock market has been a firm anchor in helping retain Danish jobs and keeping Danish
companies headquartered in Denmark. There are several examples of Danish companies that,
after being acquired by foreign owners, have relocated their headquarters, resulting in a loss of
Danish jobs.
It has to become easier for Danish businesses to retain and create new jobs if we are to meet
and overcome the challenges to growth facing Denmark today.
In the past, the stock market has been key in wealth distribution and companies’ growth opportunities. Yet, we believe there is a much greater potential, because the key to creating better
economic growth through job creation lies with smaller companies.
At NASDAQ OMX, we also operate marketplaces outside Denmark. Looking at these operations, two things spring to mind that we do not encounter in Denmark:
1. First of all, a broad-based investor culture provides a strong foundation for attracting smallcap companies to the stock market.
2. Second, we can see that when smaller companies list on the stock exchange in Sweden,
for example, they have a much higher job creation rate than non-listed, private Swedish
companies.
1
A Swedish survey1 showed that in 2006–2013, small, listed companies had an annual job
creation rate of 36 per cent. During the same period, privately owned Swedish companies had a
job creation rate of 1.5 per cent.
In other words, companies gaining access to a stock market with long term risk capital experience accelerated growth. But this presupposes that investors are willing to take a risk and to
activate their otherwise inactive savings to the benefit of the Danish economy and growth in
Denmark.
A high level of activity and risk appetite on the stock exchange is absolutely essential for Danish
companies trying to raise capital on the stock market. In fact, Denmark is doing quite well when
it comes to large cap companies.
In the first five months of 2014, the value of daily trading in shares on NASDAQ OMX Copenhagen amounted to DKK 5.2 billion, propelling the Danish equity market past both the Finnish and
the Norwegian markets in terms of trading turnover.
Source: NASDAQ OMX market research. Turnover of share-based securities, EUR bn.
Moreover, recent listings in Copenhagen have shown that there is both a willingness and an
ability in the Danish equity market to absorb large IPOs on the Danish stock exchange. In fact,
NASDAQ OMX Copenhagen has listed most of the largest IPOs in the last five years compared
to any other exchange in the Nordic region.
In addition, the Danish equity market and Danish investors have proved to be very receptive,
absorbing more than DKK 15 billion in new share issues and share sales in the first five months
of 2014.
This strong improvement enjoyed by the stock exchange, investors and large-cap companies
should be used to support small and medium-sized enterprises in search of capital.
1 An Improved Climate for IPOs for Sweden’s Growth - Problem Analysis and Proposed Actions; NASDAQ OMX
Stockholm, September 2013: http://www.nasdaqomx.com/ipo-actionplan-sweden
2
We believe more potential lies in the equity market, in investors and in the growth opportunities
available to Danish companies.
The more investors and people with savings are actively willing to put their money into Danish
companies, the better opportunities Danish companies will have to raise capital for growth and
job creation.
IPO Task Force
To capitalise on that potential, as many as 50 market participants came together in December
2013 in three working groups to discuss the specific challenges facing Danish companies wishing to float their shares.
The recent IPOs of Matas, ISS and O.W. Bunker showed that the Danish equity market is capable of welcoming mid-cap and large-cap companies wanting to go public.2
Matas was the first company to demonstrate that it was possible to float a mid-cap company.
For its part, the O.W. Bunker IPO showed that it was possible for a company relatively unknown
in the Danish media and investor landscape to attract more than 20,000 new shareholders to a
business area that only very few people in Denmark had even heard of in March 2014.
In other words, the market is open and ready for new listings. Therefore, the task ahead of us is
to ensure that small-cap companies also find their way to the market and that the Danish stock
market is better prepared to welcome new flotations.
The three working groups discussed the listing process, the investor landscape and possible
obstacles to a more inclusive Danish equity culture. The discussions led to a specification of
challenges, which the working groups then explored, trying to find solutions.
The result was a number of recommendations and proposed solutions, which we now have
compiled in this catalogue of recommendations.
One example is the high taxation on capital gains and dividends in Denmark. Danish investors
pay up to 42 per cent tax on their capital gains and dividends. The rate is 30 per cent in Sweden
and 19 per cent in the United States, and the OECD average of 16.4 per cent indicates that still
other countries have even lower tax rates on share income. Having the Danish rate adjusted to
match the Nordic average of roughly 30 per cent would, in our opinion, not be unreasonable.
Quite simply, the large difference in tax on share income means that Danish investors demand
a correspondingly higher minimum return from investing in an IPO than a US investor would
require from a US IPO. And then people wonder why US investors have more risk appetite.
As already mentioned, we operate marketplaces in other countries as well, and in many ways
we are just as happy to have an IPO in Denmark as to have one on the NASDAQ in the United
States. We are part of a global company, and our first duty is to cater to the needs of our customers. Whether that need is met here in Denmark or in other of our markets is ultimately up to
companies and investors.
2 The mid-cap segment consists of companies with a market capitalisation of EUR 150m–1bn, the large-cap segment consists of companies with a market capitalisation of more than EUR 1bn.
3
We would like to stress that, just because we would like to see more small companies float in
Denmark, we acknowledge that the Danish stock exchange may not be the right marketplace
for all companies. From time to time, we will see Danish companies seek a listing elsewhere,
either because the company in question or its investment case is not attractive to Danish investors or quite simply because the nature of its business means that it can attract a higher valuation in, for example, the United States.
Ultimately, Danish investors are to decide whether a company can successfully go to market,
and they naturally require companies of quality with everything in order.
The stock market as political priority
In addition to the levers that the market participants and we as a stock exchange can pull, as
well as the general rules that listed companies and IPO candidates should always observe,
this recommendations catalogue indicates a number of problems with the framework provided
by current Danish rules and regulations for investing in equities in Denmark and thus with the
access small Danish companies have to risk capital.
Since it is clear that NASDAQ OMX Copenhagen is a highly efficient vehicle for mid- and largecap companies, and because we can also see that much of the growth potential lies with the
small companies, we have a duty to draw attention to the skewed impact that the current rules
and regulations have on small companies seeking to raise capital in the Danish market.
At the end of the day, if small companies are unable to grow in Denmark, the loser is not the
stock market. Denmark has had a stock exchange for more than 200 years, and even during
the worst financial crisis since 1929, Danish listed companies were able to raise DKK 38 billion
in 2008 and DKK 31 billion in 2009 through rights issues and other corporate actions.
We will all be affected if small companies are unable to grow. In other words, making the stock
market more accessible to small companies and improving access to raising capital in the Danish stock market for investment in growth is in everyone’s interest.
As a country, we face major challenges in trying to get back on track for growth, and growth is
essential if we are to retain and continue to build prosperity and create new jobs. Those challenges make it imperative that we take the right decisions.
At NASDAQ OMX, we believe that the Danish economy would be much stronger if Danish companies were able to raise capital in the market on more attractive terms, and if it were easier for
ordinary citizens to take ownership and share in the responsibility for generating the growth that
we will all want to benefit from in the future.
The stock market is a unique concept in the business history of the Western world, and it should
continue to play an important role for companies both large and small. Let us all exploit the
potential available from encouraging as many people as possible to take ownership and share
in the responsibility for helping Denmark achieve its full growth potential in a fair and transparent
market. We can do it if we can find better ways to use the historically high level of savings we
have in our bank accounts and pension savings for investing in the future of Danish business
and industry.
When it comes to our businesses, we are all shareholders in one way or another, because we
all share an interest in achieving growth and prosperity for Denmark.
4
WHAT IS HAPPENING OUTSIDE DENMARK?
The challenges small companies face in financing growth is not unique to Denmark. Initiatives
similar to the IPO Task Force set up in Denmark have been launched in a number of other
markets. The main common denominator of such initiatives is the realisation that open and
transparent stock markets should play a key role in the future growth potential of businesses by
providing the necessary opportunities to raise capital.
Some examples of other initiatives are:
1. MiFID II on harmonisation and quality assurance in SME marketplaces and a revision of the
Transparency Directive intended to reduce the administrative burden on SMEs.
2. The Jobs Act in the United States, whose main purpose is to promote job creation by giving
emerging growth companies better access to financing without having to meet all the requirements of a listed company.
3. The London Stock Exchange establishing a High Growth Segment designed to assist
growth companies in the technology sector in raising capital without having to fulfil the full
set of rules applying to the premium and standard segments, for example in terms of historical financial data and free float.
4. The efforts by Euronext to introduce an “entrepreneurial exchange”.
5. In autumn 2013, NASDAQ OMX Stockholm issued its IPO Task Force report with recommendations for strengthening the Swedish capital market and giving companies better
access to financing. Among the recommendations are easing company disclosure requirements and the introduction of an intraday auction.
5
PARTICIPANTS AND CONTRIBUTORS TO THE
NASDAQ OMX COPENHAGEN IPO TASK FORCE
It would not have been possible to prepare this report and its recommendations without the contributions and active involvement of key players and stakeholders in the Danish stock market.
The time allocated and the interest shown in the project bears witness to a genuine commitment
among market participants to strengthening a pivotal link in the financial system.
The content, measures and recommendations of the report were provided exclusively by NASDAQ OMX Copenhagen, but were produced after discussions with and input from the IPO Task
Force participants listed below.
A total of 55 people contributed to initiating the work of the IPO Task Force and helping it reach
its conclusions. Each of the people listed below contributed actively to providing analysis and
proposing measures in the three working groups.
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
++
Allan Reimann, Global Connect
Casper Nørgaard, Handelsbanken
Christian Hansen, Nordea
Christian Lindholm, Danske Bank
Christian Lundgren, Kromann Reumert
Claus Wiinblad, ATP
Frank Gad, SP Group
Gorm Boe Petersen, DVCA
Gregers Kronborg, NorthZone
Hans Henrik Crois Christensen, Exiqon
Jacob Andersen, Nordnet
Jannick Nytoft, DVCA
Jens Otto Damgaard, PwC
Jesper Lau Hansen, University of Copenhagen
Klaus Søgaard, Gorrissen Federspiel
Kaare Danielsen, Jobindex
Lars Vinge Frederiksen, Matas
Marianne Philip, Kroman Reumert
Niels Erik Nielsen, Lett
Niels Mengel, Danish Shareholders’ Association
Niklas Bjerggaard Andersen, Deloitte
Peter Lyck, Hannes Snellman
Sabine Braad, SEB
Steven Brooker, SEB
Thomas Frøbert, Bech Bruun
Thomas Lindquist, ABG
Thomas Steen Hansen, Danske Bank
Torben Hansen, Nordea
Bjørn Sibbern, NASDAQ OMX Copenhagen
Carsten Borring, NASDAQ OMX Copenhagen
Peter Legind-Hansen, NASDAQ OMX Copenhagen
Anne Zeuthen Løkkegaard, NASDAQ OMX Copenhagen
Jakob Kaule, NASDAQ OMX Copenhagen
Javier Lopez Garrido, NASDAQ OMX Copenhagen
6
PROBLEM, ANALYSIS AND RECOMMENDATIONS
In this section, our recommendations are based on the obstacles and challenges small companies may face when seeking to raise capital and find new owners on the stock exchange. Small
companies are in this document defined as having a market capitalisation of less than DKK 2 billion.
The reader will note that some of the recommendations are directed specifically at the stock
exchange: these are initiatives that it will be up to NASDAQ OMX Copenhagen to implement.
Other recommendations point to other stakeholders and are aimed at market participants,
authorities, legislators, companies and investors. Naturally, the Danish market is more than the
stock exchange: it is equally dependent on the appropriate actions of market participants and on
legislators providing a framework.
We sincerely hope that the analysis and recommendations derived from the work done by the
IPO Task Force can trigger a healthy debate on how the stock market and the upward trends
NASDAQ OMX Copenhagen is seeing can play a greater role in generating growth and creating
jobs, in Danish businesses in general and in small companies in particular.
Some of the recommendations have already been implemented and others are in the pipeline,
but adjusting the rate of tax on share income, for example, will depend on external factors and
should be dealt with politically.
7
New best practice for IPOs and a guide to life as a
listed company
PROBLEM
The IPO process and life on the stock exchange is often perceived as difficult, cost-intensive
and incomprehensible. What are the myths and what are actual obstacles?
ANALYSIS
Prospectuses and the IPO process
In Denmark, the Financial Supervisory Authority (“FSA”) administers prospectus requirements,
and only the FSA can approve a prospectus. NASDAQ OMX Copenhagen admits companies
to trading after the FSA has approved their prospectus. Accordingly, NASDAQ OMX Copenhagen cannot ease the requirements, prescribe new requirements or determine how a prospectus
approval process should be conducted.
Nevertheless, based on the discussions among auditors, lawyers, compact representatives and
corporate finance people in the working groups, we believe it is relevant to submit the following
observations and proposals for improvement.
In the years preceding the financial crisis, from 2005 to 2008, a total of 78 companies were
admitted for trading on NASDAQ OMX Copenhagen and First North Denmark; in the five
years after that period, a total of 11 new companies were listed and admitted for trading. This
would indicate that, for most banks and advisers, it has been several years since they last went
through the process of taking a company to an IPO. This, we believe, warrants an update of
the best practices for listing Danish companies, now that the most severe and longest-running
financial crisis since 1929 is behind us.
We have seen a move towards international prospectus standards during and after the financial
crisis for the simple reason that most post-crisis IPOs have been lead-managed by international finance houses. This has created a very extensive and detailed prospectus standard with
much more detailed sections on risk factors and more comprehensive disclaimers than seen
previously. This was all done in the best of intentions, but we do not believe that it has benefited
investors, issuers or the market as such. As a matter of fact, today’s prospectuses can often
be characterised as a disclaimer document rather than a document providing information to
investors. This makes prospectuses much more complex than necessitated by the prospectus
requirements and investor considerations. It was a widespread view among the advisers in the
IPO Task Force that the advisory industry holds part of the responsibility for this trend.
At the same time, however, it is important to acknowledge that this situation cannot be changed
for IPOs with an international appeal, because in such cases the international standard
should apply.
Overly comprehensive and complicated prospectuses not only pose a problem for investors,
and the sheer volume of text in a prospectus does not in itself give investors a better understanding of the contents. Another thing to consider is the fact that the process of preparing a
prospectus is quite cost intensive. These costs will have to be reflected in the price at which
a company’s shares are offered and must be taken from the proceeds needed to support
future growth.
8
In addition, the actual prospectus approval process is perceived as lengthy, laborious and complex. This is partly due to the many parties contributing to writing a prospectus and a perception
that the sooner a first prospectus draft is submitted, the faster it will get FSA approval. In fact, it
impedes the approval process when the FSA and NASDAQ OMX Copenhagen are required to
read, suggest corrections to, comment on and return an incomplete prospectus draft more times
than absolutely necessary.
A third contributing factor in running up the costs of an IPO process and thereby discouraging
both companies and would-be investors are the disproportionately large IPO management
teams seen in post-crisis IPO processes. Previously, it was not unusual to see an IPO being
managed by a group of two or three banks, but today it is much more common to have teams of
five banks, regardless of the size of the IPO candidate. Furthermore, prospectus verification has
become a standardised process in Denmark. The working groups agreed that the verification
process generally improves the quality of the final prospectus, but also that the process should
be aligned with the floating company’s market capitalisation. This implies that there may be
situations in which a verification process is not needed at all.
Accordingly, it should be possible to restore best practice to the effect that both the volume of a
prospectus and the size of an IPO management team reflect the company’s market capitalisation, which then allows the approval process to be run in a more efficient manner, especially for
small companies.
Life after the float
The general feedback from the working group was that life after a float was not in itself perceived as complex or burdensome, assuming that the business is well-organised and has its
affairs in order. However, several parties emphasised that the rules for reporting and public
disclosure of insider share dealings and the rules on major shareholders were considered to be
administrative burdens.
It was also stressed that public sanctions on violations of stock exchange legislation such as
police notification and public disclosure of even relatively minor offences are considered enough
of a burden that it can actually dissuade prospective IPO candidates from floating.
RECOMMENDATIONS
Prospectuses and the listing process
►► Tailor made prospectuses to suit the needs of small companies
It would be possible to produce a less comprehensive prospectus that would still comply
with all prospectus requirements. One claim that emerged from the discussions was that
a small company could float on the basis of a 50-page prospectus exclusive of annexes.
However, this has yet to be verified.
This kind of model would be relevant for smaller listings in offerings limited to and specifically targeting the Danish or the Nordic markets and investor segments.
Until such a process has been applied in successful IPOs and a new market practice has
evolved, an anchor investor may be required to provide a seal of approval for the investment case from the perspective of retail investors.
►► Optimised prospectus approval process vis-à-vis the FSA
It should be possible to shorten the timetable for FSA prospectus approval.
9
++ Under certain circumstances, approval could be achieved over a period of 12 days and
with three filings.
++ A prospectus could be processed concurrently with the application submitted to
NASDAQ OMX for admittance to trading under the listing conditions of the stock exchange. The verification process, due diligence, should be resolved before the first filing
with the FSA.
This would require the prospectus to be virtually final at the first filing: there should be no
outstanding issues at this point.
►► Adjust the size of IPO management teams
The number of bankers and advisers appointed should better reflect the size of the flotation capital, ie. the company’s market capitalisation. Danish and Nordic banks are capable
of taking a small company to an IPO without involving numerous international investment
banks.
Life after the float
►► SME committee
NASDAQ OMX Copenhagen intends to set up an SME committee to follow up on the
challenges and potential for improvement and to work to dispel the myths about life after
the float.
►► A guide to life as a listed company
A “before-during-after” list of the formal and informal requirements should be prepared for
companies already listed and companies contemplating going public.
10
Incentives for improved investor focus on Small Cap
companies
PROBLEM
Less risk appetite for small-cap stocks in changed investor and broker landscapes.
ANALYSIS
The financial crisis and the professionalization of the Danish capital market has created an investor landscape in which small pension funds have begun to outsource their equity mandates
to large portfolio managers and pension industry players to a much greater extent. Small pension funds were previously actively involved in bringing small companies to flotation, but they no
longer make that decision themselves.
Today, mandates and decision-making powers are concentrated in the small number of large
pension fund portfolio managers in Denmark or even in London. These managers run largescale businesses and have no interest in becoming majority shareholders in a large number
of small companies. Nor does investing relatively small amounts in a large number of small
companies make much business sense to them.
Fewer small broker firms
There are virtually no more small and medium-sized securities companies with an in-house
corporate finance department and their own investor base left in the new Danish landscape.
Securities brokers such as Gudme Raaschou, for example, have disappeared from the market.
Previously, these small and medium-sized broker houses played a constructive role in listing
small-cap companies and functioned as a distribution link to high net worth retail investors. This
type of small and medium-sized securities brokers still play a role in the Swedish market, and
they are capable of bringing small companies to an IPO, providing research coverage and acting as the distribution link to the retail segment. In 2014 to date, NASDAQ OMX Stockholm has
welcomed more than 17 new floats, most of which were listed with an initial market capitalisation of less than SEK 1 billion. Such securities broker companies include Erik Penser, Mangold,
Remium, Redeye and Pareto Öhman.
Tax on equity income
Capital gains and dividends are taxed at up to 42 per cent in Denmark. This rate puts Denmark
at the top of the list in an OECD context, and it constitutes a heavy extra cost burden in Danish
companies’ efforts to raise long-term risk capital. Despite the extra cost, Danish investors are
clearly willing to buy into large cap companies able to document solid earnings and returns.
The challenge arises when a Danish investor looks to invest in Danish growth companies,
because the inherent risk of this type of company is augmented greatly by the extra cost of
investors being taxed at up to 42 per cent on share income.
By comparison, a Swedish shareholder pays 30 per cent, a Norwegian shareholder pays 28 per
cent, an American shareholder pays 19.1 per cent, and the OECD average is 16.4 per cent.
We also know from a Swedish survey that small companies that float are a major source of
job creation. Since 2006, listed small companies in Sweden have recorded annual job creation
growth of 36 per cent. During the same period, the corresponding figure for privately owned
11
Swedish companies is 1.5 per cent. In other words, job creation accelerates considerably when
small companies float in Stockholm.
The Danish and Swedish equity markets have many things in common. For example, NASDAQ
OMX operates the marketplaces in both countries. Much of the framework that we are responsible for through our stock exchanges is the same in the two securities markets, including the
stock exchange rules, the way we operate the marketplace and the way we attract securities
brokers and bankers from the Nordic region and the rest of the world.
But there are also differences: differences that encourage small companies in Sweden to create
Swedish jobs and give Swedish investors an incentive to be active in the Swedish equity market.
The importance of having an anchor investor
To many private investors, an anchor investor who takes a stake in a stock is a seal of approval
of the stock and the investment case. An anchor investor does not necessarily have to be a
major Danish pension fund. It can be a family-owned fund, a private fund or a large company
operating in the same industry sector.
Overall, a lower risk appetite translates into lower evaluation for small companies, all other
things being equal. Lower evaluation is often a determining factor for small companies’ wish to
seek a flotation in Denmark.
RECOMMENDATIONS
►► Get new banking segments involved
NASDAQ OMX plans to raise interest from new banking segments that do not currently participate in IPO management teams in order to take advantage of their substantial distribution
power to high net worth retail investors and the retail investor segment in general. NASDAQ
OMX Copenhagen believes that Danish banks, including the country’s medium-sized banks,
can come to play a much more key role in equity distribution and small flotations.
►► Search for new types of anchor investor
IPO managers and advisers should work to identify and approach alternative anchor investors independently of the major pension funds.
►► Encourage a competitive rate of tax on equity income
NASDAQ OMX Copenhagen will work to make tax conditions more attractive for investors,
e.g. through a simple and competitive rate of tax on share income by
++
++
++
++
aligning the Danish tax on share income with the Nordic level;
introducing a share savings account similar to the Swedish investeringssparkonto;
creating standard tax rules for private individuals on capital gains and losses on listed
shares; and
abolishing mark-to-market taxation of listed portfolio shares of company investors.
►► Introduce a Small and Mid Cap Interest Register
NASDAQ OMX plans to introduce and maintain a list of Danish banks that actively want to
invite Small and Mid Cap companies and IPO candidates to attend investor meetings with
their private banking and other high net worth clients.
12
Incentive to improve equity research
PROBLEM
There is a widespread lack of research coverage in the Small and Mid Cap segments.
ANALYSIS
Equity research is a tool with well-documented effects for increasing investor interest in a stock.
A research report attracts attention and visibility to a stock and makes the investor better able to
make an informed investment decision.
It is a generally accepted fact that a lack of research coverage can lead to less investor interest
and thus to less liquidity and turnover in a stock. This is not only a Danish phenomenon, but a
general challenge for all of Europe.
For the financial sector, the financial crisis squeezed earnings from share trading, and as the
costs of research coverage are often covered by income from the banks’ markets divisions, the
declining income from share trading has forced many banks to cut back on their Danish equity
research resources.
This has severely impacted the smaller stocks, which already provided the lowest turnover,
liquidity and earnings. This makes sense from a resource perspective. From a market perspective, however, it adds insult to injury: while, on balance, the larger stocks already attract a great
deal of attention in the market, small papers often only get coverage from one or two banks.
As equity research is used not only by private investors, but also very much by the professional
and semi-professional segments, having research coverage for a given stock is of huge importance for how liquid and attractive it is.
In many cases, new stocks start life on the stock exchange with research coverage. Typically, a
bank from the IPO management team will provide post-IPO coverage for a period determined at
its own discretion.
One parameter that should not be overlooked is the fact that confidence in a research report will
to a large extent depend on the personal and professional expertise of each individual analyst
and bank.
It is important to point out that a research model should be self-sustaining and commercially
viable in order to attract and retain the necessary expertise that equity research relies on for
credibility.
RECOMMENDATIONS
►► Improve equity research through a standard fact sheet
NASDAQ OMX plans to initiate a fact sheet model to be provided by an independent research company able to deliver quantitative tables of key and comparative data for benchmark analysis purposes that cover all companies listed on NASDAQ OMX Nordic across all
Small, Mid and Large Cap segments.
13
In addition to serving the purpose of allowing investors to compare all stocks listed on NASDAQ OMX’s Nordic marketplaces, the solution should be easily scalable so that companies
can add a qualitative component to the key indicators delivered by the research provider.
►► Involve and motivate new banks on IPO management teams to expand their equity
research
Involving medium-sized Danish banks in IPO management teams for purposes of distribution to private investors could motivate the banks to add more small caps to their research
universe.
14
Incentives to increase liquidity
PROBLEM
Low liquidity in the Small Cap segment.
ANALYSIS
Turnover in the Small and Mid Cap segments has nearly doubled in the past 18 months.
During this same period, bid/ask spreads have dropped to their lowest since NASDAQ OMX
began monitoring price spreads in the Small, Mid and Large Cap segments. The higher turnover and improved liquidity reflects the strong interest and attractive return potential found in the
Small and Mid Cap segments.
Historically, liquidity has been low in the Danish Small and Mid Cap segments: Danish institutional investors have often found it difficult to exit a stock once they had taken a position, for
example in an IPO.
Even with the growing market activity and increased trading in the Small and Mid Cap segments
of the last 12 months, many investors have experienced liquidity in certain Danish Small Cap
stocks as being relatively thin. A lack of liquidity is not purely a Danish phenomenon, but an
issue that most exchanges across the world are trying to address and resolve.
The perception of a lack of liquidity can act as a deterrent that encourages investors to refrain
from investing in low-liquidity stocks. In other words, it is a weighty obstacle in a small company’s efforts to find new owners and investors in the Danish stock market.
RECOMMENDATIONS
►► Liquidity Provider
NASDAQ OMX Copenhagen will introduce a liquidity provider scheme as used in Sweden.
A liquidity provider arrangement would help formalise and make visible the benefits available to listed companies that use the services of a liquidity provider. A liquidity provider
would make it easier and cheaper for private investors to trade shares in companies subscribing to a liquidity provider arrangement.
A liquidity provider arrangement modelled on the Swedish experience would place a cap
on price spreads in a stock and on the amount of time potential liquidity providers should
provide bid/ask prices for a minimum order for a stock.
It is essential that NASDAQ OMX can lay down clear guidelines to ensure that companies
and investors see the attractive benefits available from a liquidity provider arrangement.
►► Intraday Auction
NASDAQ OMX Copenhagen has introduced intraday auctions aimed at improving liquidity
in thinly traded stocks.
Today, trading on modern stock exchanges takes place in so-called continuous trading.
This means that dealers place their buy or sell orders in the order system, where they are
matched, producing a trade. In other words, a trade is executed as soon as a buying order
can be matched with a selling order. On average, about 70,000 transactions are executed
15
daily in the Danish stock market, the highest-ever level seen on NASDAQ OMX Copenhagen.
The stock market is opened and closed by a daily opening or closing auction; the purpose of
these auctions is to provide fresh and relevant opening and closing prices. An added bonus
is that an increasing proportion of the overall turnover is generated during these auctions.
From 2007 to 2013, the proportion of turnover generated during the auctions trebled.
We would like for this consolidating effect on liquidity to also benefit thinly traded stocks,
and to that end, in December 2013, we introduced a midday auction for the purpose of concentrating liquidity and enhancing the potential for a price match.
Intraday auctions are held each business day from 13:30 to 13:35 CET. During that period,
NASDAQ OMX compiles all buy and sell orders and uses them to determine an equilibrium
price to be employed when continuous trading recommences.
By introducing intraday auctions for Small and Mid Cap shares, NASDAQ OMX Copenhagen has eliminated some of the risk and uncertainty investors experience when investing in
thinly traded stocks.
►► Top ten investor factors
NASDAQ OMX Copenhagen will prepare a guide on improving liquidity containing the ten
most important factors that Danish investors look at when evaluating a listed company. It will
form part of NASDAQ OMX Copenhagen’s “before-during-after” list.
16
APPENDIX 1
Proposal for a Danish share savings account
Capital gains and dividends are taxed at up to 42 per cent in Denmark. This rate puts Denmark
at the top of the list in an OECD context, and it constitutes a heavy extra cost burden in Danish
companies’ efforts to raise long-term risk capital. Danish investors accept the extra cost when
they buy into large cap companies able to document solid earnings.
The problem arises when Danish investors look to invest in Danish growth companies, because
the inherent risk of this type of company is augmented greatly by the extra cost of investors
being taxed at up to 42 per cent on share income. By comparison, a Swedish shareholder pays
30 per cent, a Norwegian shareholder pays 28 per cent, an American shareholder pays 19.1 per
cent, and the OECD average is 16.4 per cent.3
In addition, the job creation rate in Sweden is higher for listed small companies. From 2006 to
2013, small, listed companies in Sweden recorded annual job creation growth of 36 per cent.
During the same period, the corresponding figure for privately-owned Swedish companies
was 1.5 per cent. In other words job creation accelerates considerably when small companies
float in Stockholm.
The Danish and Swedish equity markets have many things in common. There are also
differences, however. Differences that encourage small companies in Sweden to create
Swedish jobs and give private investors in Sweden an incentive to be active in the Swedish
equity market.
SWEDISH SHARE SAVINGS ACCOUNTS
One thing that Sweden does different is the share savings account, called the Investeringssparkonto (“ISK”), which the Swedish government introduced in 20124. Since launch, 438,000
people have opened an ISK.
The Swedish tax agency estimates that some 20–30,000 of these are old share custody accounts re-categorised as ISKs. In other words, a large majority of ISKs are new shareholders
representing a new source of tax income. This is an estimation from the Swedish tax agency,
however.
In 2013, the average tax income to Sweden was SEK 4,000 per ISK. Sweden’s Ministry of
Finance estimated in 2011 that new ISK-related savings would amount to SEK 50–100 billion
per year.
The ISK is an alternative to ordinary tax on share income. Investors can freely choose to be
taxed under either scheme.
3 Source: Denmark has the highest tax on share income of all OECD countries; CEPOS, 31 October 2012
4 Source: Förslag om investeringssparkonto till Lagrådet; http://www.regeringen.se/sb/d/14761/a/168570
17
HOW IS ISK CALCULATED?
Tax on ISK is calculated on the basis of a capital base. The capital base is calculated once a
year and represents 25 per cent of the sum of
++
++
++
++
the value of the assets at the beginning of each quarter;
amounts paid into ISK during the year;
financial instruments the account holder transfers to his or her ISK during the year; and
financial instruments transferred from other investment savings accounts during the year.
The capital base is then multiplied by a pre-determined factor, which is the Swedish government
lending rate on 30th November of the year preceding the income year in question. The product
of the equation is the estimated income that automatically appears on an investor’s income tax
return and the amount is treated as capital income. This capital income is taxed at a rate of 30
per cent.
WHAT ARE THE COSTS OF AN ISK?
Sweden’s Ministry of Finance has estimated the permanent budget effects of ISK to be minus
SEK 2 billion. The costs of introducing ISK in Sweden were offset by the concurrent adjustment
of general capital gains taxation to 30 per cent.
The introduction of ISK implies an expense to the Swedish treasury of SEK 2 billion per year.
Whether that equation can be applied in a Danish framework is something for the Danish civil
servants to consider. However, it should be noted that in itself the introduction would be expected to attract first-time investors to the market, which would represent a new source of budget
income for the Danish administration.
BENEFITS OF A DANISH SHARE SAVINGS ACCOUNT
Based on the experience in Sweden, we believe that a share savings account offers a number of benefits to investors. Because the tax is paid and reported automatically, rules become
easier and more simple to follow for investors. The share savings account and the fixed annual
tax calculation mean that investors have no incentive to speculate in when best to realise an
investment.
Over a short period of time, the ISK has attracted a relatively large number of first-time investors. In other words, this could be a good way to promote a nascent share investment culture
in Denmark and to motivate investment in Danish companies, whether in newly-listed small,
growth companies or in large, well-known listed industrial companies.
18
APPENDIX 2
Catalogue of measures and recommendations
1. Recommendation to size prospectuses to the needs of small-cap companies
2. Recommendation for optimising the prospectus approval process vis-à-vis the FSA.
3. Recommendation to adjust size of IPO management teams
4. NASDAQ OMX Copenhagen has set up an SME committee
5. NASDAQ OMX Copenhagen plans to prepare a ”Before-During-After” list of requirements,
as a guide to companies after the float.
6. NASDAQ OMX Copenhagen plans to introduce a Small and Mid Cap Interest Register
7. NASDAQ OMX Copenhagen will seek to activate new banking segments for IPOs
8. Recommendations to search for new types of anchor investors
9. Recommendation to align tax on share income to a reasonable level
10. NASDAQ OMX Copenhagen plans to initiate Fact Sheet model to enhance the potential for
equity research.
11. Recommendation to involve and motivate new IPO management team banks to expand
their equity research.
12. NASDAQ OMX Copenhagen plans to introduce a Liquidity Provider scheme
13. NASDAQ OMX Copenhagen has introduced Intraday Auctions
14. NASDAQ OMX Copenhagen to produce a Top Ten of investor factors for companies
19
20