Some companies on the ACE Market are going for the offer for sale option to realise gains

PETALING JAYA: A change in the listing rules when the Mesdaq became the ACE Market has given rise to an interesting trend among companies seeking listing in the latter the offer for sale option of selling shares.

Companies listing on the ACE Market have two ways to raise funds, either through the sale of new shares (whereby the money goes to the company) or a combination of that and the offer for sale of existing shares (whereby the money goes to existing shareholders, i.e. managers, directors and promoters).

Based on data from the Bursa Malaysia website, nine out of 15 of the companies that are listing or have listed on the ACE Market have chosen to sell shares via offer for sale, with one recent listing generating as much as 71% of the total funds raised for existing shareholders.

The Mesdaq Market is the predecessor to the ACE Market, and previously there was no allowance for companies to raise funds through an offer for sale.

However, on Aug 3, 2009, the Main and Second Board merged to become the Main Market while the Mesdaq evolved into the ACE Market.

Under the ACE Market, a company is allowed to sell shares through offer for sale provided it has generated one full year of operating revenue and for promoters, in aggregate, holding not less than 45% of the enlarged issue and paid-up capital.

The question is whether these new companies listing on the ACE Market are cashing out too fast, since they are only just starting out and could instead channel the funds raised to grow the business.

According to an analyst with a local research house, it would appear that the ACE Market is indeed being used by existing shareholders to “realise their returns”.

“Regulations in the ACE Market are less stringent and thus it can be used as a venue for cashing out. Companies need not have a proven track record to list on the ACE Market, unlike the Main Market where this a requirement,” he said.

He added that this was why institutional investors tend to veer away from the ACE Market.

“But you can realise your returns earlier in the ACE Market than in the Main Market,” the analyst said.

Minority Shareholder Watchdog Group CEO Rita Benoy Bushon said the offer for sale was a common practice in the ACE Market as venture capitalists (VC) and private equity firms use it as their exit strategy from companies that were en route to listing.

“As a VC, your mandate is to grow a company to the desired level in X number of years and exit when the time is right, at which time they must see a return on investment.

“Similarly, a private equity firm will develop a company from greenfield to brownfield status and exit after they have accomplished this,” she said.

A fund manager said one should not make assumptions about why companies chose to have an offer for sale as the Securities Commission (SC) has the appropriate rules in place. “The SC requires companies listing on the ACE Market to outline how they plan to spend the funds raised in an IPO, and any changes to this plan must go through a consultation with the SC as well.

“The ACE Market is supposed to nurture entrepreneurs and help them realise their potential. It must give space for possibilities, otherwise the growth of these new companies will be stifled. For this reason, it is also a higher-risk investment,” he said.

He said this was a free market and investors were ultimately responsible for their investment decisions.