Regulators step in
05 July, 2016
The quality of companies seeking to sell their shares through initial public offerings (IPOs) has, in our view, been increasingly questionable.
Recently listed Redbubble has designers put their work on its website so that consumers can have designs they like printed on t-shirts, cushions, canvas, or whatever they choose. This may well be a clever combination of technologies; but is it "... the most diverse creative community and marketplace on the internet" as described in the company's annual report?
We were recently offered shares of what was described as a "local category killer in the book sector" which was apparently the "leading Australian online retailer of books, e-books, DVD's." The internet has no borders, so how does an online bookseller compete with the giant that is Amazon?
This issue came to a head when the Australian Securities Exchange (ASX) refused to permit the listing of online music streaming company Guvera. Aside from making significant losses, the company was burning through cash so fast that it risked insolvency. We did not like that a company owned by one of Guvera's co-founders stood to profit from the IPO, nor the reported rumours of kickbacks and unfair dealing in its previous capital raisings.
So was the ASX right to prevent the company offering its shares to investors? Listing rules ensure that companies offering shares give full, accurate and relevant information to potential investors. By stopping Guvera's listing after it had complied with these rules, the ASX effectively changed the rules. While we don't like poor quality companies, we support a market where the rules are applied evenly to everyone.
CEO of portfolio company Technology One echoed this view when he said, "The ASX has made an arbitrary decision ... companies meet the guidelines, or they don't ... They did meet it, so they should be allowed to list."