The JSE Securities Exchange last week announced that "an alternative exchange", called AltX, is to be launched in October this year. AltX will not be a new stock exchange as such, but a division of the JSE modelled loosely on the Alternative Investment Market in London.
AltX will target black economic empowerment and junior mining companies. The Department of Trade and Industry is involved in the AltX initiative because it dovetails with the government's efforts to support small- and medium-sized companies and promote black economic empowerment.
The project will replace the ineffectual venture capital and development capital markets that have never lived up to expectations or caught the imagination of the investing public. One of the objectives of the AltX initiative must surely be to stem the tide of delistings that has characterised the JSE of late.
AltX will have lower listing and annual fees and less stringent listing requirements than the JSE. Com-panies with pre-tax profits of R8 million or less and a minimum capital of R2 million can apply for an AltX listing. Other important requirements for an AltX listing are that: all directors must attend an induction programme; the company must have a designated adviser and a qualified financial director; there must be at least 100 public shareholders; and company announcements must be published on the Stock Exchange News Service and the AltX website.
The JSE has been the only registered stock exchange in South Africa since the ill-fated Union Stock Exchange ran into difficulties in the mid-1950s.
The Union Stock Exchange did not have the refined reputation and regulatory environment enjoyed by the JSE, and the companies listed on its boards were more "cavalier" than their JSE counterparts.
As a result of political pressure, the JSE agreed to take over the company listings of its competitor and created a secondary board to house these "unwanted migrants". The companies listed on the JSE's secondary board had a certain number of years in which to meet the listing requirements of the main boards. They had a chequered history, but most of them did not make it and many went under.
Perhaps the market has a long memory and it was this historical footnote that gave South African secondary or alternative markets a bad name. Whatever the reason, they have never lived up to expectations.
The only parallel that can be drawn between the Union Stock Exchange and AltX is probably the intention that the new exchange's development capital and venture capital listings will eventually migrate to the JSE.
AltX is being launched at a very difficult time. The information technology bubble burst in March 2000 and the world has been plunged into geo-political and economic uncertainty. Falling share prices and the difficulties in raising capital have resulted in a litany of delistings.
Despite the assertion of Noah Greenhill, the manager of AltX, that the early interest in AltX has been overwhelming and the confidence of the Department of Trade and Industry in this project, AltX has a huge mountain to climb. There is huge scepticism in the market that this is just another expensive exercise in futility, another blunder into the unlearned lessons of the past.
What investors must remember is that AltX will be basically a venture capital market, and any investment in this sector carries with it a far greater degree of risk. The risk-reward expectations must be carefully considered and matched to the risk profile of the investor. These companies will not be for the faint-hearted and the risk of failure and losses will be very real.
Nevertheless, there is a place for AltX in our market. The big question is whether or not our market is large enough and adventurous enough to sustain it.