Diary of a Sharemark float: Boosting liquidity

A key issue for any company considering a flotation on a stock market is “liquidity”: how often the shares in your company are bought and sold. As a small company seeking admission to Sharemark, this has been a material consideration for us.

Large corporations whose shares are listed and who have thousands of shareholders can expect to have very liquid shares. At any point in time there will be lots of buyers and sellers of shares. Traditional stock markets have market makers: traders who buy and sell shares on their own account. By doing so they increase the liquidity of those shares.

Liquidity is important for any investor. Without active buyers and sellers of shares there may be violent swings in the share price. For stockmarkets that operate with market makers that can be a big problem. To protect their own trading positions the market makers in smaller companies will set a large spread between the price at which they will buy compared to the price at which they will sell.

One key factor that attracted us to Sharemark is that it operates without market makers. Instead, Sharemark matches buyers and sellers using its trading platform and an algorithm that calculates where supply meets demand. Also, we can set the frequency of our share trading from daily to weekly or monthly.

Nonetheless we can see the risk that the seller might put their shares up for sale with no reserve price and drive down the price of our shares.

In my time as a corporate solicitor I have seen well-advised companies use a number of techniques to improve the liquidity of their share. These include:

  • Having a growth story to tell and communicating it effectively through the financial press: the use of a financial public relations company can be important;
  • Setting up an employee benefit trust and making a company loan facility available to the trustees to buy shares. This must not be used to “push” the share price, but operated independently and with clear guidelines it can help manage the liquidity in the shares;
  • Commissioning paid-for independent research which measures financial performance against key performance indicators agreed with the Board. We have already talked to a local adviser about providing this service;
  • Eventually establishing a dialogue with independent analysts who will follow the company; and
  • Developing relationships with institutional investors: once they choose to buy, this effectively puts a floor on the price as they are the known buyers at that price.

As part of our admission to Sharemark, which requires us to have 100 shareholders, we will be gifting five per cent of our shares to charities and not-for-profit organisations. We plan to build a relationship with these organisations, supplying them with regular updates on our progress, backed up with independent information about the actual and projected value of our shares.

By managing the perception of the value of our shares in this way, we would hope that they were not “undersold”, causing our shareprice to drop. In certain circumstances our modest employee benefit trust might also increase its holding in order to “put a floor” under the share price.

If we can ensure a steadily rising share price (rather than a volatile one), investor confidence should grow. This will leave us well placed when we want to issue shares to finance our growth.

James Hunt is a solicitor, serial entrepreneur and founder of Everyman Legal.

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