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September 30, 1998

Bermuda's Open Arms

By Stephen Lacey

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Will the stricter U.S. regulation of small-cap stock trading drive some thinly-capitalized companies toward a listing on a tony British colony?

Quite possibly, says a well-informed U.S. stock-market expert, commenting on the Bermuda Stock Exchange's (BSX) newest frontier: U.S. companies hungry to raise capital, but a step removed from initial public offerings.

The reason: Bermuda's 27-year-old stock exchange's liberal regulations may sway U.S companies scared by more rigorous domestic laws.

Absolute rubbish, say other experts, who note that many reputable companies are unblemished BSX perennials.

What's more, trading in new companies targeted by the BSX is in minimum amounts of $100,000, which helps guard against fraud. Equally important, it means that the typical investor will be a sophisticated institution rather than a retail Aunt Millie.

The BSX is open to companies listing on U.S. exchanges, such as the OTC Bulletin Board, which is run by the National Association of Securities Dealers.

Another expert, former Securities and Exchange Commissioner Richard Roberts, warned that past U.S. experience demonstrated that setting up marketplaces for small companies has sometimes run into problems.

"The American Stock Exchange had a public-relations disaster with the Emerging Company Market. Nasdaq had trouble with the [OTC] Bulletin Board," said Roberts, now an attorney at Washington-based law firm Reid & Priest. "It only takes a few bad apples to destroy these incubator markets. That's really unfortunate."


The companies currently targeted by the BSX are at the mezzanine level, with roughly $10 million in capital. The BSX is also eyeing hedge funds.

Recent changes handed down by the NASD on "hot issues" could make it beneficial for hedge funds to list on an offshore stock exchange, like the BSX.

As of mid-August, NASD members may sell hot issues of over-subscribed public offerings of stocks which trade at premiums in the secondary market.

In addition, NASD members may sell hot issues to offshore funds if the funds are listed on a foreign exchange, have more than 100 investors and do not invest five percent or more of its assets in the hot issue. (The investors must not be restricted persons, under NASD regulations, who control five percent or more of the funds.)

Because the BSX is recognized by the SEC as a "designated offshore securities market," U.S. portfolio managers aren't precluded by fund guidelines that limit the amount of capital that can be invested in unlisted securities.

The BSX also offers foreign investors a way to mark or value their portfolios with a listed stock price.

"The BSX is one of the two U.K. offshore jurisdictions, including Gibraltar, that is approved as full members of the Organization for Economic Cooperation and Development," Wong noted. "That's particularly attractive to Japanese investors."

The Pitch

The BSX's pitch is straightforward: list on the exchange and take a fast track toward an eventual IPO in U.S. or European financial markets.

"What we believe we can offer in the mezzanine market is a whole alternative strategy that bridges the gap between a private placement and an IPO," said William Woods, chief executive of the BSX.