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September 30, 1998

Bermuda's Open Arms

By Stephen Lacey

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"In a nutshell, [the BSX] is a pre-IPO market," said Johann Wong, president at Tremont Capital, a trading member of the BSX. "You always come across companies that don't fit into the classic bulge-bracket model of an IPO."

Wong pointed out that many underwriting firms, especially second-tier or third-tier firms, aren't well-equipped to conduct due diligence, or to distribute stock internationally for the U.S. companies that list on the BSX. (The BSX is also pitching non-U.S. foreign companies.)

"We haven't publicly trumpeted our horn yet because we're still trying to create a structure that ultimately helps companies grow and do IPOs through outside exchanges," Woods added.

Good Intentions

Meanwhile, the aforementioned U.S. stock-market expert, who declined to be named, said that though the BSX may have good intentions, it could attract questionable companies unable or unwilling to be subjected to a listing on the OTC Bulletin Board.

"The Bermuda exchange has no heavy volume, no significant order flow and no capital or dealing skills," the expert said. "Why list in Bermuda unless you have been booted off Nasdaq?"

With trading in the U.S. in some small-cap stocks plagued by scams, some experts suggest that the BSX could, at least unwittingly, lure certain thinly-capitalized companies to the self-governing British colony out of fear of heightened regulatory scrutiny in the U.S.

Through the exchange's mezzanine marketplace, prospective IPO candidates are able to attain a listing on the internationally-recognized stock exchange.

That means they could, in effect, circumvent the more rigorous disclosure requirements laid down by the SEC, and by regulators in Europe.

So far, the results suggest that the BSX's efforts are nothing if not honorable, notwithstanding the island's liberal securities laws.

Despite its diminutive size Bermuda has 60,000 inhabitants the BSX does have a well-oiled capital-raising machine.

All told, the total market capitalization of the BSX's roster of 220 listed companies is about $50 billion. (Some 140 are offshore mutual funds, while the others include publicly-traded domestic, foreign and dual listings.) The exchange's trade volume was about $2 billion in 1997.

Trading, which is screen-based, is conducted between 8:30 a.m. and 2.30 a.m. (EST).

Several prestigious financial-services firms, including insurance, telecommunications and shipping companies, are domiciled, or have outposts, in Bermuda. Many are attracted by its zero corporate-tax rate.

Since achieving its first listing last fall, the exchange's mezzanine market has been able to attract four companies:

* Mezzanine Capital, a Bermuda-based, closed-end holding company specializing in equity investments, bridge financing and investment-banking services to publicly-traded companies and IPO candidates.

* Asia Pacific Energy Development, a Cayman Islands-based company formed by a group of investment entities in Taiwan to pursue emerging opportunities in power- plant development in Asia.

* University Holdings, a Bermuda-based company which owns the Greenwich School of Management in the U.K., and plans to implement Internet-based distance learning programs.

* Deotex, a development-stage company which owns the rights to certain textile-based, controlled-release delivery systems. The company, incorporated in Nevada and listed since July 1997 on the OTC Bulletin Board, was sponsored by Tremont Capital.

Listing Requirements

To list on the BSX's mezzanine market, a company must obtain sponsorship from a BSX member firm, such as Tremont Capital, or any of the 11 other firms approved to do business on the electronic exchange.

As mentioned, trading across the BSX's mezzanine market must be conducted in trades of at least $100,000.

Although the size requirement hampers liquidity, its proponents note that it curbs trading volatility and increases a company's exposure.

"It encourages more of an orderly market," said Tremont Capital's Wong. "We believe $100,000 is a good cutoff point."

Wong's firm is now talking with some OTC Bulletin Board-listed companies about pursuing a dual listing on the BSX mezzanine market.

Optimism for the future is not in short supply among BSX officials. But will the exchange really become a serious launching pad for IPOs?

Quite possibly. A stable economy with limited government intervention has already made Bermuda a popular destination for a large number of companies.

And don't allow its diminutive size to fool you.

After all, 31 companies incorporated in Bermuda have raised about $5.77 billion in the 1990's through IPOs listed on U.S. exchanges.