Question: On October 3, 2000, E-centives, incorporated
On October 3, 2000, E-centives, incorporated in the United States, made an initial public offering on the Swiss Stock Exchange’s New Market. The company raised approximately US$40 million. E-centive’s offering circular stated that no offers or sales of the company’s common stock would be made in the United States, and that there would be no public market for the common stock in the United States after the offering.
The Swiss Exchange’s
New Market
The Swiss Exchange launched the New Market in 1999. The New Market is designed to meet the financing needs of rapidly growing companies from Switzerland and abroad. It provides firms with a simplified means of entry to the Swiss capital markets. Listing requirements for the New Market are simple. For example, companies must have an operating track record of 12 months, the initial public listing must involve a capital increase, and to ensure market liquidity, a bank must agree to make a market in the securities.
E-centives
E-centives, Inc. is a leading online direct marketing infrastructure company. The company offers systems and technologies that enable businesses to build large, rich databases of consumer profiles and interests. In return, consumers receive a free personalized service that provides them with promotional offers based on their interests. At the time of the public offering, E-centives maintained over 4.4 million e-centives online accounts for members. The company does not charge members a fee for its service. Instead, the company generates revenue primarily from marketers whose marketing matter is delivered to targeted groups of E-centives members. E-centives currently employs more than 100 people in its Bethesda, Maryland headquarters, and its offices in Redwood City, New York, and Los Angeles.
As of the offering date, the company had little revenue and had not been profitable. Revenue for the year-ended December 31, 1999, was US$740,000, with a net loss of about US$16 million. As of June 30, 2000, the company had an accumulated deficit of about US$39 million. E-centives’ growth strategy is to expand internationally. To date, the company has focused on pursuing opportunities in the United States. E-centives intends to expand into Europe and other countries. The company is currently considering expanding into Switzerland, the United Kingdom, and Germany.19
Required:
1. Refer to Exhibit 1-8, which lists factors relevant for choosing an overseas market for listing or raising capital. Which factors might have been relevant in E-centives’ decision to raise capital and list on the Swiss Exchange’s New Market?
2. Why do you believe E-centives chose not to raise public equity in the United States? What are the potential drawbacks related to E-centives’ decision not to raise capital in the U.S. public markets?
3. What are the advantages and disadvantages to E-centives of using U.S. GAAP?
4. Should the SWX Swiss Exchange require E-centives to prepare its financial statements using Swiss accounting standards?
5. Learn more about the New Market at the SWX Swiss Exchange’s Web site (http://www.swx.com). What are the listing requirements for the New Market? What are the financial reporting requirements? Does E-centives appear to fit the profile of the typical New Market Company?
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EXHIBIT 1-8 Factors Relevant in Choosing an Overseas Market 1. What is the extent of interest in a company shown by financial analysts and investors who normally participate in a market? 2. What is the level of trading activity on the exchange? Higher trading volume means more potential buyers of a company's securities. 3. How easy is it to raise capital? Some jurisdictions have complex listing or ongoing reporting requirements that may be difficult or impossible for a smaller company to meet. 4. What is the availability of capital in a market? 5. What is the reputation of the exchange? A growing international company may want the increased credibility and recognition that come with listing on a preeminent market such as the New York Stock Exchange. 6. To what extent does the company desire to raise its profile and establish its brand identity in a particular market? A stock exchange listing can benefit companies that operate or plan to operate in an overseas country. 7. To what extent are the market's regulatory environment and language similar to those in the company's home market? For example, a company from an English-speaking country with a common law (British-American) legal and regulatory system, such as Australia, might find it easier to list in the United Kingdom than in Continental Europe. 8. To what extent do institutional investors face statutory or self-imposed restrictions on the proportion of their investment portfolio that they can hold in securities of foreign companies? Sometimes these restrictions force a large international company to list on many stock exchanges to have access to sufficient institutional capital. These restrictions are difficult to overcome in some jurisdictions. 9. What are the nature and activities of investors in the market? For example, large pension funds in the Netherlands, Switzerland, and the United Kingdom invest heavily in equities of both domestic and foreign companies. 10. What is the likelihood that the company will be required to have locally listed shares to carry out a merger or acquisition in a particular country? 11. Will there be a need for locally listed shares to be used in employee stock option plans?|
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