Transcript Tradelink Equity Advisors, LLC

June 28, 2006
Ning Bo, China
An Introduction to US
Equity Capital Markets
_________________________
Tradelink Equity Advisors, LLC
Tradelink Securities, LLC
1
Outline
I.
US Exchanges
II.
Initial Public Offering (IPO)
III. Market Maker & 15c2-11 Letter
IV. Private Investment in Public Equity (PIPE)
V.
Current Regulatory Environment
VI. Public vs. Private Valuation
2
Thank You Ning Bo!
3
I.
US Exchanges
4
US Exchanges
A.
New York Stock Exchange (NYSE)
B.
NASDAQ
C.
American Stock Exchange (AMEX)
D.
Over the Counter Bulletin Boards (OTCBB)
E.
Pink Sheets
5
A. New York Stock Exchange
About:


The New York Stock Exchange (NYSE) , also known as the "Big Board", is the largest stock
exchange in the world in dollar volume and second largest by number of companies listed. Its
share volume was exceeded by that of NASDAQ during the 1990s, but the total market
capitalization of companies listed on the NYSE is five times that of companies listed on NASDAQ.
The New York Stock Exchange has a global market capitalization of $21 trillion, including $7.1
trillion in non-U.S. companies.
Listing Requirements:
Minimum Standards: Distribution & Size
(# of Holders of a Unit of Trading - (usually 100 shares)
or:
Total Shareholders
...together with:
Average Monthly Trading Volume(for the most recent six months)
or:
Total Shareholders
...together with:
Average Monthly Trading Volume (for the most recent 12 months)
Public Shares:
Market Value of Public Shares:
$
Minimum Standards: Financial Criteria (earnings)
Aggregate Pretax Earnings over the past 3 years
$
Minimum in each of the 2 most recent years
$
or:
Minimum Standards: Financial Criteria (cash flow)
Aggregate Operating Cash Flow over the last three years
$
or:
Minimum Standards: Financial Criteria (pure valuation)
Revenues for the Most Recent Fiscal Year
$
Global Market Capitalization
$
2,000
2,200
100,000 shares
500
1,000,000 shares
1,100,000 shares
100,000,000
10,000,000
2,000,000
25,000,000
6
75,000,000
750,000,000
A. New York Stock Exchange
Listing Process:



Companies that desire to become listed on the NYSE must either be acquired by a publicly
traded NYSE firm, show a proven trading history on another “major” US exchange with a fully
filing history, or sell shares to the public through an investment bank via an IPO
All firms must establish an audit committee, and submit financial filings to the SEC on a timely
basis
The NYSE charges annual fees, one time listing fees (~$150,000), and the following per share
exchange fees:
Number of Securities Issued


Fee Per Share
Up to and including 75 million
$
0.00480
Over 75 million up to and including 300 million
$
0.00375
Over 300 million
$
0.00190
While the NASDAQ is known to play host to faster-growing firms, the character of the exchange
is not a hard-and-fast rule. In fact, the NYSE is competitive with the NASDAQ for listing some of
the best, young companies.
Examples of stocks that trade on the NYSE: Motorola (MOT), International Business Machines
(IBM), Pfizer (PFE), British Petroleum (BP), PetroChina (PTR), Suntech Power Holdings (STP), &
China Mobile (CHL)
7
B. NASDAQ
About:



NASDAQ (originally an acronym for National Association of Securities Dealers Automated
Quotations) is an American electronic stock exchange. It was founded in 1971 by the National
Association of Securities Dealers (NASD), who divested it in a series of sales in 2000 and 2001.
It is owned and operated by The Nasdaq Stock Market, Inc. (NASDAQ: NDAQ) which was listed
on its own stock exchange in 2002.
NASDAQ is the largest electronic screen-based equity securities market in the United States.
With approximately 3,300 companies, it lists more companies and, on average, trades more
shares per day than any other U.S. market.
NASDAQ owns and operates two different exchanges: the NASDAQ National Market (NNM) for
Large Cap companies and the NASDAQ Capital Market for Mid & Small Cap Companies.
Listing Requirements:
NASDAQ CAPITAL MARKET
FINANCIAL REQUIREMENTS
Stockholders' equity
or
Market value of listed Securities
or
Income from continuing Ops before taxes
Publicly held shares
Market value of publicly held shares
Minimum bid price
Shareholders (usually 100 shares)
Market makers
Operating History
or
Market value of listed securities
Corporate Governance
Standard
$
5,000,000
$ 50,000,000
$
750,000
$
$
$
1,000,000
5,000,000
4
300
3
1 YEAR
$ 50,000,000
YES
8
B. NASDAQ
Listing Requirements:
NASDAQ NATIONAL MARKET
FINANCIAL REQUIREMENTS
Stockholders' equity
Market value of listed Securities
or
Total Assets
and
Total Revenue
Income from continuing Ops before taxes
Publicly held shares
Market value of publicly held shares
Minimum bid price
Shareholders (usually 100 shares)
Market makers
Operating History
Corporate Governance
Standard 1
Standard 2
Standard 3
$ 15,000,000
$
-
$ 30,000,000
$
-
$
$ 75,000,000
$
-
$
$ 75,000,000
$
$
1,000,000
1,100,000
8,000,000
5
400
3
YES
$
$
$
$
-
1,100,000
$ 18,000,000
$
5
400
3
2 YEARS
YES
$ 75,000,000
$
1,100,000
$ 20,000,000
$
5
400
3
0
YES
Listing Process:
NASDAQ’s listing fees:
NASDAQ CAPITAL MARKET
SHARES
Up to 5 million shares
5+ to 10 milion shares
10+ to 15 million shares
Over 15 million shares
ENTRY FEES
$
$
$
$
25,000
35,000
45,000
50,000
NASDAQ NATIONAL MARKET
SHARES
Up to 30 million shares
30+ to 50 million shares
Over 50 million shares
ENTRY FEES
$
$
$
100,000
125,000
150,000
9
B. NASDAQ
Listing Process:

NASDAQ’s annual fees:
NASDAQ CAPITAL MARKET
SHARES OUT
Up to 10 million
Over 10 million



ANNUAL FEES
$
$
17,500
21,000
NASDAQ NATIONAL MARKET
SHARES OUT
Up to 10 million
10+ to 25 million
25+ to 50 million
50+ to 75 million
75+ to 100 million
Over 100 million
ANNUAL FEES
$
$
$
$
$
$
24,500
30,500
34,500
44,500
61,750
75,000
In addition to paying exchange fees, companies listed on the NASDAQ must stay current in their
regulatory filings.
Companies may list their shares on the NASDAQ that meet the financial requirements
aforementioned including 3 market makers and operating history. Or, they may list their shares
if they meet the aforementioned requirements and sell shares to the public via an IPO (see IPO
slide)
Examples of stocks that trade on the NASDAQ: Microsoft (MSFT), EBay (EBAY), Google (GOOG),
Starbucks (SBUX), Jet Blue Airlines (JBLU), Costco (COST), Baidu.com (BIDU), Ctrip.com
(CTRP), NetEase.com (NTES), Focus Media Holdings (FMCN), SINA Corp (SINA), Sohu.com
(SOHU), & Shanda Interactive Entertainment (SNDA)
10
C. American Stock Exchange (AMEX)
About:


Out of the three major American stock exchanges (NYSE, NASDAQ, & AMEX), the AMEX is
known to have the most liberal policies concerning company listing, as most of its companies are
generally smaller compared to the NYSE and NASDAQ. The Amex also specializes in the trading
of Exchange Traded Funds (ETFs), and hybrid/structured securities. The majority of US listed
ETF's are traded at the AMEX including the SPDR and most Powershares.
Examples of stocks that trade on the AMEX: Apex Silver Mines (SIL), Bema Gold (BGO), Delta
Apparel (DLA), eMagin.com (EMA), Genesis Energy (GEL), Orleans Homebuilders (OHB), &
Wesco Financial (WSC)
Listing Requirements & Fees:
AMERICAN STOCK EXCHANGE
FINANCIAL REQUIREMENTS
Standard 1
Pre-Tax Income
Market Capitalization
Market Value of Public Float
Minimum Price
Operating History
Shareholder's Equity
$
$
$
$
$
750,000
3,000,000
3
N/A
4,000,000
Standard 2
$
$
$
$
15,000,000
3
2 YEARS
4,000,000
Standard 3
$
$
$
$
50,000,000
15,000,000
2
N/A
4,000,000
Standard 4
$
$
$
$
75,000,000
20,000,000
3
N/A
-
AMERICAN STOCK EXCHANGE
SHARES OUT
Up to 5 million
5+ to 10 million
10+ to 15 million
15+ to 25 million
25+ to 50 million
50+ to 75 million
More than 75 million
INITIAL FEES
$
45,000
$
55,000
$
60,000
$
70,000
$
70,000
$
70,000
$
70,000
ANNUAL FEES
$
16,500
$
19,000
$
21,500
$
21,500
$
24,500
$
32,500
$
34,000
11
D. Over The Counter Bulletin Board (OTCBB)
About:

Provides access to more than 3,300 securities; includes more than 230 participating Market Makers

Overseen by the National Association of Securities Dealers, Inc. (see Regulatory slide). The OTCBB does not
charge issuers a fee for being quoted on the service. Rather, market makers are charged for each security in
which they make a market.
Listing Requirements & Fees:

There are no listing requirements and there is no minimum bid price requirement. There are no fees charged to
the company.
Listing Process:

A company cannot trade on the OTCBB by submitting an application alone. Rather, a market maker must submit
a 15c2-11 application (211 letter) to the NASD and agree to act as a market maker for securities of the
company. This letter vouches for the financials of the company (see 15c2-11 slide).

A company wishing to become listed must satisfy the OTCBB eligibility rule requiring companies whose securities
are quoted on the OTCBB to file updated financial reports with the SEC or with their banking or insurance
regulators

If these companies fail to file current financial reports with the SEC, their securities will be removed from the
OTCBB, but could be quoted in another system, such as the Pink Sheets

Examples of stocks trading on the OTCBB: Diamondhead Casino (DHCC), US Gold Corp (USGL), Solar Enertech
12
(SOEN), China Digital Communications (CHID), MMC Energy (MMCN), Patriot Scientific (PTSC), & Xethanol
(XTHN)
E. Pink Sheets
About:

The Pink Sheets offers a quotation service for market makers. Issuers may not list securities on the Pink
Sheets. Only broker-dealers who are market makers may apply to quote securities on the Pink Sheets.

The Pink Sheets does not charge issuers a fee for being quoted on the service. Market makers are
charged for each security in which they make a market.
Listing Requirements:

There are no listing requirements and there is no minimum bid price requirement
Listing Process:

Issuers are not required to register securities with the Securities and Exchange Commission (SEC), or be
current in their reporting requirements to be quoted on the Pink Sheets. These registration and
reporting requirements apply to securities quoted on the OTC Bulletin Board (OTCBB), Nasdaq, NYSE
and other national securities exchanges.

The Pink Sheets LLC is a private company that is not affiliated with the Nasdaq Stock Market, Inc. or
the NASD.

Due to the lack of filing requirements, it is difficult to rely on unaudited or no financial reporting from
the company as an investor.

Examples of stocks trading on the Pink Sheets: Healthsouth (HLSH), Delphi (DPHIQ), Calpine Energy
(CPNLQ), First Guardian Financial (FGFC), Royal Spring Water (RSPG), & RMD Entertainment
13
II. Initial Public
Offering (IPO)
14
Initial Public Offering (IPO)
About:

An initial public offering (IPO) is the first sale of a corporation's common shares to public
investors. The main purpose of an IPO is to raise capital for the corporation.

While IPOs are effective at raising capital, they also impose heavy legal compliance and
reporting requirements. The term only refers to the first public issuance of a company's shares;
any later public issuance of shares is referred to as a Secondary Market Offering.

IPOs generally involve one or more investment banks as "underwriters." The company offering
its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the
public. The underwriter then approach investors with offers to sell these shares.

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or two
major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a
commission based on a percentage of the value of the shares they sell. Usually, the lead
underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest
commissions as discussed in the next slide.
15
Initial Public Offering (IPO)
IPO Costs:

IPO costs are typically 7½ to 8½ percent of the value of the company, including underwriter's
commission, legal and accounting fees, investor relations, printing, road show and initial listing
fee. For a $25 million offering, that's between $1.875 million and $2.125 million. This excludes
the exchange fees aforementioned.
IPO Trends:

Due to the rising costs of an Initial Public Offering, the number of IPOs in the United States have
been decreasing steadily since the technology bubble in 1999-2000, and have been replaced in
large part by PIPEs (see section):
16
III. Market Maker &
15c2-11 Letter
17
Market Maker & 15c2-11 Letter
Market Maker:

A "market maker" is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis
at a publicly quoted price.

Their function is to provide liquidity to the market they are presently quoting.
Market makers may reflect
customer orders and/or proprietary quotations. Becoming a market maker requires an extensive application and
approval process through the NASD & SEC.
15c2-11 Letter:

Rule 15c-211 was designed to allow non-reporting public company's securities to be quoted on the National
Association of Securities Dealers' ("NASD") Over-the-Counter Bulletin Board ("OTCBB") by filing some simple
disclosures.

Now, companies seeking to obtain a quote on the NASD OTCBB must be required to file reports with the
Securities and Exchange Commission ("SEC"). Under Section 15 of the Securities Exchange Act of 1934 (the
"Act"), as amended, a company who has filed a registered offering with the SEC, such as an SB-1 or SB-2
registration statement is required to file reports for one year. A company which files a Form 10 or Form 10SB
(for small business issuers) becomes a reporting company under Section 12g of the Act and must file reports.

To be eligible for a quotation of its securities, the company's market maker must file a Form 211 with the NASD,
the company must have sufficient free trading stock in its public float to allow Rule 15c2-11. Essentially, the
market maker is vouching for the company’s financials when the 211 Letter is filed.
18
IV. Private Investment in
Public Equity (PIPE)
19
PIPE Transaction
About:

PIPE transactions are privately issued equity or equity-linked securities that are sold to
accredited investors under Regulation D by public companies; issuers range in size from small
OTC Bulletin Board companies to large-cap NYSE-traded companies. Transaction sizes have
ranged from under $1 million to over $200 million.

Within the spectrum of equity alternatives for a publicly traded company, a PIPE transaction
generally best fits companies with a market capitalization under $400 million that seek an equity
infusion of less than $75 million. Traditional public equity alternatives include add-on equity
offerings (“secondary” or follow-on offerings) and 144A convertible securities. These
transactions are typically underwritten and require extensive institutional and/or retail
distribution networks. Due to the need for liquidity in the secondary trading market for these
types of securities, as well as the overhead requirement on the part of the underwriter, the
minimum transaction size is typically $65 million to $100 million to achieve optimal execution for
traditional public offerings.

While a PIPE transaction is marketed to a limited number of investors over a short period of
time, a traditional public transaction may require a broader marketing process and, in the case
of an add-on offering, the filing of a registration statement with the SEC prior to pricing.
20
PIPE Transaction
Key Benefits:

Does not require SEC registration prior to offering

Allows for a more flexible transaction size than traditional public alternatives

Improves balance sheet strength and financial flexibility

Offers greater confidentiality and eliminates typical price declines on filing of traditional public
offering (“announcement effect”)

Requires minimal preparation before launch

Increases issuer’s trading liquidity levels and diversifies shareholder base

Allows for a targeted marketing process, reducing management’s time contribution
Transaction Types:

PIPE transactions may be issued in a variety of forms, including registered common stock
(“registered directs”), unregistered common stock, convertible preferred stock, convertible debt
and equity credit lines (“ECLs”).
21
V. Current Regulatory
Environment
22
Current Regulatory Environment
A.
SEC & NASD
B.
Sarbanes-Oxley
23
A. SEC & NASD
Securities & Exchange Commission:

The United States Securities and Exchange Commission (SEC) is a United States government
agency having primary responsibility for enforcing the Federal securities laws and regulating the
securities industry. The SEC was created by the Securities Exchange Act of 1934 after the Great
Depression. The SEC consists of five Commissioners appointed by the President with the advice
and consent of the Senate. To ensure that the SEC remains non-partisan, no more than three
Commissioners may belong to the same political party. The President also designates one of the
Commissioners as Chairman, the SEC's top executive.
•
The primary mission of the SEC is to protect investors and maintain the integrity of the securities
markets. The SEC rose out of the ashes of the great stock market crash in October of 1929.
After the crash and the ensuing depression, confidence in the markets fell to an all-time low.
Congress held hearings to identify problems in the market and concluded that faith in the system
needed to be restored. As such, the Securities Act of 1933 and the Securities Exchange Act of
1934 were passed. These acts were designed to restore investor confidence through two main
principles: Companies offering securities to the public must be truthful about their businesses
and the risks involved in investing AND companies that sell and trade securities must treat all
investors fairly and honestly.
•
When these securities laws were passed, the SEC was established to enforce them. Their focus
was, and remains, to promote stability in the markets and, most importantly, to protect
investors.
24
A. SEC & NASD
National Association of Securities Dealers:

The NASD is the primary Self Regulatory Organization (or SRO) responsible for the regulation of
persons and companies involved in the securities industry in the United States. First and
foremost it is an industry organization. Its board members almost exclusively represent
securities firms. The NASD enforces practices that are in the best interest of investors. The SEC
delegated enforcement responsibility to the NASD. All firms dealing in securities that are not
regulated by another SRO are required to be member firms of the NASD.

SROs, which are overseen by the SEC, are the front line in regulating broker-dealers.

While the SEC is responsible for ensuring fairness for the individual investor, the NASD is
responsible for overseeing virtually all U.S. stockbrokers and brokerage firms. In the grand
scheme of things, the NASD is overseen by the SEC.
25
B. Sarbanes-Oxley
About:

The Sarbanes-Oxley Act of 2002 (also known as the Public Company Accounting Reform and
Investor Protection Act of 2002 and commonly called SOX or SarbOx) is a United States federal
law passed in response to a number of major corporate and accounting scandals involving
prominent companies in the United States. These scandals resulted in a decline of public trust in
accounting and reporting practices.

The legislation is wide ranging and establishes new or enhanced standards for all US public
company Boards, Management, and public accounting firms. The Act contains 11 titles, or
sections, ranging from additional Corporate Board responsibilities to criminal penalties, and
requires the (SEC) to implement rulings on requirements to comply with the new law. While
some believe the legislation was necessary, others believe that the Sarbanes-Oxley Act does
more economic damage than it prevents.

The Act covers issues such as establishing a public company accounting oversight board, auditor
independence, corporate responsibility and enhanced financial disclosure.

The Act came in the wake of a series of corporate financial scandals, including those affecting
Enron, Tyco International, and WorldCom (now MCI)
26
B. Sarbanes-Oxley

Sarbanes-Oxley does not yet apply to companies with a market capitalization of under $75
million. It is scheduled to apply to all filers for the 2007 year (for reports issued in 2008).

Based on the outcry from the industry with respect to costs (see charts below), we believe that
there will be a flurry of de-listings on the US Exchanges if the SEC imposes this on smaller firms

The largest SOX expense is in the initial up-front implementation of the system; on an ongoing
basis the costs are not nearly as large

We believe that the SEC will probably relent and have very relaxed requirements for these
smaller firms (< $75 million) when the regulations emerge, but there will still be more internal
audit requirements than exist currently, as it would be politically unacceptable to abandon the
rule in its entirety

Our firm is preparing to position itself on other international exchanges such as London’s AIM in 27
the event that the SEC enforces the rule as planned
VI. Public vs. Private
Valuation
28
Public vs. Private Valuation
Valuation Ratio
Price / Net Sales
Price / Gross Cash Flow
Price / Net Income
Private Co.
Median
0.6
7.3
7.0
Public Co.
Median
3.2
17.3
23.9
Public Co.
Premium
433%
137%
241%
Source: Pratt’s Stats™ and Public Stats™ at www.BVMarketData.com
Valuation data based on 7,503 private company transactions and 1,233 public company
transactions between 1/90 and 11/05. Universe restricted to transactions under $100 million.

Investors place a high premium on liquidity, or having the ability to sell stock quickly. As a result, public
companies trade at significantly higher valuations than private firms with similar financial characteristics. By
going public, the value of a company is immediately valued at a higher level — resulting in the creation of new
value for existing stockholders

In addition to higher valuations, public companies also enjoy other significant benefits, including:

Greatly improved sources of capital; a foundation for future financing activities

A source of liquidity for owners – in the form of selling stock or using stock as collateral for personal
loans, etc.

Creation of a stock currency to fund acquisitions and/or equity-based compensation for management and
employees. Incentive plans can be established for key employees without spending cash; creation of a
vesting schedule so that such employees will stay with the firm for several years

An international mark footprint that may attract trading partners and/or investors that otherwise would
not have known about the firm
29
Again, Thank You Ning Bo!
30
Appendix
31
Presenters
Yi Shen
Chairman,
Tradelink Equity Advisors China
____________________________________________________________
Mr. Shen has spent his entire career in the financial services industry. Upon graduating
with a Ph.D. in Statistical Physics from the University of Oklahoma, he continued his
education as a financial mathematics teacher at the University of Chicago. He built his
career as a quantitative analyst and derivatives trader at R.J. O’Brien & Associates
before joining Goldman Sachs & Co. in London. At Goldman Sachs, Mr. Shen was the
Executive Director responsible for managing the international fund trading business for
all of Europe. Before starting his own statistical arbitrage hedge fund at Tradelink in
Chicago (Digilog-Shen, LLC), he managed a $350mm portfolio for Millennium Partners,
a $4bln hedge fund.
____________________________________________________________
32