Fool.co.uk - Investments

As I mentioned in a previous article on Stamp Duties, I have the good fortune to live in Birmingham (rather than Royston Vasey) and I recently came across Birmingham's own small cap stock market Investbx.

Now, being a tax adviser, I had clearly heard of the London Stock Exchange (LSE: LSE.L - news) (LSE), the Alternative Investment Market (AIM) and the PLUS Markets Group, as for a number of tax purposes, despite being listed on a recognised stock exchange, AIM and PLUS shares are treated as unquoted shares, thereby benefiting from a number of advantages not available on quoted shares.

However, I had not realised there were still local exchanges around. In the early 20th century there were quite common, with reportedly over 20 operating across the UK. In 1973 though, the 11 remaining regional exchanges were absorbed by the London Stock Exchange (LSE: LSE).

The basics

Investbx started trading in late 2007 to bridge the "funding gap for small and medium sized enterprises (SMEs)"and raise equity finance of up to £2m. Researchers are commissioned to independently investigate companies and the information is made available to potential investors, before listing the shares and inviting purchase through an auction-driven platform. A bit like Ebay (NASDAQ: EBAY - news) , really.

Investbx, being Birmingham based, requires potential listee companies to be based in, or have a significant presence in the West Midlands, although there appears to be no similar restriction on investors.

What's the point?

The AIM market was established in 1995 with the aim (no pun intended) of creating an alternative route to market, and therefore equity finance, for younger, smaller, more dynamic companies who either couldn't meet the strict requirements for a full public listing, or who did not have the inclination to pay the hefty fees an initial public offering (IPO) required. And AIM has been very successful, so much so that in 2006 a new contender entered the frame.

PLUS-quoted (the phoenix from the Ofex ashes) sought to fill the gap created by AIM's success. As increasing larger companies joined AIM, and the IPO fees increased, PLUS attempts to offer a cheaper alternative that is tailored to the smaller, entrepreneurial end of the market- much as AIM did ten years earlier.

So is the new development of local markets a natural hierarchy forming underneath the bigger players?

The pros and cons

Well, so far Investbx hasn't got off to a screaming start. The current index lists three companies, including the PLUS listed Early Equity plc. It does, however, offer a West Midlands index of 'properly' quoted shares (LSE, AIM and PLUS) for which it offers a share dealing service. Naturally.

The Investbx website itself also offers depressing caveats, "shares are not traded on the London Stock Exchange or any other recognised investment exchange and it may be difficult for investors to sell the shares and obtain reliable information about their value or the extent of the risks to which the share price is exposed. The share price may be subject to sudden and large falls given the restricted marketability of the shares." Although honourable and FSA compliant, it does not really inspire confidence.

From a company's perspective, it does offer an interesting and low cost way of attracting outside investment. However, without the regulations and checks on companies required by recognised exchanges, is the system open to abuse by unscrupulous company directors?

What do you think? Would you take a punt at a local stock exchange? Or are AIM and PLUS risky enough for you?