The importance of the new ASO rules for the safety of the NewConnect market

The NewConnect market, known for its innovation and dynamism, has long struggled with the problem of issuer quality and the limited transparency of share offerings. This has led to weak financial results of companies after their debut, breaches of good market practice standards and, as a consequence, losses for investors. The response to these challenges is the new rules of the Alternative Trading System (Alternatywny System Obrotu, ASO), which will decisively improve the quality of issuers on the NewConnect market.

The problem of issuer quality on the NewConnect market

Although the NewConnect market served as a platform for raising capital and providing share liquidity for many outstanding and innovative companies, many of which over time moved to the main market of the Warsaw Stock Exchange (Giełda Papierów Wartościowych, GPW), it struggled with uneven issuer quality. The quality of companies listed on NewConnect varied widely, and this hurt the reputation of the market as a whole. Particularly problematic were cases of lower-quality companies that failed to grow and then either declared bankruptcy or were removed from the NewConnect market, which reflected negatively on the perception of the market as a whole.

One of the main problems was the inability of many companies to raise adequate equity capital, which they need to stay liquid and keep growing. This lack of capital often held back the companies’ development and limited their investment potential, and it not infrequently resulted in a loss of financial liquidity. In addition, speculation in shares by company founders led to considerable share price instability on the market, which often resulted in heavy losses for stock market investors.

Another serious problem was the low liquidity of shares, caused mainly by limited demand from investors. A lack of trust in companies and their management boards, which on many occasions were unable to implement their planned strategies and declared business goals effectively, reduced the market’s attractiveness in the eyes of investors. This situation underlined the urgent need to implement changes aimed at increasing the transparency, stability and credibility of the NewConnect market.

Stricter criteria for admitting shares to trading

The new rules of the Alternative Trading System (ASO), which will come into force on June 1, 2024, bring stricter criteria for admitting shares to trading, aimed at reforming the NewConnect market and improving the safety of investment on it.

The main changes are:

• Higher capital requirements: Raising the minimum value of issuers’ equity is intended to make sure that companies debuting on the market are financially stable and ready for the challenges of public trading in their shares.
• A larger number of unrelated minority shareholders: Introducing a requirement to have a larger number of unrelated shareholders is intended to increase the diversification of ownership and reduce the risk of share price manipulation by individual large shareholders.
• Restrictions on the transferability of founders’ shares: These rules are intended to limit speculation and keep share prices stable in the initial phase of trading on the market.
• Greater issuer transparency: The new rules require issuers to be more transparent about financial and strategic information, which allows investors to assess risk more accurately.

Impact on the market and investment safety

These changes are of fundamental importance for investment safety and for the long-term perception of the NewConnect market:

• Greater safety for investors: By raising financial standards, the market becomes safer and more stable for investors.
• Improved market credibility: Greater issuer transparency helps build trust in the market, which is essential for attracting new investors and sustaining healthy demand for shares.
• Reduced risk of speculation: Restrictions on the transferability of founders’ shares are intended to limit price volatility and speculation, which contributes to the long-term stability of the market.

The introduction of these changes is a response to the needs of the market and to the proposals of the Authorized Advisers, and it reflects the effort to create a market that is more predictable, transparent and safe for all market participants.

Integrating crowdfunding into the GPW’s offering

Integrating investment crowdfunding into the offering of the Warsaw Stock Exchange (GPW) is a strategic step toward creating a coherent system of trading platforms that meet the different development needs of companies. Thanks to the crowdfunding platform run by the GPW, a continuum is created: from higher-risk startups raising capital through crowdfunding, through companies in an early growth phase that are ready to operate effectively on the NewConnect market, to mature companies whose shares are listed on the main market.

In the past, many problematic companies were admitted to NewConnect, mainly because of the lack of available alternatives such as crowdfunding. Today, many of these companies would not be admitted to trading on NewConnect unless they demonstrated readiness in terms of scale of operations, transparency and financial results. The fact that it is the GPW that will operate the crowdfunding platform is a positive signal and a commitment to taking part in all segments of Poland’s fast-growing capital markets. This integration helps companies prepare better for a stock market debut and creates solid foundations for their further development.

Proposals for additional regulations

With a view to further improving the NewConnect market, an important step should be the introduction of additional regulations concerning the so-called capital adequacy of issuers. Many early-stage companies have difficulty developing adequate growth strategies and plans for implementing them, and consequently in presenting detailed and realistic financial forecasts. As a result, many of them raise capital before their NewConnect debut that is insufficient to implement their strategy, or even to maintain financial liquidity at all.

Beyond focusing on shares and disclosure transparency, the new regulations should also require companies to present detailed and professional financial forecasts, including cash flow statements and liquidity positions, for a period covering at least 18 months after their debut on the NewConnect market. Such a step would substantially raise the quality and safety of the market, giving investors better tools to assess the risk and investment potential of companies.

Strengthening the role of Authorized Advisers

An important element in the process of improving the NewConnect market is the need to increase the role of Authorized Advisers. Authorized Advisers, whose main role so far has been to support issuers in the formal process of admitting companies to trading on the NewConnect market and, after the debut, to oversee compliance with reporting requirements, should offer issuers high-quality corporate finance services. These services, which focus on preparing detailed growth strategies, operating plans and financial forecasts, are central to preparing companies properly for their market debut. To achieve this, advisers must have substantive knowledge, advanced analytical tools, extensive experience and the ability to assess a business as a whole, taking into account their future strategic, operational and financial prospects. Such a holistic, high-quality advisory process will be essential for setting optimal capital development paths for companies aspiring to enter the NewConnect market and, consequently, for establishing a new market standard.

Summary

The NewConnect market, as an arena for innovative companies, struggled with uneven issuer quality and limited transparency. This led to financial instability and losses for investors. The new ASO rules, introduced from June 2024, aim to solve these problems by tightening the criteria for admitting shares to trading, which includes raising capital requirements, increasing the number of unrelated minority shareholders, restricting the transferability of founders’ shares and strengthening issuer transparency.

Integrating investment crowdfunding into the GPW’s offering creates a coherent system of trading platforms, from startups raising capital through crowdfunding, through companies on NewConnect, to companies on the GPW main market. In the past, the lack of alternatives such as crowdfunding resulted in problematic companies being admitted to NewConnect. The current integration helps companies prepare better for a stock market debut.

In addition, the proposed regulations on capital adequacy, which would require companies to present detailed financial forecasts for at least 18 months, will substantially raise the quality and safety of the market. Strengthening the role of Authorized Advisers in corporate finance, growth strategies, operating plans and financial forecasts is essential to setting optimal capital development paths for companies and establishing new market standards.