Mystery and misinformation in the world of penny shares

Investing in small caps can be exciting as well as rewarding, says Tom Bulford. But the route to penny share profits isn't always straightforward.

The world of penny shares is an exciting place to be for a private investor, a place where time spent learning about small companies often brings rich rewards. That's why I love writing about them and I guess that's why you're reading Penny Sleuth.

However, the route to penny share profits is not always a straightforward one

If you read Penny Sleuthon 5 January, you will recall the curious story of Worldlink (WGP).

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Its shares were listed on the stock market in November, accompanied by the announcement that "the market capitalisation at listing is anticipated to be circa £55m and the opening share price approximately £2.50".

Given this official announcement, any shareholder who bought the shares on the first day of trading at the quoted price of £1.25 would have been entitled to think he or she had a bargain.

But a day later the share price was just 25p and it sank to a low of 10p. That was before my article provoked a rally.

It also provoked a response from the London Stock Exchange (LSE), whom I accused of turning a blind eye to this apparent misinformation.

A representative of the LSE called me to say that as Worldlink has its shares traded on the Stock Exchange's Main List, responsibility for its oversight lies with the Financial Services Authority (FSA). The LSE only has responsibility for companies that trade on AIM.

That seems crazy to me. Does it really make sense to have two regulatory authorities for quoted UK shares?

Recently the plot has thickened with a number of developments, including a possible takeover bid for Worldlink. While it has been expanding the range of global data feeds it can make available to committed traders, and signed a deal to feed sports betting data to India's Dusane Infotech, it has also attracted the attention of The One Media Technology Corporation.

This Chicago-based private company aims to offer a combined package of tablet computers, operating software and the type of data-based services offered by Worldlink. To that end it has made a takeover approach to Worldlink.

You might have expected such an approach to propel the latter's share price back towards the 250p it apparently thinks it is worth. But in fact the share price is still just 30p. To add to the mystery, one of the advisers, Bridge Hall Stockbrokers, that put its name to the 250p statement, has since gone into liquidation

Now let me turn to another contentious issue for private investors: share placings'.

Share placings: Why you lose out

This preferred method for a company wishing to raise fresh capital sees its broker ring a handful of City institutions and favour them with some newly issued shares at a discounted price. To protect the interests of existing shareholders, companies on the LSE's Main List are only allowed to place shares up to a maximum of 10% of the existing share capital.

But there is no such limit for AIM-listed companies. They freely issue new shares, justifying this on the grounds of speed of execution and, because they need not publish an expensive prospectus, low cost.

Where small sums of money are raised through the issue of shares at narrow discount to the market price this is fair enough, but two recent issues look less than fair enough.

On 13 January, Falkland Oil & Gas (FOGL) placed 113m shares at 43p, a discount of 15% to the closing price on the previous day. This was no small matter, because it increased the total number of issued shares by 55% from 207 million to 320 million.

And on 26 January, Sirus Minerals (SXX) raised £50m through a placing of shares at 18p, a 23% discount to the previous closing price. This increased the issued share capital by 30%.

These are hefty amounts of money. The discounted offer surely would have been snapped up by the many small shareholders who have supported these companies. But they were not given the chance through, for example, a rights issue.

Both FOGL and Sirius have played by the letter of the law, but certainly not by its spirit. But what really sticks in the craw is the sight of these companies' directors helping themselves to discounted shares. Sirius's Russell Scrimshaw took 18.9 million new shares at 18p upon which he already has a paper profit of £472,500.

At the very least, I believe directors should be disallowed from participating in discounted share issues unless all shareholders have the same opportunity.

And in these days of instant electronic communication, it should surely be possible to allow individual shareholders access to share placings.

One more thing while I'm thinking about it is how we small investors should be better treated. It should also be possible for the names of private investors, often hidden within nominee accounts, to be on the shareholder register and thus acquire full voting rights.

This is something that you can do something about if you agree by signingthis e-petition to the government.

Rant over. Let me know what you think leave your comments below.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.

Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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