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Last week, the Securities and Exchange Commission (the ‘SEC’) announced a plan to set up a stock exchange for exclusively trading stocks of small and medium enterprises (‘SMEs’). This exchange, unofficially coined the “SME” board, will also give startups a platform to raise capital, as startups generally fall within the purview of SMEs.
Startups are corporate entities that aim to introduce disruptive products and services to the current market ecosystem. Well-known startups in Thailand include Line, Grab, Gojek, Lazada, and Shopee. Noteworthy enough, these startups are all foreign companies, or are subsidiaries of foreign companies (mostly Singaporean and Indonesian corporates).
This begs the question: Where are successful Thai startups?
It’s not the case that there are few Thai startups per se. Thailand saw a huge expansion of startups from 200 in 2016 to 1,500 companies and growing in 2019. And by one estimate, there are roughly 8,500 startups pending in the incorporation pipeline. So what are the problems? What seems to underlie the lack of success story relative to our regional peers?
It is not the work of any one thing or one party exclusively, of course. Many facets of the ecosystem contribute to our startup market which trails behind that of Singapore, Indonesia, and Vietnam. However, one issue does stand out: The Thai regulatory regime is not conducive to the growth of Thai startups.
Through their typical life cycle, once the products and services of startups are market ready, startups would seek to “exit.” Traditionally, startups can choose to merge themselves with a large company or go through an IPO. Nonetheless, under the current listing framework, startups must have a strong financial performance — positive EBIT — to go public. This requirement is not practical to their business models that require substantial investments in innovations and whose financial take-off is expected to arrive in the future (aka growth company). As a result, Thai startups, needing money and exit, have to resort to corporate buyouts, and end up being part of the conglomerate bureaucracy.
Had startups been allowed to go public, one can only wonder, might Thailand have already seen its first unicorn?
To their credit, Thai regulators are aware of this concern and have actively taken numerous initiatives to address such a regulatory hurdle, among which is the launch of the SME board. On May 20th, 2021, the SEC announced that they had greenlighted the plan to set up the SME board. The board, according to the SEC, will be up and running within this year. Per the SEC’s website, positive EBIT will no longer be required in order to list startups. However, as the nature of investment in startups is quite risky, investors could risk losing all their capitals if startups they choose to invest in go bust. The SEC thus requires that, to list, startups must be a public limited company. On top of that, retail investors, whose sheer number forms a substantial portion of investors in the market (~45%), are restricted from buying startups’ stocks on the exchange. The SEC said these requirements would ensure sufficient investor protection and good financial standing of startups.
Although the initiative is laudable, it remains to be seen if this SME board will live up to its purpose. The public limited company requirement seems to be facially at odds with the nature of startups: A small and flexible company with a fluid business model.
Particularly when the conversion of a limited company to a public one requires a special resolution of the company’s shareholders and a registration with relevant authorities. This process involves dealing with government bureaucracy and paying fees, which for some startups could be excessive.
To ensure competitiveness of Thai startups amid the global easy money policy, a financially conducive regulatory scheme is much needed. The SEC will put this initiative through a public hearing. In the end, depending on the market’s responses, we might see a different version of the SME board altogether.