The exposure of regulatory reality

A book publisher has managed, almost single handed, to expose the weakness of modern regulatory systems.

I have continuously argued over the last four years that the demise of PLUS Markets and the FSA’s (FCA’s) decision to allow ICAP to acquire it (together with its RIE status) was unusual, added nothing to the London small-cap equity markets and reflected inefficiency in the modern regulatory systems.

Quercus Publishing was my client at St. Helen’s Capital (2005 onwards). I raised £2.8m for it. It struggled and then found ‘The Girl with the Dragon Tattoo’. It made millions and the fund managers piled in. It had millions of pounds in the bank. It won prizes.

The new management at ISDX (the old PLUS Markets) held it up as an example of the type of company they wants on their market. They are introducing a new set of criteria that all companies must meet. Quercus will walk in.

That is, until now. Jungle drums have been beating for a period of time and I suspected all was not well. I was surprised to be told at last year’s London Book Fair that they were publishing 250 works of fiction in the next twelve months. That’s a lot of gambles. A trading update did not feel right.

Last Friday the share price collapsed by 45% to 22.5p. The shares are down 58% this year. The capitalisation is less than £6m. The trading statement referred to ‘difficult conditions’ and to ‘constructive talks with their bankers.’

No doubt lots of questions are being asked and it might be that the management can pull it round. But as it stands it will be difficult to sell shares in any volume. The probable outcome is that they will be sold to a bigger publisher for a minimal sum. The director’s contracts will no doubt account for part of the funds received.

No-one argues that equity investment does not involve risk (for a higher reward) but it is hard to see what the FCA and the management at ISDX have achieved in protecting the investors in Quercus Publishing.

The reality is a share price down 45% and a difficult selling market.

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