Dave Chan for The New York Times Robert Ireland, the chief executive of Next Alternative, a Canadian firm that had access to European capital markets through an unregulated exchange. FRANKFURT — When Next Alternative, a Canadian start-up, wanted to raise money a few years ago, it opted for a listing on a new offshoot of the Frankfurt Stock Exchange. As part of the bourse’s so-called First Quotation Board, the six-month-old start-up could tap investors for capital without the higher costs, stricter disclosure requirements and other regulatory hurdles of an offering on the main exchange.
Now, Next Alternative has to find another home. The owner of the stock exchange, Deutsche Börse, is closing the unregulated market in December after a number of dubious parties used it to defraud investors. The situation has left hundreds of small companies, including Next Alternative, scrambling to qualify for the next level of the market or face delisting.
“Deutsche Börse’s requirements were way too lenient, and it ruined things for everybody else,” said Robert Ireland, the chief executive of Next Alternative, which had about 11 million Canadian dollars in revenue in 2011. Mr. Ireland is working with his company’s Frankfurt-based advisers to apply for a listing on another exchange affiliated with Deutsche Börse.
The First Quotation Board, which opened in 2008, was intended to give small companies fast, cost-efficient access to capital markets. With little oversight, the exchange didn’t require companies to file a prospectus or have revenue in order to trade. A year later, roughly 400 companies in Germany and elsewhere had flocked to the platform.
But the exchange also attracted a fair share of dubious activity. Last year, the German Federal Financial Supervisory Authority, BaFin, conducted 166 investigations, a “large majority” of which involved companies on the First Quotation Board, according to Regina Schierhorn, the head of market manipulation at BaFin. An inquiry has ensnared Next Alternative, although the company and its chief executive have not been implicated of any wrongdoing.
“It goes back to how frustrating it is to be listed in Frankfurt, where the rules change continuously,” Mr. Ireland said. “We had wanted to get our feet wet in the public market and be present in Europe, but the listing hasn’t benefited us at all.” Mr. Ireland added that he was not aware of the investigation into manipulation of Next Alternative’s shares.
Often, the regulator said, swindlers used the exchange to operate a “pump and dump” scheme. Brokers working in Asia, Britain, Canada and Germany would promote certain stocks, either by cold-calling prospective investors or through an orchestrated media campaign, according to Ms. Schierhorn. The fraud schemes usually focused on investments in hot sectors like commodities or nanotechnology.
“By combining tips from investors who felt scammed with suspicious patterns in order books, we got a hint that much activity on the First Quotation Board was based on pump-and-dump strategies, like it can happen with pink sheets in the United States,” said Michael Zollweg, the head of the Frankfurt exchange’s trading oversight board, which works closely with BaFin.
Hulbee, a search engine start-up in Switzerland, claims to be a victim of such activity.
In 2008, the company’s chief executive, Andreas Wiebe, said he was approached by two German men in Bonn who offered to help his fledgling Internet company raise money by joining the First Quotation Board. The men persuaded Mr. Wiebe to give them 17.5 percent of the company in exchange for their consulting services and a planned investment.
While Mr. Wiebe focused on expanding the company, he said the two men prepared the necessary documentation and got Hulbee, then called Grossbay, registered on the First Quotation Board. Soon after, the two men, through a call center in Düsseldorf, started heavily publicizing Hulbee to investors.
According to Mr. Wiebe, they pitched the potential of the company, which had no revenue at that point, as a rival to Google and misrepresented themselves as company executives. Shares reached a peak in July 2009, but by the end of that year, they had dropped 75 percent. The shares now trade around 30 cents.
Officials are still pursuing the ostensible manipulation of shares in Hulbee, and Mr. Wiebe is not a focus of the investigation, said Claudia Krauth, the chief public prosecutor in Stuttgart.
Mr. Wiebe said, “The whole affair took two years of my life. When I look back, I can hardly believe our company survived.”
As such problems started to emerge, regulators and prosecutors tried to crack down.
In March, a court in Munich convicted Tobias Bosler, a former official of an association to protect small shareholders, on 47 counts of market manipulation. Other cases are working their way through the courts.
The bourse, too, tried to curb fraud. In the fall of 2011, the Frankfurt Stock Exchange removed 126 companies from the First Quotation Board. But “it wasn’t enough to end the systematic abuse,” said Mr. Zollweg, who headed up the efforts.
So in February, the exchange opted to close the First Quotation Board. The remaining 448 companies listed there will have to meet the higher requirements of the next level of the market, the Entry Standard Board, or they will be delisted. Companies will have until Dec. 15 to comply. A representative of Deutsche Börse said that by mid-April, 53 companies had applied for the Entry Standard, of which 11 were admitted and 38 delisted, so far.
For some industry participants, the closing of the First Quotation Board and the higher requirements for the Entry Standard have raised concerns about financing options. They worry that young companies won’t have many alternatives, especially at a time when private equity and bank financing can be hard to find in Europe.
Still, many players welcome the stricter oversight as a means of weeding out dubious companies and improving the reputation of the Frankfurt exchange.
“It will make the market more respected,” said Marvin Rowe, the managing director of Go Public Pros in Berlin, a company that advises companies that want to go public. “It’s good for everyone in the end.”