Abstract

In January 2000, the London Stock Exchange published special rules applicable to "innovative high growth companies". The creation of these new rules implied that existing rules and regulations and existing market procedures were insufficient for, or inapplicable to, a particular, new and different, class of companies. We argue that the perception of a set of differences sufficient to justify a new class of company and special rules is invalid. Insofar as there are any real differences, companies in this class differ from other companies only in that they exhibit marked characteristics of human resource asset specificity and often are weak in terms of physical assets. This is a problem common to many categories of business activity. We further argue that human resource asset specificity can only be said to constitute a "problem", and then only to the companies concerned, in relation to borrowing from risk-averse lenders. Typically, if there is no reification of the intellectual property and no use of contracts with covenants, firms must rely on equity capital, high-risk unsecured borrowing, or some system of guarantors. Alternatively, they will not start up. It is erroneous and part of special pleading to assume that "failure to start up" is an economic loss. It merely reflects the realities of risk-averse investors and unsecured intellectual capital. Special rules will not change these realities except by introducing economically inefficient distortions in capital markets.