Stock Exchange warned on 'risky' dotcom quotes

The London Stock Exchange (LSE) is being urged not to give risky hi-tech companies quotes which could harm its own and the IT industry's reputation.

Analyst Richard Holway believes that although the LSE put out several warnings about the dangers involved in investing in hi-tech companies with no track record and "market valuations which are quite simply unsustainable", it should go further.

"The LSE should consider its own position in allowing so many companies to get quotes in the first place," says Holway.

"The reputation of the LSE and the IT sector will suffer as investors seem incapable of differentiating the quality companies from the others."

He believes the private investors' appetite for the new dotcoms is dangerous, warning: "The opportunity for some major collapses, possibly even associated with some serious malpractice, is real."

Holway criticised the growing band of "risky internet investment incubator companies" that raise money mostly from private investors, which is then funnelled into "equally risky internet startups".

He warns: "There are even less checks and safeguards on these, so the money laundering opportunities are great."

Holway points out that the companies they invest in "don't have to obey strong Stock Exchange laws."

"They aren't all bad, but the risk of finding a bad apple is high. You can control direct investment in a company but people have less control over where the money is going. Some are doing five or ten investments a week."

However, the LSE said it would not stop quotes of risky hi-tech companies.

A spokeswoman said: "The Exchange wouldn't limit the number of companies from a certain industry wanting to access equity capital. As long as companies meet our suitability criteria, we are agnostic as to their type."

She added: "We have progressively - and with the backing of market practitioners - modified our rules to ensure that, as new types of company develop, they can access our market. Our rule changes around scientific research based companies, AIM and techMARK are all examples of this approach."

The Financial Services Authority (FSA) is due to take over the Exchange's listing authority role on 1 May after a transfer order laid down in Parliament this week.

A spokesperson for the FSA said it would continue with the Exchange's rules for now: "The intention is business as usual in the short term." However, it plans to "look at some aspects of the rules in more detail and consult with the industry", said the spokesman.