London's Alternative Investment Market and U.S. Companies
Nigel H. Reynolds, Partner, PricewaterhouseCoopers LLP
Over the past two years, U.S. companies have seen the cost of being listed in the United States spiral, largely as a result of the Sarbanes-Oxley law. This cost is disproportionately high for smaller companies. Factoring in the risks of being a director of a U.S. Securities and Exchange Commission (SEC) registered company, it is not surprising that directors of U.S. companies are looking for alternative places to do an Initial Public Offering (IPO).
The rise of London's Alternative Investment Market (AIM), which opened in 1995 but only recently has taken off, has coincided with these U.S. changes and is starting to become the market of choice for growth companies from around the world.
AIM has benefited from tax breaks offered to investors as well as its reduced regulatory requirements. This makes it cheaper and easier for companies to IPO, make future acquisitions, and comply with the day to day regulatory and investor requirements. As a result the cost of capital on AIM can be cheaper.
AIM is regulated by "nominated advisers" (or Nomads) who prepare the listing documents and get the issuer admitted to AIM. Every company needs a Nomad to act as their regulator. Although AIM is a self regulated market, it has a good reputation for being well policed while at the same time providing a flexible trading environment for growing businesses. This flexibility includes no minimum requirements over company size, track record, or the percentage of shares in public hands.
However, in regard to track record, if the company has been trading for less than two years, then the directors of the company and any major shareholders cannot sell their shares for a further year. Therefore, in this context there is still no exit until a track record is proven.
There are over 1,500 companies listed on AIM, of which 519 registered in 2005. One hundred twenty foreign companies were admitted in 2005 which significantly exceeds NASDAQ's figure of forty. AIM has also raised more money than NASDAQ in the first half of 2006. AIM now has over 250 companies incorporated overseas of which thirty-six are from the United States (excluding U.S. companies who have parent firms in other territories often for tax or listing reasons). Companies already listed on NSADAQ or several other major regulated markets can apply to AIM without the need and cost of an admission document.
It is not always clear how valuations differ between AIM and NASDAQ, although there is much evidence showing NASDAQ companies are typically more highly valued. However, the cost of complying with SEC requirements can erode significantly the company's profit, and thus eliminate this advantage.
There are also many IPOs that would not be possible in the United States that can and are being done on AIM. AIM is what NASDAQ used to be, which is a global junior market for emerging companies. NASDAQ, for example, is no longer suited to companies with market capitalizations under $250 million. The ideal value of businesses on AIM is between $50 million to $500 million. At this level there is a liquidity advantage for AIM over NASDAQ.
AIM is also largely an institutional investment market which makes the cost of investor relations cheaper. Investors on AIM also have a good appetite for the risks involved in investing in growth companies and are sophisticated enough to understand the volatility of fast moving, dynamic businesses.
In regard to the AIM admission process, it can be very quick, taking as little as three months. And there are no specific corporate governance requirements for AIM companies. However, Nomads and the investors take corporate governance seriously, which is one reason that AIM has achieved its good reputation.
Nomads will want to ensure that there are independent, non-executive directors, proper board committees (e.g., remuneration and audit committees), and good internal controls and procedures. Many AIM companies choose to follow the requirements of the Combined Code for main market companies in the United Kingdom, and this is seen as favorable by investors (and can therefore lead to a higher share price).
This self regulation ensures that AIM has a good reputation for governance. There are no Sarbanes-Oxley requirements for AIM companies. However, a company must be careful not to get caught by SEC rules relating to U.S. shareholders, which would require them to register with the SEC. If this did happen, a company would be required to comply with all of the SEC rules. This would obviously take away any advantages of an AIM float compared with a NASDAQ listing.
We should also consider why a company may want to be listed on AIM and what the alternatives are. There are many reasons to be listed such as raising the company's profile, providing liquidity to shareholders, and making it easier to make acquisitions. However, these can be offset by many other factors including the cost of regulation, becoming short-term-oriented to meet half yearly market expectations, and having the distraction of managing investors. The alternative is venture or debt funding, which also have their benefits and downsides. AIM has become a major competitor in the United Kingdom to venture capital, while at the same time offering an exit route for earlier stage VCs.
So what does a U.S. company need to consider before listing on AIM? As noted above, each company must have a Nomad, who will be on an approved list of advisers which can be obtained from the London Stock Exchange. The company will also need a broker who will price the company's shares and sell these to the investment community. The Nomad and the broker can be from the same firm and this is commonly the case. This may have a cost advantage but this can also lead to a conflict of interest.
In addition, a logical commercial reason for raising funds in London will give a U.S. business greater credibility. Already having a European business or a strategy to enter European markets is undoubtedly useful.
Many AIM investors are the European arms of American investors, and they may therefore view U.S. businesses favorably. However, their purpose is to invest in European businesses. Companies will also need to consider many other issues that will arise including the tax and legal consequences and also the accounting issues. U.S. companies, for example, will need to choose whether to list under U.S. accounting standards or international standards. Again advice should be sought. All of this should be done well in advance of listing as there can be a high tax cost of changing group structures at the time of a listing when the market value is likely to have gone up.
Last, there are several ways for a company to come to market. The cheapest way is by introduction where the existing shares are listed on the market and no new shares placed. This is an easy way to start. However, it doesn't tend to give much liquidity. A placing is the most common method, where shares are placed with a small group of institutional investors. The advantage here is that the company has a good idea as to the likely take up of the shares before going to market, which reduces the need and cost of the shares having to be underwritten.
The third method is through an offer at a fixed price. However, this will need to be underwritten at a cost of about 2 percent of the issue. The final method is an offer for sale by tender where a minimum price is given and investors can bid higher than this price to ensure they get their allocation. This is only appropriate where there is a high demand for the shares (and happens rarely).
AIM is a credible alternative for U.S. companies looking for a market listing. But U.S. companies must be aware of the risks and not treat the process lightly. AIM investors are not easily fooled, and having the right advisers is critical.
© 2006 Nigel H. Reynolds. All rights reserved.