The Real Reason Companies List In London

Critics of Sarbanes-Oxley often have predicted that the large costs required to comply with the landmark legislation would encourage a slew of companies, especially smaller ones, to bypass U.S. stock exchanges and list their shares overseas.

Five years after the passage of SOX, those critics have been proven partially correct … and partially not.

Yes, overseas stock exchanges—principally the Alternative Investment Market of the London Stock Exchange—have seen a booming business in listings. But thanks to other rules enforced by the Securities and Exchange Commission, most publicly traded U.S. companies still must comply with SOX even when they list overseas. What’s more, experts say, many of the forces pushing companies to list abroad have little to do with Sarbanes-Oxley anyway.

“Compliance aspects are a piece of the puzzle,” says Bryce Linsenmayer, a partner with the law firm Haynes and Boone. “But, they are not everything.”

Linsenmayer

Linsenmayer says his firm has helped a half-dozen clients list on the AIM, and they are not alone. Nearly 1,600 companies trade on the AIM today, and 500 of them are based outside of the United Kingdom. Sixty of those overseas companies are based in the United States; Anne Moulier, who heads business development for the LSE in North America, says a majority of them have listed on the AIM within the last two years.

The AIM clearly has easier listing standards than Nasdaq, its closest American counterpart (which is currently trying to acquire the LSE, albeit with little success so far). To join the AIM, companies do not need a particular financial track record or trading history; Nasdaq has various standards for revenue and cashflows in a listing company’s previous three years. Companies trading in London also need to report their financial results only twice each year instead of four times annually as required in the United States.

The appeal for certain small U.S. companies is Regulation S, which exempts them from registering a securities offering in the United States if the offering takes place outside of the country, and as long as they have fewer than 500 shareholders. The Regulation S exemption is intended to help U.S. companies raise capital overseas quickly and cheaply, without having to comply with the full registration rules mandated in the Securities Act of 1933.

The exemption “was designed for small private placements,” Moulier says. “It’s now being used to go public on AIM.”

Whatever the case, companies that qualify for the Regulation S exemption don’t need to meet the requirements of Sarbanes-Oxley—including Section 404, its nettlesome provision that companies audit their internal controls over financial reporting. Critics of SOX and Section 404 use the wave of listings on AIM as proof that Section 404 is too burdensome (especially for small companies), and should be scaled back.

And yet, for all the talk about companies circumventing SOX, it does not seem to be the dominant factor for most companies that have chosen to bypass U.S. exchanges for AIM. “There aren’t that many companies that went on AIM on that basis” of avoiding SOX compliance, insists Andrew Gowans, who leads the Silicon Valley offices of Osborne Clarke, a law firm based in London.

Foremost, many public companies—even small ones—can easily grow out of the Regulation S exemption once they exceed 500 shareholders and $10 million in assets. “If a company already has a wide shareholder base, they will reach that,” Gowans says. Then they must register with the SEC and meet SOX requirements for internal controls and other governance standards, even if the company lists overseas.

Why AIM For London?

Ackerly

Instead, experts who help companies list on AIM cite other reasons to cross the pond when going public. Going public on the LSE is less time consuming than it is for U.S. exchanges; Tod Ackerly, with the law firm Covington & Burling, says a company can hold an initial public offering and start trading on the AIM in less than three months, while U.S. listings can take at least twice as long.

Listing on the AIM—and then remaining there—is also much less expensive. According to Canaccord Adams, a Vancouver-based financial services firm, an IPO on Nasdaq of $50 million and 5 million shares can cost nearly $5.2 million. Meanwhile, a $50 million IPO and 20 million shares costs only $3.86 million when done on the AIM. The difference, Canaccord Adams says, comes from items such as the underwriting discount, registration fees, legal fees, printing costs, and accounting fees.

Annual costs to remain on the AIM are also markedly different than those for U.S. exchanges. Canaccord Adams estimates annual costs for a Nasdaq-listed company at more than $2.3 million, compared to just $922,000 on the AIM. Moulier cites lower costs for directors and officers insurance as one reason, as well as lower legal fees. “That’s a big difference on an on-going basis,” Moulier says.

AIM advocates also point out that companies get better visibility and support on AIM than on Nasdaq. “Many companies feel the Nasdaq market’s standards are so high, it is almost impossible for a small or mid-cap company to go public,” adds Moulier.

Experts say companies listed on the AIM are less likely to get lost. The market cap of AIM-listed companies is fairly evenly spread—with a core group in the $50 million to $400 million range, Canaccord Adams points out. In contrast, companies with more than $1 billion in market capitalization make up almost 90 percent of Nasdaq’s overall market value, it adds.

In addition, virtually every company that trades on the AIM has at least one analyst—and sometimes more than one—who follows it. The analysts generally work for investment banks and brokerages on the sell-side, a practice rapidly losing steam in the United States after Sarbanes-Oxley. Sell-side analysts are a vital link between small companies and the capital markets, since without them a company can lapse into obscurity and may be overlooked by institutional investors.

A major reason analysts are more likely to cover small companies on AIM is because institutions are the primary buyers of small and medium-size companies in London. “AIM is largely populated by large institutional investors, who get to know the company and the business plan better,” says Linsenmeyer.

Gowan

That also means many of the companies that list on AIM don’t worry much about hitting that 500-shareholder threshold that would trigger a U.S. filing; the companies typically have six to 12 institutions owning the bulk of their shares, Gowans says.

“It’s really hard to get to that number [500 shareholders],” says Linsenmayer, unless you go public with a large number of shareholders as a result of previous private placements and awards to employees.

Meanwhile, in mid-November, a new procedure went into effect that eliminates a drawback for U.S. companies listing on AIM. Previously, trades in securities of U.S. companies had to be settled in paper format for at least a year, to assure compliance with the SEC’s Regulation S and thereby avoid SEC registration. This “physical settlement” requirement had increased the cost of trading such securities.

The LSE has been seeking an alternative to physical settlement. Now, SIS SegaInterSettle AG, the settlement-system operator based in Switzerland, will provide an electronic settlement service. “Physical settlement is no longer a drawback,” says Ackerly, who worked with SIS to develop the electronic settlement system.