Foreign Stock Listing: You Can Run, But Can You Hide?
from
July/August 2007
by Charlie Deitch
Warning: If you’re thinking of joining the U.S. companies seeking to be listed on foreign stock exchanges, attorney Andrew Gowans has some advice: Don’t tell the locals you’re doing it to avoid Sarbanes-Oxley regulations.
That can be particularly self-defeating if you want to list in England, he says. More than 60 U.S. companies are now listed on the Alternative Investment Market, which the London Stock Exchange established to handle international trading of small to midsize companies—up from a mere five a year and a half ago. Some trade only in the U.K., while others also trade in the U.S.
Gowans, who heads the Silicon Valley practice at London’s Osborne Clark law firm, helps companies get listed with AIM. “The worst thing you can do,” he says, “is tell your Nomad that you’re trying to escape heavy regulations in the U.S.” “Nomad” is short for nominated adviser, usually a financial-services outfit assigned by the exchange to assess a company’s fitness to be listed and to make the company aware of all rules and regulations. “If you mention Sarbanes-Oxley more than twice,” says Gowans, “they’re likely to walk away, because Nomads don’t want to talk to companies who are coming to London because they perceive it to have low standards.”
In fact, Sarbanes-Oxley applies to all U.S. companies, even those that don’t trade on U.S exchanges, but it does make an exception for businesses trading abroad that have fewer than 500 American shareholders—the same-size companies to which AIM looks so good. And while the London markets are not as heavily regulated as U.S. exchanges, Gowans says they’re certainly not the Wild West. The London exchanges have their own requirements regarding audit committees, independent directors, internal controls, and market disclosure of “unpublished price-sensitive information.” Still, says attorney Dennis Zakas, a partner specializing in global capital markets and mergers and acquisitions with the Atlanta office of Hunton & Williams, “there is no SEC and there is no Sarbanes-Oxley.” AIM is less heavily regulated than U.S. markets, he says, and there seems to be “much less exposure to shareholder litigation.
That all relates to less money to be spent on compliance costs.” The annual compliance costs and fees on NASDAQ, for example, average about $2.3 million for small- and mid-cap companies, according to Canaccord Adams, a leading financial-services firm in Canada and a Nomad. On AIM, they’re closer to $920,000.
“If I’m an investor, I’m going to like the regulatory environment on AIM because money that would be spent on Sarbanes-Oxley compliance can now be spent on sales and product development and research,” says attorney Don Reinke, a partner in Reed Smith’s San Francisco and Oakland offices who handles foreign listings. Even more important, Zakas says, “there’s technically no minimum capital requirement for companies wanting to go public on AIM.”
Some companies also opt to do their initial public offerings on the exchange, most of them outfits specializing in technology, biotech, and natural resources. Those that did so recently include Protonex Technology Corp. of Southborough, Massachusetts, a manufacturer of fuel-cell systems, and three California companies: OCZ Technology of Sunnyvale, which produces storage devices and memory for cameras, computers, and the like; Entelos of Foster City, a biopharma-ceutical company; and Enova Systems Inc. of Torrance, a maker of hybrid drive systems. “Enova was a phenomenal success that would not have happened in a market that required a higher capitalization,” says Reinke, because its market cap at the time when it went public fell short of NASDAQ’s $50 million minimum.
American companies listed in the U.S. have traditionally been reluctant to delist and trade exclusively on a foreign exchange, Gowans says, though he is working with three companies he won’t name that are trying to do just that. “Practically speaking, we’ve found that U.S. clients don’t need a constant U.K. presence to do business on AIM,” he says. “However, in the early days companies thought that meant they never had to go to London, and that’s not the case. You have certain institutional investors that want to be able to look you in the eye and ask you questions two or three times a year. The CEO and CFO will generally be expected to meet with the key institutional investors to discuss financial performance, strategy, and prospects. And Americans have to realize that in London we don’t do those things over a conference call. We take care of them over dinner.”
