This article from CFO.com reports that VCs have been having trouble taking their portfolio companies public in the U.S. largely because SOX has made it too expensive for small companies and the Wall Street research settlement has resulted in much less analyst coverage of small public companies. Larry Ribstein also talks about this here. As a result, a couple of U.S. venture backed companies have recently gone public in London instead, and the London Stock Exchange’s Alternative Investment Market (AIM) is trying to capitalize on this potential trend. AIM representatives are in the U.S. pitching their market to VCs and emerging companies as an alternative to the U.S. IPO market. As noted by one attorney, “[t]o some extent, the AIM is replacing the Nasdaq as the international market for growth companies, and that, increasingly, is of interest to venture capitalists.�
Companies can avoid SOX by going public overseas because most SOX provisions only apply to companies with securities registered under the ’34 Act. ’34 Act registration is required if a company goes public in the U.S. but not if it goes public overseas. The AIM solution, however, is not perfect. The SEC casts a wide regulatory net and requires any U.S. company with $10 million or more in total assets to register under the ’34 Act any class of equity securities held of record by 500 or more shareholders worldwide, regardless of whether the securities are publicly traded in the US. Hence, a U.S. AIM traded company needs to carefully monitor the number of shareholders it has to avoid going over the 500 shareholder threshold. Another option would be to create a foreign holding company for the U.S. company and list the holding company’s shares on AIM. This holding company would be considered a “foreign private issuer� and would not have to register any class of its securities under the ’34 Act so long as the class is held by less than 300 U.S. shareholders. This structure, however, may have adverse tax consequences.
Regardless of which route a U.S. AIM company goes, it does not realize all of the benefits that accrue from a U.S. IPO, e.g., the company will not have freely-tradeable U.S. stock at its disposal for use in acquisitions and employee compensation plans. But at least some regulatory competition is emerging. It will be interesting to see what kind of inroads AIM can make and how Nasdaq and the SEC respond.
