AIM Grabbing Nasdaq Business
U. S. companies find new investors on London market
by Thomas Frostberg, Chronicle Staff Writer

Friday, April 28, 2006

A growing number of U.S. companies, leery of Wall Street in the age of Sarbanes-Oxley regulations, are turning to a relatively unknown market in London to go public.

It's called the Alternative Investment Market, or AIM, and last year 19 companies from the United States floated shares on the market. Run by the London Stock Exchange, the market now boasts 37 listed U.S. companies, eight of them from California.

AIM offers a less-regulated marketplace with lower costs than the Nasdaq Stock Market. For instance, AIM says it charges $7,319 for its admission fee and yearly fee. Nasdaq, according to the London Stock Exchange, charges companies a minimum of $100,000 for admission, along with yearly fees of $25,000 to $75,000.

"There are fewer opportunities for VC-backed companies to go public on Nasdaq than six, seven years ago," said David Berkowitz, senior vice president for Vancouver's Ventures West, which has helped two North American companies list in London. "AIM is very small-company friendly and a lot easier to go public on. It also gives access to a whole new set of investors."

The alternate market was started in 1995 but didn't really attract a large number of companies until the past few years. The number of companies on AIM has doubled in two years, with international companies growing even faster. The total market value for AIM companies has tripled during the same time. By the end of March, 1,473 companies with a total market value of $129 billion were listed.

The market includes a Mountain View fuel cell company called PolyFuel, a spin-off of SRI International that listed on AIM in 2005.

Berkowitz, an early investor in PolyFuel, has mixed emotions on his companies' listing on AIM. On one hand, he said, AIM gives companies a chance to raise capital they might not get in the United States.

"After the bubble burst, the IPO market completely closed," said Berkowitz. "Nasdaq tends to be more focused on larger, late-stage companies."

The downside for U.S. companies heading for a listing on AIM is that the management team must spend more time in Europe with analysts and investors.

"We want them to focus on customers and business, but they have to go to London," Berkowitz said.

But that hasn't proven to be a deal-breaker for VCs like Berkowitz. Other advantages have emerged. For instance, it's possible to do quick follow-up investments without going back for shareholder approval when listed on AIM, an opportunity that PolyFuel used recently as a response to interest from investors.

"The IPO is a challenging effort, but the secondary financing was phenomenally successful for the company. Within 48 hours they were able to raise 10 million pounds," Berkowitz said.

The London Stock Exchange has been marketing AIM heavily during the past two years. The 19 U.S. companies entering AIM last year raised a total of $2.13 billion. So far this year, six more U.S. companies have joined AIM and raised $445 million.

"AIM used to be a place to raise money but not get liquidity. There has been a dramatic shift. A year ago, most companies thinking about how to go public focused on Nasdaq. Today, most companies are looking at AIM. It's been a dramatic change," said Allan Ferguson, a partner with the global venture capital and private equity company 3I.

Despite those advantages, a Nasdaq weakened by Sarbanes-Oxley regulations is something that worries the National Venture Capital Association (NVCA).

The organization launched a "U.S. Competitive Initiative" during its annual meeting in San Jose this week. As part of a larger agenda, the group hopes to lessen the regulatory burden for smaller companies going public.

"There's a lot of good stuff in Sarbanes-Oxley about corporate governance, but they went overboard. I think Sarbanes Oxley was thrown together extremely quickly without thinking about the consequences," said Ted Schlein, a managing partner with the Menlo Park venture capital company Kleiner Perkins Caufield & Byers.

Schlein recently represented the VC association on a Securities and Exchange Commission advisory committee regarding smaller public companies, where he also suggested fewer rules and restrictions for smaller companies.

"The recommendation is to adopt different levels of rules depending on size of companies, not to remove regulations. The overregulation is a bad thing and all it means is cost," Schlein said.

But most of all, the venture capitalists are hoping to maintain an advantage in innovation and capitalization.

"So many other countries are turning to the U.S. model, and we are concerned as we see a number of threats to the U.S. being the home of innovation," said Robert Grady, managing director for the Carlyle Group in San Francisco and the VC association's new chairman.

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London's upstart AIM
Founded: 1995

Parent company: London Stock Exchange

Companies listed: 1,473

Market value: $129 billion

Description: The Alternative Investment Market is a cheaper, less regulated market that is attracting a growing number of U.S. companies leery of going public in this country's Sarbanes-Oxley regulated environment.

Source: Chronicle research, AIM

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