London's AIM

Entrepreneurs in the United States depend on venture capital for funding the formative years of their operations. The willingness of venture capitalists, angels and venture capital funds, to place funds with portfolio companies depends on predictions of high rates of return for these high risk investments. The most robust of these predictions depend on the anticipated sale of the company within the next seven to ten years to the public, an Initial Public Offering (IPO). Since the number of IPOs has been down for the past several years, venture capital funding has been corresponding flat.

      The fundamental reason for the small numbers of IPOs is, of course, the reluctance of public investors to buy IPO stock. The technology bubble burst in 2000 and investors still remember their losses in the IPO industries. But the IPO market would be more active if IPOs were not so expensive. IPOs cost too much to do and, once done, a company has much higher ongoing costs. The higher ongoing costs are a significant bone of contention, particularly with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002. Here I want to focus, however, on the costs of the IPO itself.

      In the United States a small company has to pay too much in fees and discounts when it sells its stock to the public. A small company selling fifty-three million dollars of its equity, as measured by the market price at the end of the first day of public trading, can net only forty-five million dollars in cash or less. Moreover, perversely those who charge to do the IPOs, underwriters, are uninterested in the smaller offerings; underwriters do not make enough money on the small offerings to justify their expenditure of time on them. A small company that wants to raise twenty-five million dollars cannot find an underwriter; a fifty million dollar IPO is a practical minimum.

      The London Stock Exchange is successfully marketing a low cost public offering process to small companies, entitled the Alternative Investment Market (AIM). AIM caters to companies in the micro to small cap universe, offering access and liquidity comparable to NASDAQ at a lower total cost to the issuer. Small companies can raise capital on the AIM with fees and underwriting charges that are forty percent of those incurred in the United States markets. Under-pricing losses are less as well. The listing process takes only eight to twelve weeks, compared to the six to eight months required in the United States.

      The AIM market has limited listing requirements. A listed company must have a “nominated advisor” and declare its working capital. The Nominated Advisor (Nomad) vouches for the company, determining its suitability for AIM, and will do due diligence, but the requirements are less stringent than those for a full listing. The Nomad’s certification provides the substitute for the underwriter’s certification in the United States.

      The AIM market is booming. In 2005 AIM had 335 IPOs compared to NASDAQ’s 35. The deal size comparisons are also telling. The average technology IPO deal size on the NASDAQ was $117.5 million, on the AIM it was $18.7 million. The AIM supported the smaller deals. Interestingly, the enterprise value as a multiple of revenue was lower on the NASDAQ 4.7x than on the AIM, at 6.3x. AIM investors were willing to accept more risk. The London market has successfully created a public offering market for small and micro cap companies. To remain competitive, the United States trading markets need to mount a successful competitor to this market.