London’s AIM is not the Answer to Sarbanes-Oxley

January 1st, 2007

The AIM, formerly known as the Alternative Investment Market of the London Stock Exchange, has gotten attention recently in the US due to increasingly complex and burdensome reporting requirements for companies listed on US-based stock exchanges, most notably the Sarbanes-Oxley Act of 2002.  In particular, Sarbanes-Oxley’s Section 404 requires companies to certify that their internal controls and procedures are sufficient to provide complete and adequate disclosure of material issues to investors.

Sarbanes only applies (formally at least- more on that point below) to public companies listed on US exchanges, esp NASDAQ and the NYSE. A trend has thus arisen in the last couple of years where companies seeking to raise capital from public markets do so on exchanges outside the US. A few companies have listed on the Toronto Stock Exchange, but the exchange receiving the most attention is the London Stock Exchange’s AIM.

In some respects, this is a natural fit. The AIM was created in 1995 as a “lighter-touch” alternative to the main London Stock Exchange. Costs of an initial listing are much lower than the LSE, NASDAQ or NYSE and ongoing regulatory requirements are much less stringent as well.

There are currently about 1,600 companies listed on the AIM, of which 36 described themselves as US-based as of this writing. The regulatory requirements consist principally of the oversight of a “nomad“, a nominated advisor hired by the company both to vet the company’s filings and to advise the company on investor-relations issues. The Wall Street Journal (subscription required) has a good article on pros and cons of the nomad system. Since January 2005, the number of US companies listed on the AIM has tripled from 12 to 36, indicating a possible trend in the making (though the numbers do not exactly indicate a mass exodus from US exchanges).

However, companies hoping that the AIM will let them avoid the US regulatory framework are misguided (Sarbanes-Oxley imposes the most stringent set of requirements in the US currently, so this post focuses on compliance with it).  It is the rare company, public or private, that continues in business indefinitely without being acquired.  Any company that lists on the AIM thinking it will be able to forever avoid Sarbanes issues succeeds only in (a) limiting its pool of prospective acquirors to other business not subject to US securities laws, (b) reducing its sale price by the amount required to bring the company into compliance, or some combination of the two.
Thus, companies listing on the AIM still need to comply with Sarbanes-Oxley. AIM provides a way for companies to go public at significantly lower cost than in US markets, but as the title of this post suggests, the AIM is not a way out of Sarbanes-Oxley compliance.

AIM Performance Chart

However, this is not to say that AIM has no value.  There may well be companies capable of going public and supporting a reasonable valuation on a small-cap exchange, but for whom compliance with Sarbanes-Oxley and other US regulations would be excessively burdensome.  This seems like a pretty big gamble, but it is possible that such companies could go public on AIM, get enough cash to kick the business into high gear, then bring in US compliance at a later date.

Given that the AIM has underperformed major US indices recently (see chart), it seems as though the risk here is extremely high. As this chart shows, the S&P 500 during 2006 outperformed the AIM as a whole by close to 15% (note: I have not tried to separately measure performance of US-based AIM companies).
On balance, then, the AIM sounds like a great opportunity, but it entails significant tradeoffs as well.  Companies listing on AIM need to be aware that long-term planning will probably require them to deal with Sarbanes-Oxley and other US securities laws at some point, and choosing not to comply in the short term may foreclose- or alter the economics of- merger opportunities in the future.

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  • Anders Chydenius

    While the point that you make is valid, it misses The Point. Granted, firms that choose be operate in a manner that is out of compliance with SOX bear the costs that you describe. However, the main motive for AIM listing is to avoid potential criminal prosecution. One can list on AIM, be almost in compliance, and sleep at night. And, THAT is the attraction of AIM.