RSM Resources

Needing to raise capital, a California-based fuel-cell developer considered an initial public offering in the United States — but found U.S. exchanges to be more appropriate for larger companies. Instead, in June 2005 the company listed on the London Stock Exchange’s Alternative Investment Market (AIM), which caters to small to midsized companies,and raised $14 million.

"There’s a strong sense that unless you want to do a $50 million offering and expect a post-market valuation of $250 million, it’s hard to get [the U.S. markets] to pay attention to you," said Mark Campion, CFO of Polyfuel, during an interview with Investment Dealers Digest. In January 2006, Polyfuel raised an additional $17.8 million in a follow-on offering on the AIM.

Polyfuel is one of a growing number of U.S. companies turning to the AIM to raise capital, largely because such firms are considered too tiny in the eyes of the U.S. stock exchanges including the NASDAQ, which specializes in smaller-cap stocks. Domestic initial public offerings (IPOs) also have become less popular with business leaders who are reluctant to go public in the tighter U.S. regulatory environment, particularly when it comes to complying with the Sarbanes-Oxley Act of2002 (SOX).

"The key factor that might make a company not think about floating on the main U.S. markets is Sarbanes-Oxley," says Tom Lawton, head of listed company services at RSM Robson Rhodes in London."It would cost even a fairly small company listed in the states $500,000 or more annually for that compliance. So if you’re looking to raise only $10 million to $20 million, that’s a fairly large annual cost on top of the other annual costs of being listed in the U.S. — and the initial costs of listing that can run upward of $1 million."

AIM-ing for the midsized market
The London Stock Exchange launched the Alternative Investment Market a decade ago to provide a market for growing companies too small to list on its main exchange. Most AIM companies have market capitalizations between $10 million and $100 million, says Martin Graham, director of market services at the London Stock Exchange and head of AIM. In contrast, the average size of a NASDAQ IPO last year was $290 million.Average proceeds raised from new AIM listings run around $10 million.

The AIM lists more than 1,400 companies, and it actively markets to companies outside the United Kingdom. While about 80 percent of those listed are U.K. companies, foreign participation is rapidly increasing. For example, of the 29 U.S. companies listed on the AIM, 18 joined last year. Those firms include Clipper Windpower, a renewable energy group; DIC Entertainment, which owns a library of animated children’s programs; and Consentino Signature Wines.

The AIM represents a wide range of sectors, led by oil and gas, mining, financial services, and leisure and hotels. Other sectors include computer services and software, media and entertainment, pharmaceuticals and biotechnology, general retailers, and real estate.

The AIM touts many benefits for midsized companies, including:

• A more flexible regulatory environment, under the auspices of the London Stock Exchange.
• No required trading record.
• No minimum amount of shares.
• No prior shareholder approval required for transactions (in most cases).
• Admission documents prevetted by a nominated advisor, not the exchange or government regulators.
• A knowledgeable group of advisors and potential investors who have strong capital support.

Is the AIM right for your midsized company?
Perhaps your company is looking for capital but finds the prospect of going public on U.S. exchanges too complex or expensive. The AIM market could be your key to raising capital — or not.

The AIM, fueled mainly by institutional investors, particularly favors potential growth companies with promising intellectual property, technology or assets (such as exploration assets), Lawton says.

"In general, mature,slow-growth companies that are in difficult industry sectors, such as manufacturing and construction, would not be of great interest to the market," he says. "To attract interest, there would have to be something in the company or the industry itself with potential for at least reasonable growth and reasonable sustained profits. As you might expect, AIM investors do look to find fast-growth companies in fast-growth industry sectors as the stars to follow."

Main requirements for listing on the AIM generally include:

• A reasonable-sized business and initial funding requirement of at least $10 million for an overseas business.
• A good track record or clear, exceptional business opportunity if the company has no track record.
• A growth story that stands up to the dynamics of the industry sector.
• A compelling reason to float and a good reason for floating on the AIM.
• Appropriate management, systems and controls.
• High-quality asset backing.
• Management lock-in periods.

Steps toward listing on the AIM
While listing with the Alternative Investment Market may be simpler and less expensive than listing with U.S. exchanges, the process still requires careful planning and execution. U.S. companies preparing to list on the AIM need to follow these steps:

Appoint advisors. Only designated nominated advisors (NOMADs) can introduce companies to the AIM, so prospective AIM companies need to find the right partner to assess their suitability for the exchange and oversee the admission process. Companies also must appoint a reporting accountant, broker and lawyer.

Determine deal structure. Some foreign companies listing on the AIM establish a U.K. parent company to facilitate the process. However, being U.K.-based is not required.

Prepare required documentation.Listing on the AIM requires an admission document, which details the company, its market, historic performance, strategy and funding requirements. Required documentation also includes professional advisor reports (including financial and legal reports), a working capital review, an agreement detailing the NOMAD’s responsibility to the company and a placing agreement that supports the issue of shares.

The listing process typically takes three to four months and costs up to about $900,000.

Before crossing the pond
The opportunity to gain access to U.K. capital markets, enjoy more-relaxed regulation and heighten your corporate profile may sound enticing to midsized U.S. companies. But it’s not all a bed of roses.

Going public on the AIM is, after all, going public. And being a public company carries important responsibilities. While AIM regulations carry a comparatively lighter touch, the rules do bear some similarities to SOX — such as the requirement for boards to have independent directors.Even though it’s not mandatory, most AIM companies look to comply with the requirement of the Combined Code on Corporate Governance. It’s likely a U.S.-based company will be required to appoint at least one U.K.-based, non-executive director.

Furthermore, experts advise that U.S. and other foreign companies going public on the AIM spend time in the United Kingdom — a move that carries some expense. First,directors should travel to meet potential advisors and sell the prospects of their companies to brokers and potential investors. Then,to help boost share price after going public, directors should make regular pilgrimages to the United Kingdom to meet with their NOMADs and other advisors while touting their companies’ potential value to current and potential investors.

"If a company really wants to use its listing to grow share price, it needs to work at it," Lawton says. "Directors need to make the effort to make that happen."

For some midsized companies, the AIM may be a stepping stone to the main London Stock Exchange, the NASDAQ or other markets for larger companies. Some companies have multiple listings on the AIM and other markets. But for others, especially those with relatively small capital needs, the AIM may provide all the profile and capital they need for the foreseeable future.