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The SEC's committee on smaller businesses kept one eye on IPO activity abroad as it finalized its suggestions for tweaking Section 404.
Helen Shaw, CFO.com | US
April 12, 2006
There is much debate in the North American financial community, government organizations and media about the large volume of IPOs over the last 12-18 months that have taken place on the AIM exchange in London. Even Alan Greenspan, ex-head of the Federal Reserve, is concerned that this increase in IPOs elsewhere is a negative reflection on U.S. market competitiveness.
The biggest culprit according to many commentators are the U.S. compliance rules (i.e. - Sarbanes-Oxley Act of 2002) which are driving the IPOs "overseas". This is simplistic and not particularly accurate.
Other reasons that IPOs may be going "overseas" include, Reason 1: The economic cycle and market cap increases over the last two years have been heaviliy weighted to resource companies (mining. oil and gas, etc). U.S. exchanges have not typically represented these same sectors to the extent of the FTSE or the TSX for instance.
All you have to do is take a look at the gains on FTSE and TSX indices (35%+,40%+ respectively) over the last two years versus gains on the NASDAQ and DOW (roughly 20% each)to understand an important market dynamic and attractor.
Reason 2: So based on 1. above it follows that many of the IPOs going overseas have been resource based. Nothing succeeds like success for a market (i.e. TSX-V or AIM) when you have domain expertise in a hot sector.
Reason 3: U.S. exchange rate values over the last two years versus other currencies coupled with the change in U.S. market indices versus non-U.S. indices. If you spend a few minutes on the currency issue versus market gains you will also understand why money has often gravitated to non-U.S. markets. A U.S. dollar just isn't worth what it used to be.
Reason 4: Cheaper money offshore. My guess is that other markets such as AIM are awash in petrodollars or "trading surplus dollars" that in many cases would not be invested in U.S. markets in any event (i.e. - politics, privacy, etc etc). These dollars have to go somewhere and these overseas markets are taking advantage of the situation. A market "awash" in money is going to attract new companies.
Now, are any of Reasons 1. through 4. really driven by the the Sarbanes-Oxley Act of 2002? No. These are critical components to the growth of overseas markets and central to the increase of IPOs in these same markets. Which leaves us with the cost of compliance issue and Sarbanes-Oxley driving away IPOs that "should rightfully be happening on U.S. markets".
So, is compliance expensive? Certainly there is a cost to implementing financial and accounting standards, but the standards exist to protect investors. Current dissatisfaction with the cost of SOX (particularly Section 404) is very related to initial implementation, deferred procedural maintenance, excessive auditor attestation, and let's face it, management whining and procrastination. After a generation of focusing on productivity/growth, looking at controls is somehow seen as an unrelated, non-value added management exercise.
All you have to do is take a look at the number of financial restatements to understand that there are some problems that need to get solved and quick! This discussion about compliance (i.e. - processes to ensure timely and accurate information)being expensive reminds me of the discussion in North America about how expensive quality was in the 1970s and 1980s when Made in Japan went from being a joke to being an industry destroyer. It turns out that getting things right the first time (quality and its close cousin, financial compliance) is actually cheaper.
Some IPOs are going overseas because the compliance is more "flexible" and thus cheaper. Some IPOs are going overseas because those markets are more focused on those sectors and the stage of the economic cycle. By the way, there are approxiamtely 30 U.S.-based companies listed on the AIM as of March 31, 2006 out of 1450+ companies. About a third of the 1450+ have market caps under 10 million pounds, and over 80% are based in the U.K.
Posted by Charley Best | April 21, 2006 10:31 am
A financial executive visiting the Competence Software booth at a trade show last week, and pondering over financial education options, said: "I'm not sure what we need - the Sarbanes or the Oxley?" How many finance execs don't understand even the most basic terms? The demands of SOX is a great opportunity for anyone in business to go back to basics and study up on financial statements. Jessica Wall-Byrnes
Posted by Jessica Wall-Byrnes | April 20, 2006 07:31 am
Given the amount of money that large companies have spent on SOX Compliance, it makes sense that small companies with shallower pockets would try to avoid such costs.
Posted by Barb Polidore | April 14, 2006 09:44 am
Are you really trying to tell me that we should feel pity for 'small businesses' that are not sophisticated enough to have (and be able to prove)basic internal controls, but are sophisticated enough to pursue IPOs overseas? Is anyone truly buying idea?
Posted by Brian Gramm | April 13, 2006 07:58 am
Let's face it. The U.S. market has the world's highest investment standards and equity volumes. Marginal companies may be encouraged to begin their "public journey" elsewhere because of the attractiveness of "flexible regulatory regimes" ( What does that mean?! Gumby does Compliance! Next it will be optional compliance). In any event, the good companies all want to enjoy U.S. market valuations and trading coverage. The issues before the SEC and the Small Business Advisory are ones of standards and cost-effective implementation of those standards. The investing public is not well served by lowering the standards, nor are the companies themselves as their long-term cost of capital will increase. Effective compliance is good for business long term - just like good hygiene is important for public health.
Posted by Charley Best | April 12, 2006 05:47 pm
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