Growth Strategies

Small-Caps Eye Listing Abroad

While avoiding Sarbox costs can be a prime mover, the presence of more receptive investors also plays a role in prompting some small U.S. companies...
Helen ShawAugust 9, 2005

U.S. small-cap companies are increasingly launching their initial public offerings or placing their secondary listings on foreign securities exchanges. Often, potential issuers are lured by what they see as more flexible regulatory regimes. But foreign markets also appeal to some companies because their customer bases might be abroad or foreign investors have a greater interest in its particular industry.

The Toronto Stock Exchange, for instance, has welcomed five U.S. companies in the past year, according to a report in CFO. (See “Going Public, Eh?” in Newswatch.) This year has also witnessed the opening of at least two new markets that cater to small companies. The Irish Enterprise Exchange, part of the Irish Stock Exchange, debuted in April as a destination for small-sized to mid-sized companies; currently, eight Irish companies are listed on it. Alternext, created by Euronext in May, also caters to them. Although it currently lists only European companies, it’s open to international issuers, including U.S.-based ones.

Fledgling though such efforts are, they could one day represent a source of competition for a piece of the IPO market covered by the U.S. exchanges, experts suggest. One market in particular stands out. Since the Alternative Investment Market (AIM) on the London Stock Exchange opened in 1995, a total of almost 1,300 companies have joined; of those, 18 are U.S. companies, eight of them having joined in 2004 and three in the first half of 2005.

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One such company is XL TechGroup, a Melbourne, Florida-based company that links with technology partners to build “biotech, ecotech, and medtech” companies. The company launched its IPO on the AIM in October 2004 and now has a market cap of about $300 million. The management team undertook a leveraged buyout of the company, which was previously part of Safeguard Scientific, in 2001. The managers chose to take the company public to raise money and continue operations, according to Harold Gubnitsky, senior vice president and chief relationship officer.

But how — and where — should they raise capital? XL TechGroup considered various options, including a U.S. listing, traditional venture funding, and the European markets. The company chose not to list in the United States because its business model would cause it to incorrectly be viewed as a regulated investment corporation. Under the Investment Company Act of 1940, that would trigger different reporting requirements. “That’s not only onerous, but also well outside the character of our business model,” explained chief financial officer David Szostak.

In general, regulated investment corporations also tend to raise at least $100 million — much more capital than XL needed, he said. “We don’t invest in businesses; we create and grow them,” said Szostak. The company typically spends between $20 million and $25 million each year on growing its business. Venture-capital funding also wasn’t a good match for the company, since it doesn’t do the acquisitions or hatch the uniform investment strategy venture capitalists favor, said Gubnitsky, who noted that XL often changes its investing plans.

Although investors abroad questioned XL about why a U.S. company would seek a listing in the United Kingdom, the company presented an argument they ultimately accepted. Two of XL’s group of companies, AgCert and Tyratech, have a strong customer base in Europe, where there’s a market need for services that aid compliance with the environmental standards of the Kyoto Protocol. The market need in Europe presented to investors a more compelling argument for the company, said Szostak. As a result, European bankers were more attuned to the company’s market.

AgCert brings about reductions in greenhouse gas emissions by implementing physical changes on farms that release emissions. The company also captures information on reduced emissions from agriculture so it can be reduced to a credit on paper, which can be purchased by a greenhouse gas emitter as an offset or traded on the Chicago Climate Exchange or on European exchanges, noted Szostak. The credits, called “offsets,” help companies satisfy the requirements of the Kyoto Protocol. For its part, Tyratech develops environmental-friendly insecticides. The product has particular appeal in the European Union, where over 300 pesticides are banned, according to Gubnitsky.

From the point of view of XL’s management, market considerations were a factor in deciding to list on the AIM. Further, the regulatory difference between the AIM and U.S. exchanges were part of XL’s decision “to some degree,” said Szostak. “Not that it was a primary driver, but it supports us in concentrating our efforts and business as opposed to the more significant regulatory requirements in the U.S.” The rules of AIM and the U.K. federal government are not as all-encompassing and detailed as those of the Sarbanes-Oxley Act and the Securities and Exchange Act.

For example, unlike the U.S. exchanges, AIM does not require for admission a minimum market cap, a trading record, minimum shares in public hands, or prior shareholder approval for transactions (except in the case of reverse takeovers). AIM does require admission documents, ongoing disclosures semi-annually (rather than the quarterly and annual filings required for U.S. listing), and the appointment of a nominated adviser to the company.

Pennington, New Jersey-based Ocean Power Technologies also found significant investor interest in the United Kingdom and Europe for its technology to convert the mechanical energy in ocean waves into “reliable, non-cost, clean electricity,” as George Taylor, chief executive officer of the company, put it. “Because those countries have signed the Kyoto Accord, which the U.S. has not, there are all types of incentives — renewable obligation credits, carbon credits, etc. — ways to support renewable power as it grows to the point where it can compete head-on against fossil fuel power,” said Taylor.

Formed in 1994, Ocean Power first sought support for a U.S. listing in 2003. But investment banks weren’t interested in renewable power then, Taylor noted. Listing abroad, however, “provided us with a very facilitated access to a capital marketplace that was very receptive to our story and our industry,” commented Charles Dunleavy, CFO of Ocean Power Technologies. The timeframe for the IPO process was more compressed than it would be on a U.S. exchange; the entire process lasted just over three months, he said. In October 2003, the company raised $42.5 million in its IPO on the AIM.

About 25 large U.K. and U.S. funds took up the offering, said Taylor. The AIM is backed by mainstream institutional investors such as Schroders, Fidelity, and Gartmore, added Mat Wootton, deputy head of the Alternative Investment Market. The company’s IPO might not be its final capital markets experience, however. Taylor mentioned that Ocean Power Technologies is considering the future possibility of launching a secondary offering or listing in the United States.

Given the strictures of Sarbanes-Oxley, however, not many U.S. small caps who have struck pay dirt abroad seem likely to want to gain a listing here. Even if companies seek to list abroad only for market-specific opportunities, “there is a general awareness and concern that the regulatory burden is very costly on small issuers in the U.S., so they shy toward new exchanges, whether they are regional or [international],” observes John O’Shea, president of Westminster Securities Corporation.