Top of Mind: IPOs Take AIM

Most small and midsize companies that seek to go public fail to meet the listing requirements for U.S. exchanges and are unable to pay the ongoing costs associated with public ownership. Many such businesses, especially those in the tech sector, turn to the Alternative Investment Market (AIM) of the London Stock Exchange (LSE).

Founded about 10 years ago to meet the needs of smaller or high-risk companies that don't qualify for a full listing on the LSE, AIM has grown to include more than sixteen hundred companies located throughout the world. "AIM fills a gap between venture capital or other private financing on the one hand and a Nasdaq or NYSE initial public offering on the other," says Gary L. Benton, partner with Pillsbury Winthrop Shaw Pittman LLP in Palo Alto, Calif. "If done right, an AIM initial public offering allows for smaller companies -- those with market caps around at least $50 million or so -- to go public, raise money at a good valuation and avoid the painful time and cost of U.S. public company reporting and Sarbanes-Oxley compliance," he reports.

AIM listing requires no minimum company size, no minimum proportion of shares to be in public hands, no trading record, no prior shareholder approval for the majority of transactions, and no restriction on the transferability of the company's shares. And there's no requirement that the listing company be incorporated in the United Kingdom. The main requirement is that a company retain a "nominated advisor" (Nomad), a firm that meets the specific standards of the LSE and plays an important role in bringing companies to AIM and advising them on their obligations and opportunities as a listed company. The Nomad prepares the prospectus for its client, ushers along the admission process and may provide ongoing research services. Companies whose securities are already traded on another international exchange may be fast-tracked for listing.

"Unlike in the U.S., the IPO prospectus is not filed or cleared with any U.K. regulatory authority; it is the responsibility of the Nomad," explains Bryce Linsenmayer, partner with Haynes and Boone LLP in Houston. As a result, the entire process is substantially faster and cheaper than a comparable transaction in the United States. The prospectus must include all information that an investor needs in order to make an informed investment decision, although the prospectus is generally less comprehensive than an SEC-filed registrations statement, says Linsenmayer.

Another advantage of an AIM offering is that the majority of investors in this market are institutions, which are more likely than individual investors to support an issuer based on long-term prospects rather than short-term earnings results.

But while AIM offers important benefits, what can AIM companies expect in terms of stock performance over time? "AIM is still developing, and there are lingering questions about whether it can provide long-term liquidity and stability," says Benton.

In fact, recent research into the stock performance of AIM-listed companies paints a somewhat disappointing picture compared to that of Nasdaq listings. A study conducted by New York City-based Innovation Advisors shows that the median AIM technology company was down 12 percent through June 2006, while its Nasdaq counterpart was flat. U.S. tech companies that went public on AIM found that their stock was worth less than half of its IPO price after two years, losing 57 percent of its value. That compares with a 12 percent increase for Nasdaq. After the third year, AIM company returns fell to a negative 65 percent versus a negative 26 percent for Nasdaq. And after five years, all AIM tech IPOs traded 60 percent below their issue price, while on Nasdaq they traded 19 percent below their IPO price.