FIVE | The new Nasdaq?

American companies looking to raise capital on the public markets are increasingly opting to file not on the Nasdaq, the storied index of dotcom success, but on the London Stock Exchange’s AIM market, which allows even early-stage companies to float their stock for quick cash without the regulatory headaches involved with a Nasdaq filing.

The number of U.S. companies listing on AIM more than doubled in 2007, from 29 in 2006 to 67 at the last count in 2007. The majority of U.S. companies listing on AIM are technology companies, and the market is particularly attractive to cleantech companies, which typically have a longer growth cycle.

The London Stock Exchange launched AIM in 1995 specifically for small-to-medium-size early-stage companies and the risk-taking investors who love them. Although it continues to be dominated by British companies, a study conducted by the London School of Economics in November 2007 noted the market has matured into a viable option for foreign companies, particularly since the dotcom bust.

The report puts the failure rate on AIM at 3 percent over the last four years, with an average monthly trading volume of more than 20 million shares, and liquidity on par with that of similarly-sized companies on other major markets, all of which increase AIM’s appeal for cleantech companies seeking to raise capital. The report also notes the total market value of overseas companies on AIM has leapt by 181.6 percent through 2006 and 2007.

A late 2006 survey of American investment banks and hedge funds by U.S. mid-market specialist investment bank Jeffries found 57 percent believed AIM would increasingly become the market of choice for cleantech companies, over the Nasdaq, in the next three years, thanks to a regulatory regime tailored to small companies and London’s long-standing familiarity with the energy sector.

If Sarbanes-Oxley regulations are relaxed, some larger companies currently looking at listing on AIM may return to the Nasdaq. For smaller companies, for which the Nasdaq is not an option, however, AIM offers the chance to list with no minimum share requirement.

Still, investment bankers, venture capitalists and analysts warn companies should not see listing on AIM as an easy way to raise capital and avoid Sarbanes- Oxley regulations.

One London analyst points out that in addition to the cost of listing—hiring advisors, a broker, and lawyers based in the United Kingdom alone is expensive—it’s expensive for companies to stay listed. All companies on AIM must retain a U.K.–based financial adviser for at least a year, and, if they want their stock to do well, they need to spend money to educate the market’s investors about their company.

And AIM is not entirely unregulated— it still requires audits and reports, and it’s important for U.S. companies listing on AIM to realize that once they have 500 shareholders, Securities Exchange Commission (SEC) reporting requirements come into play. It’s also easy for stocks to get orphaned on AIM, especially now that it is becoming more popular.

“Revenue is important, but it’s more important to have a high-level news flow,” says Ranjeet Bhatia, managing director of London–based venture capital fund Saffron Hill Ventures. “If you list on AIM and don’t have a product for two years or much news about your company’s progress, you’ll lose the interest of investors. Being orphaned on AIM is the kiss of death, and sometimes it happens to good companies just because they list too soon and can’t keep up the level of interest.”

AIM investors also like to see at least some British presence or involvement in the deal, Bhatia says, whether it’s members of the management team, the investment bank or the venture funding. Companies should think twice before listing on AIM without meeting the requirements— the market has earned a reputation as a high risk. On average, 30 percent of the companies that list each year are gone the next, and SEC regulator Roel Campos recently referred to the market as “a casino” in Forbes. However, for cleantech companies, in addition to the liquidity of the market, AIM is popular for the sorts of investors it attracts. While U.S. investment in cleantech is heavily concentrated in the venture capital realm, Bhatia notes significant, established financial capital interests in the UK see cleantech companies as a solid investment.

Bhatia says some of the U.S. companies he’s looking at are even considering AIM as an alternative to venture funding, not so much for liquidity as for financing. He says companies can sometimes get more money on AIM than from venture funds, and can do a follow-up round of capital fundraising after listing.

The number of U.S. companies listing on AIM through 2008 is likely to increase if early announcements and press leaks are any indication, which means it will actually become increasingly difficult to raise cash on the market. One analyst notes, “There’s a strong following for cleantech companies on the AIM. ... But companies need to be able to be heard above the noise.”

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TrendWatch 2008
The Sustainable Industries editorial team talked with dozens of industry leaders, reviewed hundred of articles, and sifted through stacks of research to bring to you, our readers, insights on what to expect from sustainable industries on the West Coast and beyond in the year ahead. Keeping reading for more insights into the year ahead!
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