Protonex Technology Corp. is a company in Southborough, Mass., that develops fuel-cell systems for military and commercial applications. By early 2006, it had raised private equity from venture capital investors twice and was ready to go public. Protonex was seeking money for R&D, commercialization of new products, and overseas expansion at a time when alternative energy companies were being well received in equity markets in countries that had signed the Kyoto Protocol. While Protonex did consider NASDAQ, the stalwart of technology stock markets, for its initial public offering (IPO), it concluded that this was not the best option.
”Early-stage technology companies with low revenue [and] no profits but a lot of potential are typically too small for today’s NASDAQ market,” says Protonex CEO Scott Pearson. What’s more, it would have been ”financially difficult” to comply with the demanding reporting required under the Sarbanes-Oxley rules adopted by the United States in the wake of the Enron and Worldcom scandals.
So, in July 2006, Protonex turned instead to London’s Alternative Investment Market (AIM) to raise US $16.2 million in equity capital. ”We ended up very pleased,” says Pearson, who reports that the company’s share price has risen more than 12 percent since the IPO. ”Our AIM listing gave us an awareness and credibility outside the U.S. market. We are not viewed as just an American company anymore.”
For small to midsize technology companies like Protonex—short on capital but long on global ambitions—AIM is fast becoming the IPO market of choice. ”Fifteen or 20 years ago a start-up company would go on NASDAQ and raise $40 million or less and get good coverage from analysts and a robust market for its shares following the issue,” says Bryce Linsenmayer, a corporate and securities attorney with Haynes and Boone, in Houston. ”But you can’t do a deal like that in the States anymore.”
The NASDAQ electronic market, founded in 1971, for many years offered U.S. entrepreneurs access to public equity. But these days NASDAQ is setting its sights on larger corporations, the likes of Google and Microsoft. Also, fewer and fewer U.S. analysts have been covering the financial progress of smaller public companies since the dot-com bubble burst, making it more difficult for these firms to keep investors interested after the IPO.
Jim Poage, president of The San Antonio Technology Accelerator Initiative, a not-for-profit organization that offers advice and support to local technology-based companies, finds the shrinking opportunities for smaller firms in the U.S. public equity market worrisome. ”New companies are the lifeblood of our system,” he says. ”And if you withdraw one of the major carrots of financial reward, that is a very troubling macroeconomic trend.”
AIM, launched as a submarket of the London Stock Exchange in 1995, has recently stepped in to fill the breach left by NASDAQ, aggressively marketing to U.S. companies. As of the end of September 2006, 47 U.S. companies were listed on AIM; 16 of those (34 percent) had joined in the first nine months of 2006.
One of AIM’s attractions is that it requires no minimum capitalization or issue size. (A company’s capitalization is its share price multiplied by the number of shares outstanding; issue size is the number of shares sold at one time multiplied by the price per share.) The average capitalization of an AIM IPO issuer is $90 million, and the average issue size is $30 million to $40 million.
Nominated Advisors, known as Nomads, are a unique feature [see photo, "Support for the Faint of Heart"]. These investment advisors, licensed by the London Stock Exchange and handpicked by AIM, guide issuers through the process of coming to market, preparing the prospectus, and vouching for the company’s investment potential. Nomads are directly responsible to the exchange for the integrity of the issuers they bring to market—AIM issuers do not have to file with any UK regulatory authority—and often act as brokers, setting the initial share price and helping buy and sell the shares after issue.
Unlike the brokers and investment banks that bring companies to the public market in the United States, whose relationships with a company often end after the IPO launch, Nomads are required under AIM rules to continue to guide and monitor a company in the years following the IPO. They take the role very seriously. ”It’s a virtuous circle you get into if you associate with companies that grow and make money for investors,” says Adam Hart, head of business development for the London Nomad company KBC Peel Hunt. ”If your client company goes bad, it’s bad for you.”
Anne Moulier, head of U.S. Business Development for AIM, puts it more bluntly: ”Nomads build their reputation on the back of AIM. If they lose their AIM license, they lose their business.”
Because the listing process is streamlined and straightforward for AIM companies, the lead time to market is relatively short—as little as six weeks. Compare that with the four to six months required for a company to be ready for a NASDAQ issue. Since Congress passed the Public Company Accounting Reform and Investor Protection Act (also known as the Sarbanes-Oxley Act), domestic public markets issuers face a big increase in financial and corporate governance reporting requirements. Section 404 of Sarbanes-Oxley, which requires companies to assess the effectiveness of their internal controls at the end of every fiscal year, has presented particular compliance challenges for small companies.
Another attractive feature of AIM is that a company, once listed, can dip back into the market for additional capital in a matter of days, giving it the flexibility to move quickly when acquisition opportunities arise. Companies listed on U.S. exchanges are required to consult shareholders every time they come to market for equity capital.
Overall, NASDAQ has a higher number of buyers and sellers on a given day than AIM. That is, it is more liquid. But AIM is more liquid for shares of companies valued between $100 million and $200 million. In particular, AIM can deliver on liquidity events, such as IPOs, Moulier observes. By October, companies had raised $18 billion on AIM this year, while NASDAQ companies had raised only $8 billion.
The total cost of raising capital on AIM is also substantially lower than on NASDAQ, according to the Canadian investment bank and Nomad company Canaccord Adams. The total approximate cost for a small-cap company coming to market on AIM, Canaccord reports, is $922 000, versus $2.3 million on NASDAQ.
Unlike the U.S. Securities and Exchange Commission, which requires companies to file quarterly financial reports, AIM requires only semiannual reports. ”When you have to focus [just on] every 90 days, it can create behaviors that are not always optimal for building longer-term value,” says Stephen Dixon, CFO of Carlsbad, Calif.�based Alphatec Holdings, a $160 million cap medical device company that raised $83 million on NASDAQ earlier this year. In contrast, AIM’s reporting requirements reflect the longer-term investment horizon of its institutional investors—three to five years out.
”AIM is set up with the appropriate rules and regulations for smaller companies,” says Hart, of KBC Peel Hunt. ”Some say it is a ’light’ touch. The AIM rulebook is very small; it runs to 30 pages. Put that up against the SEC and NASDAQ rules, and I know which market I would like to apply to.”