London Calling

The London stock exchange is courting American entrepreneurs for its small-cap market. Are you a perfect match?
Magazine Contributor
6 min read

This story appears in the July 2006 issue of Entrepreneur. Subscribe »

The British are coming. And this time around, they're bringing cash for growing businesses.

Nearly every month this year, representatives from the London Stock Exchange will fly to the United States to make a series of presentations about how U.S. companies can go public and score big bucks on the LSE's international small-cap market, called the AIM. (AIM originally stood for Alternative Investment Market, but these days, the investments are not nearly so alternative.)

Bruce Khouri heard the AIM calling in 2003. As founder and COO of Solar Integrated Technologies (AIM symbol: SIT), Khouri was funding his company's rapid growth out of his own pocket. Solar Integrated's unique solar-electric roofing systems were gaining popularity among commercial customers like Coca-Cola and Frito-Lay, so Khouri needed a substantial amount of cash to finance assembly and installation for waiting customers. He also had his eye on foreign markets, such as Germany, where solar electricity is more widely embraced, but he lacked the cash to launch marketing, inventory and installation crews there.

"At the time, raising capital in the U.S. was not appropriate," says Khouri, 47. "We were a guppy in a large ocean." With only $8 million in 2004 sales, Solar Integrated Technologies was not going to get the attention it needed from the public markets in the U.S. Although venture capital was an option, Khouri ruled it out. "We didn't take the VC route because the haircut would have been dramatic," he says, referring to the low price most VC investors would have been willing to pay for the company's stock. With that possibility nixed, a public offering on the AIM seemed like the perfect option.

Rapid growth and European expansion plans are two things that make companies like Khouri's good candidates for IPOs on the AIM, says Anne Moulier, North American business development manager for the LSE. The excitement in her voice when she talks about the AIM is uncharacteristic of a banker--and it's not a tone you'd hear on Wall Street. Then again, the AIM is definitely not Wall Street.

"We believe the AIM can offer what Nasdaq used to, but no longer can today," Moulier says. "It's about access to capital and to blue-chip institutional investors." Indeed, it is the investors that set the AIM apart, not only from the U.S. markets, but also from small markets around the world. Markets in Germany, Korea, Singapore and Toronto, to name just a few, try to attract listings from U.S. companies. Only the AIM has truly succeeded because London's institutional investors, such as Bear Stearns, Citibank, Merrill Lynch, Morgan Stanley and TD Waterhouse, are willing to invest in AIM companies.

"Last year, companies raised $15.6 billion on [the] AIM," says Moulier. "Ten billion of that was from initial offerings and $5.6 billion was through secondary [follow-on] offers." All in all, 519 companies joined the AIM in 2005, bringing the total number of companies listed to over 1,300, representing 25 countries.

The market is young and rich; since its inception in 1995, it has placed over $42 billion. More than 40 percent of the total investment has gone to companies based outside the United Kingdom, according to the LSE's own numbers.

The AIM is clearly picking up steam. During 2004 and 2005, the market introduced 181 new foreign companies--almost double the total of the previous nine years combined. As for U.S.-based companies, the momentum is obviously building. More than 15 percent of new foreign companies listed on the AIM last year were based in the U.S. The total number of U.S. firms listed is now 37, and there are more in the queue.

That's probably no surprise to any entrepreneur who has tried to comply with Sarbanes-Oxley reporting requirements. U.S. markets like the Nasdaq seem hamstrung by Draconian regulations and lackluster economic performance. Although the Nasdaq once rolled out the welcome mat for young, growing companies, these days going public seems reserved for companies that can afford the immense costs of regulatory compliance.

The advent of Sarbanes-Oxley legislation has certainly made Moulier's job easier, she says. By comparison, listing (and staying listed) on the AIM is a walk in the park. The exchange's unique structure makes it basically self-regulating. Instead of lengthy filings, the market has a system of professional representations by small investment banks called "nominated advisors," or "nomads" for short. Nomads get to know the company in great detail, then represent the company to the institutional investors. This essentially skips the kind of registration requirements that the SEC places on companies that list in the United States.

Solar Integrated Technologies first became interested in the AIM in 2003. It started with a few introductions to advisors and bankers in British financial markets. Only five months later, it debuted on the AIM, making the company $22 million richer. Of that, Khouri says, approximately $2.9 million went toward paying lawyers and accountants, underwriters and other intermediaries. The company's nomad also received stock warrants.

The timeline is short on the AIM not only because the regulations are more flexible, but also because the institutional investors are a tightknit group. "We had only six institutions that dominated our free float," says Khouri, referring to the financial firms that initially purchased his stock on the AIM. Together, the investors purchased about 25 percent of the company, he says.

Perhaps the most interesting thing about the AIM is the diversity of companies that have found a home there. From very early stage companies to very mature ones, U.S. and international businesses in just about every industry are represented. For example, Moulier points out two very different success stories from the United States in 2005: Polyfuel, a development-stage alternative energy company in Mountain View, California, that raised $15.5 million in an initial round and $17 million in a second round (which took just 48 hours from start to finish); and Billing Services Group, a telecommunications services company that had 2005 revenue of $157 million and raised almost $250 million through two offerings in 2005.

Those results should be encouraging to U.S. entrepreneurs who are frustrated with markets at home. The same pressures that make raising money stateside so difficult are opening doors--and checkbooks--in London. The process of listing on the AIM is straightforward, and there is an abundance of reputable professionals available to help entrepreneurs throughout the process--including the people behind the market, like Moulier. "We're committed to the U.S. market; it's an important market for the LSE," she says.

Likewise, a growing number of entrepreneurs in the United States, like Khouri, are blazing a wide path and are happy to share their experiences. "The AIM platform was perfect for us," says Khouri. "It was the right place at the right time."

David Worrell is author of the e-book Finding Funding.
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