Compliance Blog

There has been much press in the U.S. as to how the Sarbanes-Oxley Act of 2002 is driving away IPOs. There has also been much glee in places like London where the AIM Exchange (Alternative Investment Market) has experienced a dramatic increase in listings as compared with U.S. markets such as NASDAQ.

Is the effort and cost associated with SOX really a detriment to the market and to investors?

A progressive Republican senator from California (imagine!), Senator Hiram Johnson, is reported to have said in 1917 around the time the US joined WWI was that " When war is declared, truth is the first casualty."

Methinks "truth" is lacking in the debate as to the perceived weakness in U.S. capital markets.

Some facts of interest to help move the debate forward are as follows:

1. Listings on AIM are indeed far higher than NASDAQ.
2. Legal costs and accounting costs are higher to list on U.S. markets than international markets.
3. IPO discounts (money left on the table) are generally higher on U.S. markets.
4. U.S. markets provide higher overall investor returns and greater share multiples than foreign markets.
5. Indeed the compliance requirements are stricter on U.S. exchanges than all other exchanges. Only the Canadian markets (TSX and TSX Venture) have compliance standards of comparable quality to the U.S. markets.

A very interesting study by an M&A boutique, Innovation Advisors, can be found here under the title- "Research Shows AIM Misses the Mark".

It appears to me that the following can be said on this debate as to U.S. market competitiveness:

1. The U.S. was an expensive market (fees, discounts) prior to SOX - not because of SOX. If you want to be the "Wal-Mart of IPOs" then lawyers, accountants and brokerage firms are going to have to reduce their fees.
2. Smaller and in many cases marginal firms are listing on AIM. It smells lots like a "pink sheet" market that is more geared to initial investors getting some money out than a long-term trading alternative.
3. Investors will make more money and companies will achieve greater market valuations on U.S. exchanges.
4. Some of the large foreign IPOs, particularly from China, never had any intention of listing on U.S. exchanges for both political and transparency (lack thereof) reasons.

You could actually argue that SOX is improving the quality of firms on U.S. markets and forcing marginal businesses to capital pools with lower standards.

There is no doubt that investors in the U.S. appear to be enjoying the benefits!

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