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The Champ Feels Some Heat

Stock exchanges in Asia and Europe have made tremendous strides in raising equity capital for companies over the past three years. Is U.S. superiority at an end?

Experts credit the LSE’s creation of the Alternative Investment Market, or AIM, to attract small, international growth businesses. The 13-year-old AIM offers minimal regulatory hassles and low-cost underwriting fees. Companies file financial reports only twice a year, and don’t need to comply with the Sarbanes-Oxley Act.

Sauickie took Titanium Asset Management public on AIM in a $120 million IPO in June 2007. The process was faster and the upfront underwriting expenses were lower. Sauickie estimates his company’s all-in cost was $700,000, roughly half the price tag of a U.S. listing. And as a special-purpose acquisition company (SPAC), Titanium found other advantages. In the United States, these shell companies with no operating assets are prohibited from talking with prospective acquisitions prior to their IPO. They also must spend at least 80 percent of IPO proceeds on their first deal. UK securities laws impose no such restrictions.

Chris Work, CFO of Resaca Exploitation Inc., a Houston-based oil-and-gas development company, says his company never seriously considered going public on a U.S. exchange. The company took its $106 million IPO to AIM last July. Beyond benefiting from lower underwriting costs and lighter regulations, he says, Resaca is now paying substantially less for directors’-and-officers’ insurance than it would have in the litigation-happy States. Work also figures that if Resaca invests in foreign companies, its stock will enjoy a higher price from British investors, who, he says, with a long imperialistic history, tend to value the foreign reserves of small oil-and-gas companies higher than U.S. investors do.

It isn’t just that U.S. stock exchanges are losing domestic listings. According to the CCMR, they captured only 6.9 percent of international IPOs in 2007 and a paltry 1.7 percent in the first half of the year — and missed out on all of the 20 largest international IPOs. That pales in comparison with previous years (see “Exporting Capital” at the end of this article).

Even when foreign equity issuers do come to the United States, the CCMR notes, they almost always bypass the exchanges and raise money directly with a 144A private placement. That lets them avoid Securities and Exchange Commission registration, but also limits the potential investor pool to qualified institutional buyers.

Not So Fast

It would be hasty to write the obituary for the U.S. financial markets just yet, however. History has shown, from the Great Depression to the savings-and-loan crisis of the 1980s, that they can take a punch. The Federal Reserve posits that the shrinking share of international business going to the United States reflects a maturing of foreign equity markets, not an erosion of U.S. platforms. Growing numbers of Chinese companies are starting to list their shares in Hong Kong and Shanghai, as evidenced by Shanghai’s jumping from seventh to third in equity financing worldwide in 2007, according to Dealogic.

But as the Federal Reserve mouths confidence, it has been pumping billions of dollars into the U.S. banking system, determined to keep U.S. financial markets from crumbling. Likewise, the SEC, to keep the doors open to foreign companies, recognized international accounting standards for companies that want to list here, rather than forcing them to continue to reconcile their financial statements with U.S. generally accepted accounting principles.

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