U.S. markets lure damaged by Sarbanes-Oxley

By Megan Davies and Joseph Giannone

SAN FRANCISCO (Reuters) - Cooler investor demand for small companies and the cost of stricter financial regulations have made U.S. markets less attractive for initial public offerings, but New York exchanges remain the top choice for overseas firms, venture capitalists said on Monday.

For years, almost all non-U.S. companies going public aspired to a listing on the Nasdaq Stock Market (NDAQ.O: Quote, Profile, Research, Stock Buzz), considered to the most liquid, most open exchange for both companies and investors.

But the added expense of complying with stricter reporting standards under the U.S. Sarbanes-Oxley Act of 2002 created an opening for other markets, such as London's Alternative Investment Market, to lure start-ups with the promise of a liquid marketplace and looser regulations.

Even so, Nasdaq is still the top choice among emerging market companies, U.S. venture capitalists said at the Reuters Venture Capital Summit held in San Francisco.

"Nasdaq I think is still the best market out there," said David Chao, co-founder of Doll Capital Management. "Folks in China, no question, view a Nasdaq listing as the primo, the primary -- it's the prize. For them to go public (on) AIM or Hong Kong is the next best thing."

Sarbanes-Oxley, enacted in the wake of the Enron and WorldCom scandals, was meant to clean up corporate governance and accounting.

But stricter corporate reporting and governance requirements created new expenses, and the emergence of viable alternatives has prompted many companies outside the United States to shy away from U.S. markets. Of particular concern is Section 404 of Sarbanes-Oxley, which forces more disclosure about corporate internal controls.

For small start-up companies, these costs are a significant drain on profits and subsequently the companies' market value. That has allowed AIM, a division of London Stock Exchange (LSE.L: Quote, Profile, Research, Stock Buzz), and Paris-based Euronext ENXT.PA, to compete for listings.

NEW ALTERNATIVES

Claude Leglise, managing director of U.S. venture capital firm WI Harper, said AIM and Euronext had been "all over Asia" encouraging small companies to choose their exchanges.

"A key selling feature is that liquidity is almost as good as Nasdaq and there's no Sarbanes-Oxley," he said. "So you structure the company so it can exit anywhere."

At the same time that U.S. lawmakers made the American markets less inviting, other countries have developed broader, more liquid systems that provide a viable alternative.

"Nasdaq, or the U.S. markets, had a quasi-monopoly on the world financial markets, they were the most attractive, the most liquid, the most open," Leglise said. "That quasi-monopoly has been absolutely destroyed, there's no question about it ... The magic is absolutely broken."

The loss of market share in new foreign listings has drawn fire from business interests and some key U.S. lawmakers who want to roll back many provisions of Sarbanes-Oxley.

Meanwhile, venture investors noted that exchanges in Hong Kong, Japan and Singapore are also options for non-U.S. firms, depending on a company's management and industry sector. Hong Kong, for example, is a good venue for Chinese companies whose management does not speak English well.  Continued...