L.A. firms lured by foreign exchanges; launching IPOs is easier but U.S. markets still goal.

More local companies are choosing to go public--but they're doing it overseas, where the fees are lower and the regulations less onerous.

Mainly because of the Sarbanes-Oxley legislation that went into effect in 2003. a typical company now can expect to spend $1 million a year just to comply with various Securities and Exchange Commission regulations--dramatically higher than just a few years ago.

"I'd much rather spend a million plus dollars on research than on meeting SEC guidelines," said Charles Call, the chief executive of Oxnard's Catalytic Solutions Inc.

His company last year started selling its stock on the London Stock Exchange's Alternative Investments Market, which is for small caps and start ups. Often called AIM, it is sometimes likened to Nasdaq of 10 or more years ago.

Catalytic is not alone. Vycon Inc. of Cerritos and Enova Systems Inc. of Torrance are among the local companies that floated their stock on the AIM in the last 18 months. Solar Integrated Technologies in Downey did so earlier: in fact. it was among the first American companies to list on the AIM after SarbanesOxley went into effect.

Randall MacEwen, the chief executive of Solar Integrated, said the money he's saved with fewer financial reporting roles and lower filing fees has allowed his company to begin contemplating listing on domestic markets.

"Going public overseas gave us the opportunity to grow liquidity quicker than if we had waited to qualify for an IPO in the U.S.," said MacEwen.

In all, 50 U.S. companies list their stock on AIM, up from two in 2002, before Sarbanes-Oxley. California businesses, with an estimated $1 billion in market value, have the largest representation of the U.S. firms on AIM.

Last year, the growth of AIM contributed to the $50 billion in stock offerings in London, which surpassed the combined proceeds from initial public offerings on the New York Stock Exchange and Nasdaq for the first time ever.

Smaller bourses

Although AIM has been one refuge for American companies looking to go public in a cheaper and faster way, it is not the only one.

The Toronto Stock Exchange, commonly called TSX, has been popular. The TSX had 30 American companies listed in 2002, but now has 120.

Russ Frandsen and John Iino, L.A.-based securities lawyers for Reed Smith LLP, said they have several deals on deck to take local companies public on foreign exchanges. AIM and Toronto are the hottest stock markets attracting L.A. issues, with Germany and Switzerland in the second tier and young upstarts such as Dubai's DIFX Financial Market vying for attention. (See related article, below)

Of the 120 U.S. issues, 20 are from California, including 2007 newcomers California Nanotechnologies Corp and Omni-Lite Industries Canada Inc. both of Cemtos, as well as oil and gas company Pacific Energy Resources Ltd. of Long Beach--with a combined market valuation of about $180 million.

David Grant, founder and chief executive of the two Cerritos companies, which have common ancestry in Canada, said he mulled over listing on AIM and Nasdaq.

"We took a look at Nasdaq and the listing costs as well as costs associated with (Sarbanes-Oxley) were too stringent for our taste," he said. "Plus Nasdaq was too big a pond for a tiny fish like us. And we thought that we might get lost under all the paperwork and higher-profile companies. AIM was better than Nasdaq but in the end, our ties to Canada won out."

There are larger, more established foreign stock exchanges than AIM and some of the others, but many U.S. companies have shied away from them because they can be almost as expensive as the big American exchanges.

As an example of the listing expenses. AIM charges a new public company approximately $7,500 for admission and yearly fees of $10,000 to $30,000. That's much less than Nasdaq's $100,000 admission fee and annual fees of $30,000 to $100,000. And it is far less than the New York Stock Exchange's initial lee of $250,000 and annual fees of $100,000 to $500,000.

Another advantage of the smaller overseas exchanges, of course, is the lower regulatory burden. Instead of preparing and filing quarterly and annual financial reports in the United States, an AIM-listed company only needs to submit earnings reports twice a year. And there's no Sarbanes-Oxley, which can cost companies $500,000 or more to comply.

What's more, it's faster. To get a stock listed on AIM takes an average of 12 to 18 months less than on an American exchange.

"Generally the ability to expedite a listing in foreign markets is a lot quicker than that of any U.S. exchanges," said Rich Simitian, managing partner of Grant Thornton LLP's Los Angeles office. "This is what's driving a lot of the smaller local and national companies to list overseas."

Nonetheless, Simitian, whose firm predominately handles clients with revenues and market valuations below $500 million, said the common thread for listing on foreign markets is to sidestep the high listing fees and the regulatory burden.

Opportunity costs 

Of course, there are formidable opportunity costs associated with floating shares on upstart markets.

One big one is lack of transparency. For instance, basic information on market capitalization as well as financials are not readily available for the period ending Dec. 31 for most companies on the AIM, a decided drawback for investors.

Additionally, companies don't enjoy as much liquidity or institutional investor presence on foreign stock markets as on Nasdaq or the Big Board.

Darren Kactic, president of Pacific Energy Resources, said that trading on the Toronto exchange has been both a benefit and a "thorn in the side." His company has hit a ceiling and is hoping to offer on the American Stock Exchange (AMEX) this summer.

"Sure you avoid (Sarbanes-Oxley) and other stuff, so that can be a benefit," Kactic said. "But you don't avoid Reg S and over time the amount you save dwindles. Besides we're a California company and the investor audience we ultimately want is in the U.S."

The Reg S he referred to is SEC's Regulation S. another drawback. It essentially means a foreign-exchange listed stock must be purchased overseas. As a result, analyst road shows and other methods companies use to get word out to investors can't happen within American boundaries.

Kactic's experience is fairly typical, some said, in that he is ready to list his company's shares domestically.

Iino said the practice of going overseas to list with ultimate plans of coming back is akin to a "public late round" of financing or the "minor leagues" of international markets.

"For small local companies, it's not about avoiding regulation, it's about raising public funds faster and easier with the option to come back later," said Iino.

Still, he said, "There are groups that don't come back and maybe (Congress and the SEC) has something-to-think about with (Sarbanes-Oxley) as London grows bigger and Canada, Germany and Switzerland grow bigger, the world flattens, and it no longer matters where you are or where you list."

BY ABULANI LEFFALL

Staff Reporter