AIM4Tech

Irony, the SEC and Sarbanes Oxley - Or: Whoever Thought The Four Horsemen Of The Apocalypse Were A Laughing Matter?

Readers of the Old Testament – particularly the Book of Revelation – will recognise The Four Horsemen of the Apocalypse as the forces of man's destruction.

Although pedants and keen students of the Bible will point out that the Good Book only names Death, common usage has it that the four are named:
• War;
• Famine;
• Pestilence; and
• Death

Film Buffs on the other hand have no interest in debating the handles of evil, preferring instead to squabble over whether Rex Ingram’s 1921 WWI masterpiece starring Rudolph Valentino, does a better job of depicting fatal Franco-German familial rivalry than Vincente Minnelli’s 1962 WWII work.

Meanwhile US tech company leaders – affectionately known by their VCs as the Living Dead - and who are familiar with www.aim4tech.com will know that, as in times of yore, their ambition is dogged by the four forces of evil that ride freely on the entrepreneurial plains of America.

The latter day Four Horsemen are:
• Sarbanes Oxley;
• The SEC;
• Nasdaq’s disinterest in smaller “unpredictable” companies; and
• The Plaintiffs’ Bar

These nihilist forces work in harmony to speed the destruction of the VC-backed tech sector as we know it.

War, famine, pestilence and death are obvious bedfellows that naturally provide little opportunity for wit or humour.

What no observers of the Grim Reaper’s kissing cousins would ever expect is that there is an opportunity for irony amongst the latter day Four Horsemen.

But irony there is.

Before I go on, and at the risk of turning this blog into a dissertation on classical literature, I feel the need to call upon the Bard for help.

One of the critical junctures in Shakespeare's No 1 play - the tragedy Hamlet - Prince of Denmark– comes when the play’s eponymous character surreptitiously changes the target of the death warrant carried by his treacherous college buddies - Rosencrantz and Guildenstern - swapping their names for his.

An act that he celebrates with the words:

For 'tis the sport to have the enginer
Hoist with his own petar; and 't shall go hard

Which roughly translated into 21st century English means:

“The next best thing to sex is to turn the tables on someone who wants to do you harm”

(For the students of 16th century English having difficulty with this translation - “hoist” means to blow up, an “enginer” is a soldier whose job it was to hoist doors and walls to allow attackers in, and a “petar” (aka petard) is a small bomb used by enginers to hoist doors and walls to allow attackers in.)

Oh, and definitionally, turning the tables in suitable circumstances is the physical equivalent of irony.

And, ironically, like petards, ironic hoists can come from the most unexpected sources: in this case the relationship between the SEC and the GAO (United States Government Accountability Office).

In a surprisingly lightly reported judgement, David M. Walker - who is none other than the Controller General of the United States - found in his report “Securities and Exchange Commission’s Financial Statements for Fiscal Years 2007 and 2006” that the:

“SEC did not have effective internal control over financial reporting;”

Now I know what you’re thinking –

“This can’t be right. Surely the organisation that is charged with ensuring reporting accuracy can’t make mistakes? Or at least if they do make them, presumably they’re not material? They're probably just itsy bitsy little errors”

Well, prepare to be shocked. It may not be right – I leave that conclusion to the great American voting public – but it is correct.

The GAO report says:

“During this year’s audit, we found control deficiencies in SEC’s period-end financial reporting process, in its calculation of accounts receivable for disgorgements and penalties, in its accounting for transaction fee revenue, and in preparing its financial statement disclosures. We believe these control deficiencies, collectively, constitute a material weakness.”

“Aha!” I hear the optimists cry as they cling futilely to hope

“Material? There's a terminological inexactitude here – these terms have always been confusing – isn’t ‘Material’ less significant than ‘Significant’?”

For those of us who serve on Boards subject to the oversight of the SEC (and I sit on two) we have grown to be very familiar with the terminological difference between “significant” and “material” but for the layperson who can only stand in wonder as the big beasts with deep pockets wrestle with the agonies of the SOX taxonomy, let me quote the GAO’s definition from page 4:

“A material weakness is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.”

Hard to believe then that material weaknesses can exist in a body charged with maintaining probity in the capital markets and whose head – Christopher Cox – says things like:

“I think we all recognize that effective internal controls over financial reporting are necessary to help ensure that companies provide investors with accurate financial statements. ……………………………….. Our regulatory scheme, which is based on full and accurate disclosure, provides transparency, which fosters the success of the financial markets. If investors lose faith in the accuracy and completeness of companies' financial statements and other disclosures, they will be less willing to invest, and our financial markets will suffer.”

(Speech to Twelfth Annual CFO Summit, Tampa, Florida, May 8, 2006)

And for those still confused about the difference between material and significant deficiencies – rest easy - it doesn’t matter. The SEC also clocked up three significant deficiencies!

“We also identified three control deficiencies that adversely affect SEC’s ability to meet its internal control objectives. These conditions concern deficiencies in controls over (1) information security, (2) property and equipment, and (3) accounting for budgetary resources,”

Hard to believe, but true.

All of which raises a big question:

“Who, in their right mind would want to IPO a young high potential, fast growing, but unpredictable company on a market regulated by a body whose passion for enforcement is equalled only by their own failure to comply?"

To help you to compose your answer, here is some homework:

1. Take a moment to read the following extracts from the GAO report:

“In our review of SEC’s year-end draft financial statement disclosures, we noted numerous errors including misstated amounts, improper break out of line items, and amounts from fiscal year-end 2006 incorrectly brought forward as beginning balances for fiscal year 2007. For example, in its disclosure for Custodial Revenues and Liabilities, SEC improperly excluded approximately $320 million in collections. In another example, for its disclosure on Fund Balance with Treasury, SEC misclassified approximately $90 million into incorrect line items.”

And, given the SEC's anal focus on companies meeting deadlines:

“In addition, the cumbersome and complicated nature of SEC’s financial reporting process discussed above did not allow SEC finance staff sufficient time to carry out thorough and complete reviews of the disclosures in light of the November 15 reporting deadline.”

2. Check out the SEC’s own clear statement on the subject.

(You’ll have to dig deep for it – the SEC doesn’t do contrition - but to aid your search, start on page 20.)

3. Use Google news to exlore the piercing commentary from the fearless members of the Press whose love of irony is legendary.

Enter “The SEC's Material Weakness” - it won't take long to read the entries.

Or you could just refer back to Who Shaves the Barber” Who Regulates the Regulator? for a prescient analysis of what happens when 50% of the Horsemen of the Apocalypse find themselves locked in ironic conflict.

Which brings us back to the question:

“Who, in their right mind would want to IPO a young high potential, fast growing, but unpredictable company on a market regulated by a body whose passion for enforcement is equalled only by their own failure to comply?"

Especially when there is a perfectly welcoming alternative in London?

Rudy Does a Campos – The War Against Error Claims Another Scalp

I’ve just returned to the UK from my old stamping ground, Boston, having witnessed yet another round in the New York/London FUD War which will see thousands of US tech companies doomed to remain trapped amongst the Living Dead.

Readers of aim4tech.com will recall the great Campos blooper of earlier this year.

That was the one in which SEC Commissioner Roel Campos carelessly likened AIM to a casino with the immortal words

"I'm concerned that 30% of issuers that list on AIM are gone in a year”

As with all such events, critics of this outrageous statement fell into two camps (weak pun entirely intended).

On the one hand were ranged the cock-upists.

They put Campos’ blunder down to an understandable slip of an ill-informed Commissioner. A view that was reinforced by his response to the Financial Times’ interviewer who questioned the provenance of Campos’ data, pointing out that the actual number of annual goners was around 3% - a global norm.

On the other hand sat the conspiracists.

Their read was of a deliberate attempt to mislead those weak and vulnerable CEOs and Directors of US VC-backed tech companies who dared even to contemplate escaping the threats of being a US public company by IPOing on London’s AIM exchange.

This latter group - the conspiracists - cited Campos’ defense as proof that his statement had been a cynical example of FUD-spreading. As I learned as a trainee salesman at IBM in the 1970s – casual disparagement is very effective but below the belt behaviour.

Spread a bit of Fear Uncertainty and Doubt and you can wreak havoc in the minds of a prospective customer.

Rhetorical questions were the favoured technique of the 70s –

“Our Nobel prize winning R&D labs published a paper recently pointing out that one of the biggest challenges facing tomorrow’s systems is the mean time between failure of critical system components like disk drives. I know that the maths for mtbf are pretty complex but I assume you’ve compared the regression analyses of our disk technology versus that of the other vendor on your short list.”

This sort of thing was a sure fire winner with the chance of being rumbled very slim.

In the unlikely event that the prospect:
a) agreed with our labs’ view;
b) had done the maths; and
c) had found that our disks were not the most reliable

all you had to do was say “Gosh, I’m surprised, totally amazed. This is a vital discovery that I need to communicate back to our Nobel prize winning boffins so that they can review their programs to ensure that our future products remain world-class. At least they’ll be able to understand your calculations - by the way, do the other vendors on your list have direct access back to their labs? Oh, and how many Nobel prizes have their scientists got?”

Now I admit that in the cold light of 2007, that all seems rather convoluted – but if you are a vintage IBM salesman or customer from the 70s it is guaranteed to instil waves of nostalgia!

Obviously it would have been so much easier to lie and quote some spurious statistic like “Our disks are 5 times more reliable than everybody else’s – only a fool builds a mission critical system with anything less than the most reliable core components.”

And if the Prospect caught us out lying all we had to do would either deny having ever said what he thought he’d heard us say, or reply “Oh I’m sorry – the numbers I was given must be wrong, let me go back and check and get you the correct figures.”

But for the IBM salesman of yore, we were unable to adopt either stratagem – for two reasons:
1. Lying is wrong before God and
2. Disparagement was a capital offense leading to summary dismissal

Fortunately for SEC Commissioners the standards aren’t as high and Mr Campos able to brush his entirely gross FUD attack by denying he had meant what he said - asked by the FT if he felt that Aim was a casino, he said:

“Absolutely not, I don’t believe it’s a casino and that was not the intention….What I was referring to was a generalised situation in which if [regulatory] standards are ignored and you have a spiral downward you could get into a situation where an exchange could be nothing more than a casino.”

Proof, the conspiracists claimed, that the Casino remark was deliberate misinformation designed to cause harm, confident in the knowledge that even if the truth is discovered most of the slur will stick because almost no one who read the first headline will ever the second.

Well, it’s not for me to judge whether it was a conspiracy or a cock-up.

I’m a Brit – and therefore brought up in a land whose manners dictate that it is unacceptably rude to impugn the motives of friends.

And we are friends – to quote the poster at BA’s Logan airport check-in desk – The UK and US Stand together.

But I am beginning to have my suspicions…..

It was a fine Fall day last Thursday and I was in Copley Square’s Au Bon Pain. At my table someone had left a copy of USA Today – I wonder whether anyone ever actually buys USA Today? – and as I idly flicked through it looking for some news (any news) I came across the Giuliani Prostate scandal.

Quoting an AP story the paper described the prospective Presidential candidate’s New Hampshire radio ad promoting his approach to healthcare reform. Using his illness to illustrate a message that the private insurance market will provide the best care he says:

"I had prostate cancer, five, six years ago,"

"My chance of surviving prostate cancer, and thank God I was cured of it, in the United States: 82 percent," he says. "My chances of surviving prostate cancer in England: only 44 percent under socialized medicine."

So here we have it – yet another reason to avoid our primitive cousin across the Atlantic.

We may stand together, but it’s better to keep our distance.

Not only are their capital markets little more than gambling houses (I thought that was what all capital markets were – but no matter!) the sheer unevolved state of the place is such that grown men are much more likely to die from malignant growths.

The message is clear - avoid the UK and all things British.

As you will already have guessed, Rudy’s claims were as specious as Campos’ – as overgrown as a terminal stage prostate.

So much so that it prompted the British Health Minister – Alan Johnson – to make a rare public intervention by a British politician in a US Presidential candidate campaign by pointing out in London’s Times newspaper:

“The British NHS should not become a political football in American presidential politics. Our rate of prostate cancer survival is actually much higher than has been claimed. The latest data shows a survival rate of over 70 per cent – and increasing.”

Undeterred by the facts – and probably confused by the interjection of a complex sporting analogy – a spokeswoman had previously insisted that Giuliani would continue to repeat the statistic and run the advertisement. The Times reported that she said the 44 per cent figure came from an article in a “highly respected intellectual journal” published by the right-wing Manhattan Institute, which he had read because “he is an intellectually engaged human being”.

And as Eugene Robinson points out in a Washington Post Op-Ed piece, those interested in the maths of the subject will find it is much more complex with the correct comparator being mortality – deaths per 100,000 of the male population.

Not surprisingly for two civilized countries on this measure the USA and UK are level pegging.

As of today and despite having its data so roundly criticised, the joinrudy2008 campaign site has remained totally silent on the subject. But then there’s no need to coment or issue a correction – the damage is done and the FUD is in circulation.

Now what does this have to do with the NOs – the Nasdaq Orphans?

Well firstly, CEOs contemplating their escape from the Living Dead can rest assured that their risk of death from prostate cancer is independent of which of the two main markets they choose for their IPO. And, to illustrate how facts can be presented to give the wrong impression – unlike most prostate-related issues the Atlantic equality is true for men and for women.

But more importantly, Rudy’s blooper is a wake-up call to the NOs’ CEOs to check all assertions about the world’s capital markets prior to deciding whether to list on AIM or to wait forever for a Nasdaq IPO.

I continue to recommend that all grown up companies seeking an IPO on a market designed for the operationally uncertain realities of relatively young companies visit the UK to check its relevance to their strategy.

Unfortunately I can’t issue the same enthusiastic invitation to Rudy.

If he is lucky enough to visit the UK in the near future (and with £1 changing hands for $2.05 he may find a lot to learn about economic management) he’d better only come if he’s in the rudest of health.

Or put another way – intellectually engaged human being or not (and I leave that judgment to others) he should spare no effort to stay out of the hands of our healthcare professionals who may find their treatment of folk who indiscriminately launch FUD missiles is less susceptible to the Hippocratic Oath and more to every citizen's solemn duty to fight the War on Error.

Labor Day’s Behind Us – Time For A Union Of The Living Dead?

That’s it.

The kids have gone back to school, the yard’s been treated, the furnace serviced and now it’s a clear run til Thanksgiving.

Labor Day has always been an ironic institution. As everyone knows it was initiated in the 19th century by the Central Labor Union as a day of rest so really it should be called No Labor Day.

And for most of the nation’s employees, government workers and the unemployed the first Monday in September has become a payless Labor Day with the time spent away from the factory or office dealing with a list of domestic chores that has built over the preceding months.

Unfortunately the same isn’t true if you’re the leader of a tech company with 6 or 7 or even more Labor Days behind you.

For you and all of your peer members of the Living Dead, Labor Day marks another period of deep reflection as you contemplate the agonisingly distant prospect of that perpetually elusive goal - an exit.

Even as you reorganize the garage, sew name tags into the kids’ clothes or whatever you find yourself struggling to summon up another wave of enthusiasm to deal with your ever more irritable shareholders as the prospect of another 12 months of hard labor come into closer relief.

First let me say that the term “Living Dead” isn’t my term. It’s one used in the US VC community to describe all of their existing portfolio holdings that were going to be sure fire 10-baggers when they put their money in back in 1999, 2000, 2001, 2002, 2003 and 2004.

Today of course, those companies bear scant relationship to those shiny new businesses contemplating the arrival of their Series A Round back whenever. Now saddled with layers of preference shares that make the global debt market’s structure seem simple, the Living Dead are soldiering on unglamorously dong what businesses have done since time immemorial – business.

Unfortunately V 2.0 of business isn’t as compelling as V 1.0 was.

Back then the talk was of planetary domination – “the leading global supplier of xyz” was the priapic boast of every company’s website. Today’s ambitions are more tempered and the tech leaders who remain in place (or more likely - their replacements) are focused on the challenges of delivering enough organic growth to satisfy their owners (cash for acquisitions dried up long ago) while worrying about how little their own ever-diluted share of the company is worth.

The lucky Living Dead (if that’s not an oxymoron) are those whose VCs have so lost interest (or been fired) that Board meetings happen only rarely.

The real losers are those who have to endure a monthly beat-up session in which their wholly unreasonable refusal to contemplate a bargain-basement fire sale to a trade buyer is picked over in fine detail by their bellicose but otherwise impotent shareholders.

The real real losers are those who, having survived another Board meeting from Hell have to go home to explain to their partner and children why the dream of early retirement, holiday homes on the coast or merely the best schools for the kids, have had to be put on hold for another month!

Perhaps the leaders of US tech companies should take a leaf from the books of an earlier generation of downtrodden workers by forming a Union so that they can rise up against their oppressive owners?

Perhaps something along the lines of the Noble and Holy Order of the Knights of Labor who organized the original Labor Day on September 5th 1882?

Started by Uriah Stephens and a group of Philadelphia tailors in 1869, the Knights of Labor set the scene for the institutional organization of those who lived by the sweat of their brows rather than off others’ capital for a generation.

Under the motto – “An Injury to One is the Concern of All." - the Knights were responsible for many innovations such as calling for a 24 hour work week and welcoming as members women and blacks (although inexplicably they excluded Asians!).

Among their more novel quirks was the exclusion of bankers, doctors, lawyers, gamblers, stockholders, and liquor manufacturers on the grounds that they were unproductive members of society.

We are probably a long way from the formation of the Knights of the Living Dead or The International VC-backed Stalled Tech Company Leaders Association to counter the oppressive employers represented by the fat cats of the NVCA.

But I guess if some brave souls were to form a Union of the Living Dead their exclusion list would be topped by Preference Shareholders.

Unfortunately next September’s streets won’t be full of chino-clad tech CEOs marching in mutual support under the banner "A hurt to one is a hurt to all".

Mind you if this year is anything to go by they will all be at the office slaving away over spreadsheets trying to figure out a way to avoid a Groundhog Day amongst the Living Dead in one year's time!

Waiting For Godot

As, I suspect is the case for most of my readers, High School seems a very time ago.

I attended a now defunct institution – High Pavement Grammar in Nottingham, England. Founded in the 18th century it remained largely below the world’s radar screen until the conviction of alumnus Dr Harold Shipman. He notoriously broke with school tradition – motto "Virtus Sola Nobilitas” (Virtue is the only Nobility) – and more importantly with his Hippocratic Oath to become Britain’s top serial murderer by bumping off at least 200 of his elderly patients.

Although Shipman and I were there at the same time, he was 5 years older and so I guess I was too young to attract his developing geriatricidal attention.

However it’s likely that we did share the eccentric Drama teacher – Bert Brown – whose singular belief was that the system needed to be brought down – and at any cost.

As part of his lifelong campaign to develop an army dedicated to his cause, Bert taught us boys about philosophy, communism, anarchy and reinforced our budding revolutionary zeal by taking us to see seditious plays by men like Chekhov, Gorki and the like.

High on Bert’s list of must see plays was Waiting for Godot. Back then it was pretty avant-garde although now it has gone the way of all flesh and joined the mainstream. In it, five characters engage in apparently meaningless discussions while awaiting the arrival of the play’s eponymous figure – Godot – who never arrives.

Written by Samuel Beckett it was a prime example of the Theatre of the Absurd, a genre which Wikipedia describes as follows:

“Time, place and identity are ambiguous and fluid, and even basic causality frequently breaks down. Meaningless plots, repetitive or nonsensical dialogue and dramatic non-sequiturs are often used to create dream-like, or even nightmare-like moods.”

And for tech company leaders who are contemplating a Nasdaq float, I can guarantee that a world where everything is ambiguous, meaningless, repetitive or nonsensical will seem horribly familiar!

For example, just last month the WSJ carried a headline announcing a loosening of the SoX strictures “Sarbanes-Oxley Is Eased”

In the generally upbeat article, SEC Chairman Christopher Cox said the guidance

"is intended to right-size the evaluation and assessment efforts of managements, and it's intended to do that for companies of all sizes,". "Investors will benefit from reduced compliance costs."

The article went on to pray that:

“Regulators hope the management guidance and a companion measure that is expected to be approved by the Public Company Accounting Oversight Board today will reduce costs enough that they will at last feel comfortable requiring smaller public companies to comply with the internal-controls provision of the 2002 law.”

And exotically named SEC deputy chief accountant Zoe-Vonna Palmrose positively trilled:

“We do believe that it’s not only doable for smaller companies, but doable in 2007.”

Never mind the trill - the thrill didn’t last long.

On the same day, Senators Kerry and Snowe read a very different conclusion in the SEC’s smoke and the PCAOB’s silence.

In a joint press release the Chairman and Ranking Member of the Committee on Small Business and Entrepreneurship voiced:

“strong concern that the Securities and Exchange Commission (SEC) failed to provide an extension for small public companies to comply with Sarbanes-Oxley internal control regulations.”

More depressingly for business leaders but not at all of course for accountants and other fans of the Theatre of the Absurd, the Senators' release went on to point out that:

“According to a recent Government Accountability Office study, small public companies spend a disproportionately greater amount of time and money to comply with Sarbanes-Oxley regulations than large public companies. Firms worth $1 billion or more spend just 13 cents per $100 in revenue for audit fees, while small businesses are forced to spend more than $1 to comply with the same rules.”

Yes - small business spend $1 in evry $100 to meet compliance regulations!

The absurdity of this situation was reinforced by National Venture Capital Association (NVCA) President Mark Heesen who claimed in their release with the following headline:

“National Venture Capital Association Warns Congress that SEC and PCAOB SOX Reform Proposals Do Not Go Far Enough Venture Industry Cites Lack of Effort by Auditors to Reduce Costs”

"First, we are gravely concerned that the accounting profession will not change its high cost practices and the recent guidance provided by both the SEC and the PCAOB regarding materiality is not specific enough to compel them to do so," Mr. Heesen testified. "Second, the oligopoly that exists for 404 audits leaves no choice for small companies in terms of service providers. It does not provide any incentive for the Big 4 accounting firms to lower costs. Lastly, because of these first two concerns, it is imperative that prior to adoption, all proposed measures are fully field tested to confirm that they will indeed reduce costs."

All of which fell on deaf SEC ears as reported in the Deal with the headline

Cox Defends SOX for Small Firms, Donna Block wrote:

“Despite persistent criticism from top lawmakers and advocacy groups, Securities and Exchange Commission Chairman Christopher Cox is standing by his agency's decision to make small businesses begin complying this summer with the most controversial provision of the 2002 Sarbanes-Oxley law.“

(By the way, Bert would have given me bonus marks at school for including Cox, Block and Sox in the same sentence - ah the advantages of a classical education!)

So while non-US companies avoid having to pay anything for controls assurance, US public companies are massivley undermining their competitive position by paying a tax 1% of revenues for the privilege!

And if you don’t believe me or even the bi-partisan Senators Kerry and Snowe, check out the tear-jerking WSJ piece by Ken Wilcox - president and CEO of Nasdaq listed SVB Financial Group (SIVB) in which he laments:

“In 2006 we paid over $20 million to the Big Four for an average of about $17,000 per employee. This is more than five times as much as we paid them only three years ago.”

In Beckett’s play, the five characters - Vladimir, Estragon, Pozzo, Lucky and the Boy - waited in vain for Godot.

The play closes with the Boy arriving to announce that yet again, Godot will not be coming; followed by Beckett’s much-quoted lines:

Vladimir: Well? Shall we go?
Estragon: Yes, let's go.
They do not move

And let's face it - for those once-meteoric US tech companies starved of growth capital, Godot isn’t coming either.

(Mind you, compared to paying $17,000 for Sarbanes Oxley compliance it’s not clear who are the unfortunate ones!)

I never thought, back in my teens with a world-class mass murderer of tomorrow sitting in a nearby classroom and Bert ranting about the absurdity of our existence that Art could ever prepare me for life!

But even such a robust a classical education leaves me unable to answer the award winning absurd question of the 21st Century US capital markets –

If Nasdaq isn’t coming – why does no one move?

Perhaps the answer lies in the definition of US Regulation, aka the Theatre of the Absurd:

“Time, place and identity are ambiguous and fluid, and even basic causality frequently breaks down. Meaningless plots, repetitive or nonsensical dialogue and dramatic non-sequiturs are often used to create dream-like, or even nightmare-like moods.”

Yet Another New Market In New York – And This Time It's Pink!

This week sees the announcement of some more apparently great news for the tech NOs – Nasdaq Orphans. Especially for those still in denial about the impossibility of an IPO in the USA. Also known as the Living Dead, the NOs are estimated to number over 300 tech companies that have received over $50m of venture capital and that would have expected to have listed on Nasdaq by now were it not for the Four Horsemen of the Apocalypse. Four unstoppable forces that have successfully prevented the NOs from realising their leaders’ visions. Wikipedia tells us that:

“the four horsemen are traditionally named Pestilence, War, Famine, and Death”

Keen theological students of the Book of Revelation will know that interpretation of the Horsemen’s role is complex and cloaked in controversy. Those more concerned with mammon and keen to vanquish non-abstract, earthly threats will recognise aim4tech’s interpretation of the Four as: • The SEC; • Sarbanes Oxley; • Nasdaq’s inexorable rise up market; and • The Plaintiff’s Bar. And for the last two or three years, the Horsemen have enjoyed the freedom of the plains, diligently carrying out the Devil’s work stifling the IPO plans of any sub-$500m companies that dared to raise their heads. Until March 5th that is, when Pink Sheets LLC commenced trading on its new upmarket version of the old down-market OTC exchange – OTCQX. I must admit that I missed the news when it was issued and I had failed to spot the original Pink Sheet announcement back in March of 2006. I don’t feel too bad about that because, as a trawl of Google’s news archive will show – it didn’t exactly kick up a storm at birth. Nor has it featured in any of the many high profile defences of New York’s capital markets uttered by Big Apple luminaries. But the OTCQX hit the news in London today when, under the headline

“Tate & Lyle lists on US Aim rival”

the FT reported that the venerable British manufacturer of Splenda had decided to list its ADRs on the bit of the OTCQX which is reserved for foreigners – the International PremierQX.

Tate & Lyle joins other high profile names Day Software Holding AG, Globex Mining Enterprises Inc., Pryme Oil & Gas Ltd., Starpharma Holdings Ltd. and Wal-Mart De Mexico S.A.B. de C.V. as the pioneering members of the International PremierQX.

For the record, the domestic pioneers (torch bearers for the Nasdaq Orphans) are: Computer Services, Inc.,(service and software solutions for banks in both a service bureau and an in-house environment) Detrex Corp., (A supplier of cleaners and solvents ) Meritage Hospitality Group, Inc., (the nation’s only publicly traded "Wendy’s Old Fashioned Hamburgers" restaurant franchisee, and is the nation’s first "O’Charley’s" restaurant franchisee) and Moro Corporation,(A leader in infrastructure products and services for the commercial construction industry)

So far, so good, but as ever, reality and perception are separated by a fairly large gulf.

Prima facie, OTCQX is good news for NOs. It offers US tech companies an alternative to AIM without the need to travel or learn another language.

But unfortunately the language of the Pink Sheets is all too familiar to American business leaders.

Never mind the threat of the Four Horsemen – the Pink Sheets have traditionally been that part of the swamp where all manner of nasty things reside.

But don’t just take my word for it - read what Pink Sheets’ Chairman and CEO – Cromwell Coulson – has to say. In today's article the FT asserted that:

“The new platform is an attempt to differentiate better-performing US and foreign companies from the mass of distressed and shell companies which account for about 45 per cent of the 8,000 companies listed on the Pink Sheets.”

Now, call me old fashioned, but if close on half of my customers were described as “ a mass of distressed and shell companies” I would come out fighting.

Mr Coulson’s position is somewhat more circumspect, and I use the term circumspect advisedly. Presumably Tate & Lyle take some comfort from this colorful description – they were until last week listed in the swamp along with the other 8,000 or so other companies proud to be public in the Land of the Free, but I doubt that their reptilian erstwhile colleagues will be as well pleased.

“You drain a swamp by taking out the good stuff. We are creating a place for reputable operating companies to separate themselves from the rest,"

But don’t give up yet! Just because a market’s leader disses his customers doesn’t mean that it’s not a serious place to IPO. After all the whole regulatory framework of the OTCQX is modelled on the one that has been so successful for London’s AIM. To quote Pink Sheets LLC’s own release:

“Based on the NOMAD model of the London Stock Exchange's Alternative Investment Market (AIM) market, the DAD and PAL advisory roles are designed to bolster investor confidence in the quality and availability of issuer disclosure”

DAD and PAL? Yep, I’m afraid so!

DAD = Designated Advisor for Disclosure
PAL = Principal American Liaison

And what do these required advisors do to bolster investor confidence? Well, in an era when all the US’s senior market honchos are emphasising the importance of tight, SOX-like regulation, the scope of the DADs’ and PALs’ jobs is described thus:

The Primary Role of a DAD is to:

• Provide professional guidance to the issuer as they build long- term relationships with managements;
• Help companies discern what information is material to the market and needs to be disclosed to investors; and
• Provide a professional review, not affirmation, of the company's disclosure

Fundamental Responsibilities of the PAL:

• Review that the issuer satisfies the listing prerequisites of the tier for which it applies. In essence, the PAL is simply acknowledging and relying on the work already completed by an international company to list on its primary exchange.
• Act as a liaison between the issuer and the U.S. market. The PAL must have the resources and knowledge base to help the issuer communicate effectively with the U.S. investment community.

But again, just because a market chooses silly names for its regulatory proxies and requires almost nothing of them doesn’t make it a bad thing.

And actually OTCQX isn’t a bad thing – it’s just a thing. In the realm of grown-up capital markets there’s chance that the OTCQX might continue to emulate London’s AIM and become a real market for proper companies with real shareholders – who knows they might even merge with Nasdaq’s PORTAL and do something interesting.

But there are three big reasons why, if I were a tech company leader in 2007 seeking the capital, paper and profile of an IPO I would look elsewhere for a solution:

1. It took AIM over a decade to shrug off its humble roots and to become the global power house that it is today;
2. Even if a vibrant Nasdaq 2.0 emerges in the USA, it will only slay one of the Four Horsemen - the SEC, Sarbanes Oxley and the Plaintiff’s bar will still be there to carry out the Devil’s work.
3. While I dither and wait in the hope that someone - Capitol Hill, the SEC or anyone else, will ride to my rescue, I know that my global competitors aren't sitting on their hands and denying themselves access to the cash, paper and profile that I need to realize my dream.

Paradox 1.01: Who Shaves The Barber? Who Regulates The Regulator?

One of the great 20th century philosophical conundrums – The Barber’s Paradox - is attributed to Bertrand Russell and it is still used to teach logic and logical thinking today.

Wikipedia describes the paradox thus:

The Barber's Paradox
“Suppose there is a town with just one male barber; and that every man in the town keeps himself clean-shaven: some by shaving themselves, some by attending the barber.
It seems reasonable to imagine that the barber obeys the following rule: He shaves all and only those men who do not shave themselves.

Under this scenario, we can ask the following question: Does the barber shave himself?

Asking this, however, we discover that the situation presented is in fact impossible:

- If the barber does not shave himself, he must abide by the rule and shave himself.
- If he does shave himself, according to the rule he will not shave himself”

One of the great 21st century paradoxes is “Who regulates the regulator?”

The Regulator's Paradox

Suppose there is a market where everyone is held to the highest standards – each participant either keeps their nose clean voluntarily – ie follows the regulator's rules - or has their nose forcibly cleaned by the regulator.

The regulator is, of course and by definition, a participant in the market.

Under this scenario we can ask ourselves the following question:

Does the regulator regulate himself?

Asking this, however, we discover that the situation presented is in fact impossible. No one, it seems, regulates regulators – least of all in SEC-land.

Dramatic proof of this was presented today when one of the SEC’s longest serving Commissioners – a Harvard lawyer and businessman - made the kind of pronouncement for which senior US capital market figures are becoming increasingly well known (See John Thain of the NYSE’s preposterous claims about London’s AIM exchange at Davos).

But it wasn't a mere Exchange head who sparked today's philosophical test. It was Commissioner Roel C. Campos widely quoted remarks . Crains’ Investment News captures the gist under the following headline:

“Campos decries AIM's 'casino' culture”

Quoting an interview with Dow Jones, the article goes on as follows:

“Securities and Exchange Commissioner Roel Campos called out the London Stock Exchange Group PLC's Alternative Investment Market for its "casino" culture, saying that it has become a place that companies flock to due to its low level of oversight.

"I'm concerned that 30% of issuers that list on AIM are gone in a year," Mr. Campos told Dow Jones Newswires at the 11th annual SEC Regulation Outside the United States Conference.

"That feels like a casino to me, and I believe that investors will treat it as such."

Many of the LSE listed companies don’t even meet SEC standards for over-the-counter or pink sheet markets, he said.

"It's a losing proposition to tout lower standards as a way to promote your markets," Campos told Dow Jones.

For those of us who are subject to the SEC’s regime (and I am, as a Director of two large multinationals) this is powerful stuff.

If such a criticism were true, then only a fool or a crook would possibly consider an IPO on London’s AIM.

And it has to be true, doesn’t it, because the SEC is the guardian of truth as we know it.

They bear this onerous responsibility not just throughout the capital markets of America but. rather chillingly as uncovered by the title of the conference at which Campos was quoted - globally!)

The SEC stands for everything clean and pure - ensuring standards, as we are reminded by Mr Campos, of only the highest order.

The impact of this is, as many a US-listed company Director knows, is enormous.

Make even a marginal slip of accuracy – say incorrectly code an accounting item, wrongly state a geographical allocation, or slip up on the fine details of international acquisition accounting and the SEC is down on you like a ton of bricks.

Typically, the onslaught starts with a piercing letter and is followed up by meetings, calls, declarations, depositions and the whole panoply of regulatory investigation and enforcement until you have either convinced them of your innocence or published a correction on Edgar.

Oh, and in most cases you have to disclose the existence of the letter to the market (using an SEC filing) which guarantees screaming headlines announcing SEC investigations and implying felonies not far short of murder.

I estimate that an SEC letter costs a company a minimum of $250,000 of attorney fees, internal costs and time - plus whatever the impact of an "investigation" is on a company's shareprice and reputation.

And I don’t blame the SEC, the Federal Government standards demand their enforcement of and adherence to the highest standards of integrity.

Take the simple matter of information quality. As the SEC's own charter demands:

“Quality. The Commission takes pride in the quality of its information and is committed to disseminating information that meets the Commission's already rigorous standards for objectivity, integrity and utility. Commission divisions and offices should treat information quality as integral to every step of their development of information, including its creation, collection, maintenance and dissemination"

And who could argue with that? Keeping the market’s participants’ noses clean is a fundamental prerequisite of an orderly market.

But hold on – what did Campos say? What were the objective grounds of high integrity that informed his assertion that AIM was a casino?

The foundation, you will recall was:

“I'm concerned that 30% of issuers that list on AIM are gone in a year”

Now it doesn’t take an expert to see what is wrong here. Where widows and orphans’ futures are at stake, a market that loses a third of its new entrants within a year is clearly not a market as we know it.

Run the math.

Actually, don’t bother, anything so unstable would clearly be a total disaster from the perspective of any rational investor with anything other than an oilman’s appetite for risk.

Unfortunately, there is one tiny flaw in Campos’ data – the pesky matter of a misplaced zero.

But what’s a zero I hear you cry – it’s nothing, by definition.

I don't now what Harvard was teaching when young Roel was there, but it clearly wasn't mathematics.

The actual number of companies that “are gone within a year” isn't 30%

Not so much a zero error – more an order of magnitude one.

If Campos had said 30% and the real number had been 25% few would have quibbled.

If he had claimed that say 15% of AIM companies churned each year, it might have raised a few eyebrows of those observers who fail to appreciate that markets for young companies tend to be more volatile than their bigger siblings.

BUT IN FACT THE NUMBER OF AIM COMPANIES THAT “ARE GONE WITHIN A YEAR” IS ONLY 3%!

So what was Campos on?

Well, we’ll never know because the evidence is destroyed and he’s heavily into damage limitation mode now.

Challenged later in the day by the Financial Times to justify his assertions he fell back on the age old claim made by all fools who engage their mouth before their brain:

The following piece appeared in the later editions of the Financial Times:

Asked by the FT if he felt that Aim was a casino, he said: “Absolutely not, I don’t believe it’s a casino and that was not the intention….What I was referring to was a generalised situation in which if [regulatory] standards are ignored and you have a spiral downward you could get into a situation where an exchange could be nothing more than a casino.”

So there you have it.

You make a little slip, you correct it under mild pressure and life moves on.
True if you're an SEC Commissioner.

Not true if you're a public company Officer.

Consider who would have made the first call to the CFO of a US issuer were they to claim that:
- their profits had risen by 30% when they meant 3%, or
- their market share had gone up by something approaching a third when it meant almost imperceptibly or
- its options had been dated 27 days earlier than was the case.

Yes, you’ve got it – the SEC.

And what would the SEC’s response be likely to be if the issuer then pleaded misquotation as their defence when, many months and many millions of dollars later they had their day in court?

Yes – you’ve got it. The answer is unprintable.

In the US, the question of who regulates the regulator will become ever more pressing as increasing numbers of savvy US companies recognise that capital, paper and profile await them in a well regulated market in a country where public servants are still expected to do their homework before opening their mouths.

Or put more simply, the constant stream of ill-informed propaganda emanating from the US will certainly deter the faint hearted from seeking a listing in London, leaving the road clear for US companies of quality to access AIM's advantages.

Oh and one other thing – if you have a moment, check out Commissioner Campos’ Bio on the SEC website.

There you'll discover that before he was appointed to the Commission, he was one of two principal owner-executives of El Dorado Communications, a radio broadcasting company, at its headquarters in Houston, Texas.

Just out of interest I Googled El Dorado Communications and Houston.

Nothing came up.

Must have been one of the 30%!

IPOoP Correction! Stockholm Syndrome Reinforced!

Last week aim4tech.com took a look at Nasdaq's recent announcement of its latest Weapon of Market Disruption – PORTAL.

Or rather, as I pointed out in that blog, it wasn’t so much an announcement: more an example of that old IT industry gambit - a pre-announcement.

For those of my readers who, unlike me, have been brought up in today’s more moral times, the distinction between an announcement and a pre-announcement probably seems arcane. So let me clarify things.

The difference between an announcement and a pre-announcement is that a proper announcement includes numbers – particularly prices and dates.

The purpose of the PORTAL pre-announcement was presumably to add further fuel to the fires of FUD (fear, uncertainty and doubt) amongst the Nasdaq hostages – the many American tech company leaders who still believe that New York will arrive like the cavalry of old and rescue them from the opportunities presented by an IPO on AIM.

Unfortunately the original article (and therefore www.aim4tech.com) contained a grievous error which may have convinced many an innocent reader that this blog is horribly biased, thus undermining the very credibility of its claim – namely that PORTAL was about as useful to a budding IPO as, well, as any other pre-announcement is to a customer!

The error was to cite the wrong SEC ordinance as the foundation on which the latest engine of IPO liquidity stands.

I am grateful to Ken Lamb of Gibson, Dunn & Crutcher’s London office for pulling me up short.

In his very helpful email he writes:

“I read today your recent blog on the IPOoP. While I agree with your conclusions, some of your statements on the way the US laws work need a bit of tweaking.
There is a difference between Rule 144 and Rule 144A. The article incorrectly cites Rule 144...it should have said Rule 144A, which is the rule adopted to allow sales and resales among Qualified Institutional Investors (QIBs).”

Now, for the lay reader, it is important fully to comprehend the distinction that a pesky capital A can make.

Ken Lamb takes up the story again:

“Rule 144:

Rule 144 has a number of components.
- The one-year holding and then resale provisions that you spoke of are ONLY available to companies registered under the '34 Act, which means they are only available to companies filing 10-Ks, 10-Qs, etc...and complying with SOX.
- For private companies (i.e., non-'34 Act filers), Rule 144 becomes interesting after securities have been held for two years, as resales are generally permissible, except for affiliates (e.g., directors, executive officers and significant shareholders (generally, 10% plus but no hard and fast rule)).
-However, affiliates, even in private companies do not have it so easy. Even if they've held the shares decades, they will still need an exemption to sell...and Rule 144 does not provide that exemption for private companies...only for affiliates in public companies (my first bullet).
- Rule 144 is, however, available to QIBs, Accredited Investors and everyone else. While affiliates have problems if it is not a company registered under the '34 Act, it's not a rule focused on QIBs.

Rule 144A:

Rule 144A is designed to permit immediate resales by QIBs, whether in public or private companies. However, QIBs generally can only sell to QIBs, and the requirements to be a QIB are very high...basically, larger institutional investors only.

The SEC, NYSE, Nasdaq, etc...have been down this path before when they developed the PORTAL concept for resales among QIBs.

It's never really taken off as a market for vibrant secondary trading among QIBs, although there is an active Rule 144A market in the US...QIBs do trade directly with other QIBs.

Most Rule 144A offerings, though, still require a company to register under the '34 Act within some reasonable period of time...usually about a year...so, that's not such a great solution unless a company believes it will be ready to be public within that time period.

I'm not sure what's different this time...perhaps they are hoping that the SEC will be more liberal under Rule 144A and therefore an actual central market can develop for trading among QIBs, as opposed to the ad hoc trading that now takes place. That would be a major improvement.”

Good news then for the Optimists?

Let Ken have the penpenultimate word.

“However, it's hard to believe that whatever they implement will be that helpful for later stage growth companies, as large institutional investors in the US have not typically taken much of an interest in them until they are truly ready to engage in an IPO...attitudes are evolving among larger investors, as you know, and it may be that an active, centralized market among QIBs could have a salutary impact on current conditions in the US and provide a viable alternative for some later stage, emerging growth companies.”

To quote John Jacobs Chief Executive of Nasdaq Global Funds:

“It (PORTAL) will appeal to companies that do not need to go public on Nasdaq but want to start trading in an institutional market without worrying about liquidity.”

So for those who think that Stockholm Syndrome is a vodka cocktail, PORTAL is probably a good thing – in a Darwinian kind of way it will protect the market from the kind of company that should never be public in the first place!

New York’s latest WMD Unveiled – Rule 144, Retro Chic & IPOoPs

There are few of us in the tech sector willing to risk the damage to our mental health by casting our minds back to life before the dot.com bust, that time when Y2K equated to the promise of the Second Coming.

Those who can, will recall the principal symbol of those halcyon days, the herald of a Brave New World of computing, the paradigm shift to end all paradigms – the Portal.

Guaranteed to spell the end of the client/server architecture as we knew it, the portal promised an age when every piece of data known to mankind would be accessible via a transparent, personally configured, one-stop aggregator. Everyone rushed to promote their flavour of this must-have accessory: from Lycos to SAP, Windows was out and Portals were in.

As Wikipedia puts it in truly dry authoritative style: “In the late 1990s, the Web portal was a hot commodity.”
Now in a burst of optimistic retro chic worthy of a place in the eponymous book by Diana Eden and Gloria Lintermans, portals are back in the news. And, in a groundhog sort of a way one portal in particular is being portrayed as heralding a new era.

This time though it’s not promising a mere step change in computing as we know it – instead, its target is the technically more challenging rebalancing of the world’s capital markets.

Portals 1.0 promised to revolutionise the way technology users accessed their information, Portal 2.0 promises to revolutionise the way technology companies access their capital.

According to yesterday’s Financial News Online:

“Nasdaq is preparing to introduce a version of its Portal system for brokers and institutions that want to trade unregistered stocks, and bonds in the US private market, allowing centralised trading for the first time.”

This seemingly arcane initiative takes advantage of the SEC’s Rule 144 which allows
shares to be sold in the US to qualified institutional buyers, without conforming to the registration and disclosure requirements that apply to fully marketed public offerings.

Normally, it has to be said, such a technical announcement would barely capture the world’s attention. But apparently this isn’t merely another minor service to be offered by the tech sector’s market of choice – it’s potentially a panacea to the problem faced by early stage companies seeking capital.

And that, of course, is a very big problem.

Once upon a time, youthfully energetic technology businesses, their enthusiasm fuelled by the cash of savvy VCs, would move seamlessly from Series C to Nasdaq, acquiring the capital, paper and profile required to make a commercial quantum leap and to become truly global players.

Then Enron happened, the music stopped and the Four Horsemen of the Apocalypse were granted the freedom of the Plains. Now the Horsemen:
– the SEC;
– the Plaintiffs’ Bar;
– Nasdaq’s disinterest in small cap stocks; and of course
– Sarbanes Oxley

have terrorised the US Public markets and sapped the will to IPO of almost all of America’s finest next generation tech companies, leaving them stranded in private equity land – truly Nasdaq Orphans (NOs).

The NOs’ plight is a symptom of a greater malaise hitting New York threatening its supremacy in the global capital ecosystem.

So dire has the situation become, that Mayor Bloomberg commissioned a report by McKinsey to examine ways in which New York’s decline on the world capital market stage can be reversed.

And New York’s first tangible response is to launch a WMD, a Weapon of Market Domination, Nasdaq’s Portal.

At first sight it seems too good to be true.

Financial News’ Shanny Basar quotes Nasdaq CEO Bob Greifeld as saying the change:

“could be as significant to the capital markets as the founding of Nasdaq 36 years ago”

Which, given that Nasdaq’s exponential growth made the 20th Century tech industry what it is today, is pretty significant.

The article goes on to say

“Greifeld said he thought Portal would compete with the Alternative Investment Market, the London Stock Exchange’s small company segment, which has attracted 350 non-UK companies from 28 countries, including the US.”

Which, given that up until Portal, AIM was the only viable alternative for tech company IPOs, is pretty significant too.

So if it is true, it solves the Nasdaq Orphans’ problem at a single stroke.

All of those tech entrepreneurs whose 2007 plans call for a big capital injection but whose VCs had moved on to Web 2.0 and beyond, can breathe easy again. Just like the Cavalry in every Western, Nasdaq rides to the rescue in the nick of time.

No need to worry about London and AIM. Put away the travel guides, cancel the passport application, forget trying to remember what ‘Nomad’ stands for, dust off the SEC filings and get ready for Nasdaq via an IPOoP (IPO on Portal).

35+ years working in the tech sector on both sides of the Atlantic have tempered my natural optimism with a healthy layer of cynicism.

As Vince Lombardi must have said – “if it looks too good to be true – it is too good to be true”

One of the skills learned by anyone who has spent 3 decades in our industry is the ability to read between the lines of public pronouncements.

So, when someone says words such as “Nasdaq is preparing” and “Nasdaq plans to introduce…” and “subject to SEC approval….”

I hear “Pre-announcement”

Now don’t get me wrong – I have nothing against pre-announcements. In common with most in my generation, I have used the technique to freeze out the competition until my own product was ready on countless occasions.

The problem with Nasdaq’s Portal isn’t that it’s a bare-faced pre-announcement; it’s that it’s a bare-faced tease.

It is clearly designed to drive FUD (Fear, uncertainty and doubt) into the hearts of the Nasdaq Orphans looking to list in London by implying proof that New York is changing.

Unfortunately, if and when Portal does, eventually, see the light of day it isn’t going to solve the Orphans’ problem.

Trading equities on a truly public exchange like Nasdaq or AIM and trading them on the Portal couldn’t be more different.

A quick look at the following extracts from the conditions laid down in the SEC’s Rule 144 gives a clue:

1. Holding Period. Before you may sell restricted securities in the marketplace, you must hold them for at least one year.
2. Adequate Current Information. There must be adequate current information about the issuer of the securities before the sale can be made.
3. Trading Volume Formula. After the one-year holding period, the number of shares you may sell during any three-month period can't exceed the greater of 1%
4. Ordinary Brokerage Transactions. Neither the seller nor the broker can solicit orders to buy the securities.
5. Filing Notice With the SEC. At the time you place your order, you must file a notice with the SEC on Form 144 if the sale involves more than 500 shares or the aggregate dollar amount is greater than $10,000 in any three-month period.

Actually, you don’t need to read the Rule at all, John Jacobs, Chief Executive of Nasdaq Global Funds says it all in the Financial News article:

“it will appeal to companies that do not need to go public on Nasdaq but want to start trading in an institutional market without worrying about liquidity.”

An IPOoP’s not so much an IPO then, more of a LIMPO (Limited Invitation for Messy Private Offering).

Bad news for those who claim/believe that the US IPO climate is likely to change in 2007.

Good news for those that they compete with and who have already begun to line up their London IPO.

London’s alert level raised from hurt to peeved

The news coming from the capital markets of London and New York in recent weeks has been characterised by streams of negative propaganda targeted at US NOs – Nasdaq Orphans.

All of it has emanated from New York which is trying gamely to figure out its strategy in an increasingly competitive global market.

As reported in an earlier blog, things have become so bad that Mayor Bloomberg has been compelled to fire the kind of distress flare more usually associated with incoming CEOs of troubled companies than with leaders of great metropolises – he has commissioned McKinsey to develop a strategy for sustainability.

It’s not often that cities worry about their longterm survivability – and especially not those rooted in 20th century service industries such as finance and banking. That’s more usually the preserve of places whose livelihood depends on steel mills, coal mines or metal bashing manufacturing.

The Mayor was driven to such extremes by the realisation that the Big Apple has been overtaken by London and Hong Kong – at least when measured by IPO volumes.

That shift in global power has been felt at both ends of the corporate spectrum affecting the world’s businesses, whether larger or small with London’s AIM becoming the most active international market for growth companies.

In addition to consulting McKinsey, the banks and exchanges of New York have also sought to protect their position by adopting an old Mafia trick - frightening its competitors’ customers away.

Hence the various outrageous allegations about the absence of regulation and liquidity that have featured in the American Press since last year.

London’s response so far has been muted – as a friend of mine put it

“I gather that London’s alert level has been raised from concerned to peeved”

The response of the NOs – tech companies that, by now had expected to have IPOed on Nasdaq has been less restrained with a rumoured 50+ Valley-based tech outfits visiting London and inspecting Nomads, attorneys and accountants in preparation for a 2007 flotation.

But, while New York stews, Silicon Valley and London are getting on with making money from the tectonic evolution of the world’s capital markets.

Today's FT broke the news of another breakthrough move with the announcement that the UK’s Panmure Gordon had agreed to acquire California’s Think Equity Partners LLC.

Panmure Gordon is an old London corporate and institutional stockbroker, and when I say “old” I mean it was founded (by Harry Panmure Gordon) in 1876 – 30 years before the NYSE moved to Broad Street.

In the last few years, in step with AIM’s growth, Panmures (as it is known in the City) has grown by absorbing other brokers including Durlacher and more recently part of Lazards.

Panmures is a dyed in the wool London institution.

Think Equity is very much a child of the Valley.

Founded in 2001 by Merrill Lynch old hands - Deborah Quazzo and Michael Moe - Think (to quote their website) “offers targeted research, investment banking, wealth management and asset management services for institutional investors, corporate clients, venture capitalists, entrepreneurs and financial sponsors”

Combining the two very different houses creates another Anglo-American investment bank with access to high-potential US businesses and London’s capital market.

As Michael Moe puts it:

“ We see a unique opportunity to create the new “London bridge” bringing access to the London marketplace for US and Asia-based clients and access to the US marketplace for European based clients.”

London may be peeved, but, step by step, it is building an unassailable position as the market of choice for savvy US tech leaders who have no stomach to face the SEC, Sarbanes Oxley and the Palintiffs’ Bar!

Three Wise Men Visit London – Two Return. One Woman Left Stranded.

Last week saw three critical events in the titanic Atlantic struggle between London and New York for capital market supremacy.

Tech company leaders could be forgiven for failing to miss all of them as market pressures from Dell’s planned resurgence, the entertainment industry’s fightback against YouTube, the first full week of public Vista and the many other key industry happenings vied for their attention.

Not to worry!

No CEO or CFO should fear that their ability to score small talk points with their VCs at the next Board meeting has been fatally impaired.

As ever, aim4tech.com can be relied on to provide facts and comment on the key happenings that affect every quality company’s opportunity to find capital, paper and profile on London’s AIM.

Wise Man #1
On Monday Mayor Bloomberg, hot from the publication of McKinsey’s insightful report into what has pushed New York behind London and Hong Kong in the global IPO stakes, visited the enemy and sat down with the head of the FSA (Financial Services Authority) - Sir Callum McCarthy.

Sir Callum, knows a thing or two about regulation, and about banking, and about New York. His previous regulatory reputation was built on his pioneering work in opening up Britain’s monopoly energy supply market to competition as Chairman and CEO of Ofgem (Office of Gas and Electricity Markets).

His fitness for purpose as a market regulator is reinforced by being a trained economist and a Stanford Sloan Fellow to boot. His fitness for purpose to be a financial markets regulator is built on his time as a real banker at Kleinwort Benson and Barclays' His knowledge of New York stems form his time there as head of Barclays' US operations.

So, why was one old Wall St hand calling on another?

The biggest clue to the answer lies in Bloomberg’s press release following their tete a tete and quoted in the New York Times:

“The F.S.A. is an example of the kind of streamlined and responsive regulatory framework Congress must implement if New York City is to remain the financial capital of the world,”

Students of New York’s increasingly uncompetitive place in the world’s capital markets will doubtless concur with the Mayor’s aspirations!

Readers of aim4tech.com will recognise the importance of dealing, not just with the regulatory stranglehold that defines today’s public markets, but with all four of this blog's favorite enemies the Horsemen of the Apocalypse namely:
– The SEC’s unstoppable regulatory advance;
– Nasdaq’s disinterest in sub half-billion dollar companies;
– Sarbanes Oxley; and
– The Plaintiffs’ Bar which keeps Officers of public companies on writ-alert 24/7.

Cynics amongst the readership will, of course, question the political will in Congress to rein back the four horsemen, never mind to slay them.

And until that happens, we can expect to see an increasing stream of big US names making the trip east to observe London’s principles-based regulation in action.

Wise Man #2
One such big name who can be expected to make fewer trips over the next few months is Bob Greifeld President and Chief Executive Officer of Nasdaq.

Nasdaq owns 29% of the London Stock Exchange (which in turn owns AIM) and had launched a hostile bid to acquire the balance in late November last year.

The period between then and now has been marked by a rather acrimonious dispute between the LSE’s management and their largest single shareholder – Nasdaq – who rightly felt miffed. The tech-heavy exchange had dramatically shown its love for London as a jewel in the crown of its offshore asset strategy by borrowing up to the hilt to fund the $5.3bn transaction.

On Saturday, Nasdaq announced that their bid had failed.

In fact it didn’t just “fail” it totally bombed with almost no shareholders offering their shares. The tally showed that less than 0.5% of the available equity was tendered to the bid leaving Nasdaq with only 61,291,389 shares - a massive 44,432,818 short of a majority.

So why did the LSE’s shareholders reject Nasdaq’s advances so violently?

There were two possible reasons.

The first and obvious one of which was a fear of the USA’s Four Horsemen of the Apocalypse arriving on this Island’s shores – a prospect which would have been about as welcome as the arrival of avian flu.

Nasdaq was very sensitive to the risk of cross-infection however, and in their Offer Document, they sought to allay any such fears with the following commitment:

“A robust governance and regulatory proposal
– LSE will continue to be run as a Recognised Investment Exchange (“RIE”) regulated solely by the UK Financial Services Authority (“FSA”)
– NASDAQ has held detailed discussions with the FSA and is confident that, following the Transaction, LSE will be able to meet its obligations as an RIE “

Which was really very wise of them: because four days earlier the UK Government had confirmed their intention to assert a nation’s right to maintain its sovereign powers to make its own laws – even in the face of the SEC and Sarbanes Oxley!

The Investment Exchanges and Clearing Houses Bill was introduced to the House of Commons on November 20th and made its rapid process through the Parliamentary process, becoming law on December 20th.

All done in plenty of time to ensure that if Nasdaq were successful in buying the LSE, regulation of the markets would remain with Mr Bloomberg’s host – the FSA - for ever.

So, if regulatory creep wasn’t the reason for the humiliating rejection of Nasdaq's offer – what was?

And the answer is, the root of all evil – money!

Put simply, the exchange’s shareholders think that they can get a better price by holding on. And they think that despite Nasdaq’s avowed intent to compete vigorously with them.

That threat is not one to be taken lightly with every tech company’s favourite exchange likely to join with any anti-LSE initiatives going, of which Projects Turquoise and Boat are two that have emerged so far.

And with over a quarter of the LSE’s stock, Nasdaq is in a powerful position to block any alternative bids that may appear on the horizon.

Mind you, they are somewhat caught in the horns of a dilemma.

On one hand I’m sure the boys in Times Square would like to deal punishing blow to their counterparts in Paternoster Square, home of the LSE.

But on the other hand it would be rather dumb to drive the price down too far given how much they paid for their shares in London – that would fail the shareholder value growth objective!

All of which has presumably been priced into the shareholders’ rejection of the takeover – a clear statement that those who should know see an even more valuable role for London in the coming months and years.

Wise man #3
None of which will be of concern to Edward Forst.

Last week the FT announced that Goldman Sach’s Chief Administrative Officer would be relocating from New York to London. The rationale behind this move? Quoting an internal memo authored by Lloyd Blankfein, Goldman's chairman and chief executive, the FT reported:

"London is a global financial centre and key to many of our clients in both developed and emerging markets . . almost 50 per cent of the firm's revenues come from outside the Americas, and more than 40 per cent of our people are located outside the US. Ed's presence in London will help us to continue to drive the international growth of the firm."

1 Woman Stranded
All of which likely will come as a surprise to Kathryn S. Wylde an NYC worthy and president of the Partnership for New York City.

To add balance to that piece on Mayor Bloomberg’s trip to London, the New York Times article that quoted him also carried a quote from Ms Wylde.

Asked whether it was unusual that Mayor Bloomberg would seek advice in London, given that it is a financial rival to New York, this "internationally acclaimed expert in housing, economic development and urban policy" said:

“I can’t imagine London would want to be known as a place of loose regulation. They’ve had their own issues with corporate scandals, which has created some pressure for tighter regulation.”

Now, call me pedantic, even if I ignore the strangled grammar's clue, what in Mayor Bloomberg’s statement – or for that matter anywhere else – did I miss that Ms Wylde picked up?

He said:

“The F.S.A. is an example of the kind of streamlined and responsive regulatory framework Congress must implement if New York City is to remain the financial capital of the world,”

She heard:

“I can’t imagine London would want to be known as a place of loose regulation.”

All of which reminds me that the world can easily be divided into two camps:
– those who have absolutely no clue what they’re doing or talking about and
– those who recognise the opportunities now that the World is Flat.