AIM4Tech

The Age of IPO Market Turbulence - A Conversation With Alan Greenspan

It was George Bernard Shaw who once observed of America and the UK that we are “two nations divided by a common language”

Students of this particular claim and of our common language in general will doubtless know the work of another great Irish playwright, wit and author of such classic works as Dorian Gray and The Importance of Being Earnest – Oscar Wilde.

Note: For the pedants amongst my readers there will be some upset now for technically Oscar was Anglo-Irish, and that’s important for those who would claim him as their own. However I’m just a simple Anglo-African (with bits of Russian) and I believe that although Oscar was born in Dublin before the Easter Uprising of 1916 and so technically was a child of the English colonial era – his full name eliminates all doubt of his true heritage – Oscar Fingal O'Flahertie Wills Wilde!

But I digress.

The reason I mention Wilde is because “Earnest’s” female lead – Lady Bracknell – is particularly famous for two lines. One has to do with handbags and the other, delivered when the hapless Earnest (who is also known as Jack – for reasons too complicated to describe now if you don’t already know the plot!) has just explained that he is an orphan:

“To lose one parent, Mr. Worthing, may be regarded as a misfortune; to lose both looks like carelessness.”

Now I mention all of this because this week I had the honor of hearing one of the English language’s most lucid speakers not once, but twice.

To some this might seem like masochism - aren't there enough things to attend without going twice? - and to others mere gluttony. But it must be said that only a fool of Wildean proportions would pass up any opportunity to hear the man who is famous for saying something along the lines of:

“If you think you have understood me, then you haven’t been listening.”

Yes! This week I rolled up to hear Alan Greenspan speak twice.

The first was a rather grand affair at Reuters and the other, a more homey one hosted by KPMG at "the epitome of British style Claridge's.

The Reuters do (and here I declare my interest as a Director of that wonderful company) was very stately with speeches by our revered Chairman – Niall Fitzgerald – our fresh (or more properly, given the election fever currently raging through the UK, I should say our "current”) Prime Minister – Gordon Brown – and his replacement at the Treasury – the little known Alistair Darling (whose unchanging looks I suspect owe more to Dorian Gray than to the family in Peter Pan).

It was a very good affair. Against a backdrop of Greenspan shamedly pushing his book - The Age of Turbulence - and Brown unashamedly pushing his right to remain the leader of the world’s 5th largest economy and America’s greatest ally, we were treated to a riveting analysis of post Cold War economics delivered in the dry but enlightening style for which the ex-Fed Chairman has long been famous.

In contrast to Reuters, the KPMG event was a cosy fireside chat (albeit without a fireside, due, no doubt to the current European mania for health and safety rules) between Mr Greenspan and KPMG(UK)’s Vice Chairman Alistair Johnston.

That being said, the biggest difference between the two events wasn’t the political stature of the speakers or the standing/seating arrangements, but rather that at KPMG, because there were no pre-election speeches, there was time to ask questions.

Many years ago I decided that when attending lectures and seminars it is a wise tactic always to sit at the front. There are three reasons for this:

1. It’s more interesting because by being in the thick of things, even on mediocre occasions, it is hard to become bored or to fall asleep;
2. Because you can always catch the speaker’s eye you can be guaranteed to be able to ask a question; and
3. You can see and hear everything.

Admittedly this last point has only become important with the advancing years as the distance away from University lectures grows ever greater!

And to stick with the historic theme, I admit that I hadn’t fully developed this model when at University – in fact in truth I was an enthusiastic adherent to the obverse theory of levturee positioning (ie sit at the back) but it’s remarkable just how much more interesting presenters have become since I left Cambridge!

So, true to my principles, I duly sat at the front and was pleased to pose the only question that raised a laugh.
Ever faithful to my readers' interests I asked:

“We in the UK who work in the capital markets, especially AIM, have been very grateful recipients of the consequences of the US approach to heavy handed regulation such as Sarbanes Oxley. How much longer have we got?”

Alan’s first answer was a little disappointing – “Not as long as you’d like”

But, as he got into his stride with substantive reply, I quickly realised that he too had only been playing for laughs and was not actually predicting an early change.

He made the following points:
1. The US had over reacted by writing a hastily-drafted (and therefore poor) law in Sarbanes Oxley in general and Section 404 in particular. In his opinion SoX would eventually be reformed, but in the meantime there were two unintended and unfortunate consequences.
2. The first was that compliance overkill is leading to a damaging reduction in constructive managerial creativity and
3. That the law had turned accountants from being helpful scorekeepers into policeman with negative consequences for just about everything other than their fee incomes.

So there you have it – from the mouth of one of capitalism’s most powerful contemporary advocates and a man whose wit and eloquence will easily stand muster against those of Shaw and Wilde.

As Lady Bracknell might have said to one of the 4000+ hapless CEOs of US VC-backed technology companies and their Boards:

“To lose one opportunity to IPO (on Nasdaq) may be regarded as a misfortune; to lose both (by not seizing the opportunity presented by London’s AIM) looks like carelessness.”

Planning To Stay On The Shelf Thru 2013?

Last week I Chaired a Panel session at the Reverse Merger 2007 Conference in San Francisco.

Picture the scene - around 200 bankers, attorneys and other professional advisors spending 48 hours and a bunch of dollars exploring ways to take companies public without going through a straight IPO.

A sort of mass Nasdaq/SEC Escape Committee.

In a set of discussions that would have seemed more at home in a chapter of Alice In Wonderland, experts explained how to pick your way through the minefield created by the Four Horsemen of the Apocalypse - the SEC, SarBox, Nasdaq’s disinterest in small companies and the constant threat of litigation from just about everywhere.

I introduced our session – my co-panellists were Ken Koch of Mintz Levin Cohn Ferris Glovsky and Popeo and Gary Benton of Pillsbury Winthrop Shaw Pittman – by relating a story of my childhood.

Back in the early 60s when UK TV was limited to 2 really weedy B&W channels and the bad boys of pop music had names like Burt Bacharach and Mantovani we had to make our own entertainment.

At the forefront of bright young adolescent boys’ healthier attempts to occupy themselves was chess – the game of Kings. We played it often at school, both amicably and fiercely competitively. One day a new version hit the classroom and quickly established itself as the 1960s equivalent of Doom or Tomb Raider.
I can’t remember what its name was but, for reasons that will hopefully become apparent, I’ll call it 2.5D Chess.

The principle was simple. You set up the pieces on a board (A) as normal and placed a completely empty board (B) beside it.

It gets a little harder in a moment and so you might want to click the slide below to understand this graphically.

The games commenced as usual on Board A and play continued until a piece was taken, which triggered the unique characteristics of 2.5D Chess. Although the taken piece was consigned to the box as in the normal game, the taker moved to the destination square on the other board.

See the fate of the pawn and knight below.

When it was his turn (I attended a boys-only school) the next player decided on which board to make his move with the metaphysical transportation rules applying in reverse.

This second life opened up all kinds of exciting possibilities for the game – for example you could escape from what would ordinarily be checkmate simply by taking the attacking piece and transporting your King to the other board – subject only to not landing in check on the destination square. After only a couple of moves, the sheer enormity of the games’ possibilities became evident.

Why did I tell this story at the Reverse Merger Conference? What relevance could it possibly have to listing tech companies on the world’s capital markets?

The answer lies in the longevity of 2.5D’s appeal. About three weeks after the birth of the fever, all of we massively enthusiastic players simultaneously lost interest for all time and returned to the traditional game.

Why?

Simple – because we had come to the spontaneous collective realisation that playing normal chess and getting your opponent into checkmate was already damned difficult enough without adding needless layers of complexity to achieve the same objective.

And it’s the same with running businesses – it’s already hard enough to steer a growing company through the rapids of an IPO en route to becoming a global leader in your market, without having to add the value-sapping activities that accompany a SPAC, a super-SPAC, an AIMSPAC, a reverse merger, a PIPE, a clean reverse merger, a super-SPAC up a PIPE with a clean reverse and all the fixins, or any of the other exotic mechanisms explored during my two days in San Francisco’s Four Seasons.

That being said, the 2-days contortionistfest wasn’t wholly a waste of time. Amongst the complex gaming that characterized most of the material, there was one spectacularly illuminating presentation.
Brian Cooke of Keating Investments LLC, New York gave what qualifies as one of the best slides I have ever seen in a lifetime of enduring other peoples’ presentations- a lifetime that stretches back to the days of handwritten overhead foils.

Brian’s underlying point lays bare something that is screamingly obvious to any leader of a growing US VC-backed tech company today – namely that they aren’t going anywhere.

But unlike those who merely rant about the subject and wail about their misfortune – Brian analyses unimpeachable data to show the magnitude of their problem – and it’s very, very big.

His algebra is seductively simple. Calculate the size of the inventory of VC-backed companies, divide it by the current rate of exits – trade sales and Nasdaq IPOs – and the result is the time that it will take before all of today’s VC-backed companies can expect to escape from private hands.

Namely the length of the sentence that will see them starved of development capital and handicapped by a preference share structure that is guaranteed to piss off everybody involved.

I include the slide below, but to spare you the effort of double clicking, the answer is TWELVE YEARS!

So, if you assume a constant stream of escaping companies, the average time that each can expect to wait before either being sold or floated is SIX YEARS.

Or put more simply if you are normal you can expect to stay trapped in the status quo until some time in 2013.

So now you know.

And to test just how awful that prospect is if you are a tech company leader, rehearse the following speech on your way home tonight:

“Honey, I’ve got some bad news. You know how hard I’ve worked over the last [3, 4, 5, 6, 7, 8 – Delete as necessary] years, staying out late, skimping vacations, sharing my pain with you and the children? And you also know that the reason I did it was because I totally believe in my company and its potential to achieve global domination in our sector thus showering me with fame and us with riches beyond imagination. And you know how my CFO and VCs have always said that we were just [3 – 6, 6 – 12, 12- 18 – Delete as necessary] months away from an exit and that all we had to do was to wait for Nasdaq to open up a little? Well I’ve just discovered that I’m going to have to hunker down for a little longer. How long? Oh it definitely won’t be more than twelve years and hopefully it will only be [3,4,5,6,7,8,9,10,11 – Delete as necessary].”

Shock horror! It's official: UK is well regulated! Don’t ask me – ask Ben Bernanke.

Over the last months, as London’s competitive advantage over New York’s failure to cater for the needs of emerging high tech companies has become increasingly apparent, more and more negative chaff has blown out of the Big Apple’s many orifices.

In stark contrast – and with the notable and ignoble excpetion of Roel C. “London’s a casino, 30% of IPOs don’t last a year” Campos, Washington has preferred to rely on facts rather than hope in comparing the regulatory environment of the two markets.

Starting with Hank Paulson speech to New York Economics Club the Atlantic distinction has been defined as rules based versus principles based.

For those of us whose day jobs involves direct experience of both sets of regulators, the differenece is better described as being between an entirely dumb box-ticking approach and less dumb risk-based approach.

To paraphase Paulson, London’s regulatory regime depends (largely) on asking whether something is right, rather than is it legal.

As a good friend of mine who is a veteran of many AIM boards puts it – “Never mind the rules in London I am bound by the daily tabloid test. If my wife reads a story about me in a tabloid and asks –“Is any of this true?” I always want to be able to say “Yes” if it’s positive and “Absolutely not.” if it’s negative”

Yesterday acknowledgement that the SEC can improve American capital markets’ competitive standing by learning from the UK practices, received a ringing endorsement from none other than the head of the Fed – Ben Bernanke.

Speaking to the Federal Reserve Bank of Atlanta's 2007 Financial Markets Conference in Sea Island, Georgia he said:

“Some commentators have sought to draw a sharp distinction between the approach to financial regulation in the United States and that in the United Kingdom. These observers have characterized the British approach as being principles-based and as using a "light touch"--the implication being that these two features somehow go together. In a speech in February of this year, Sir Callum McCarthy, the head of the United Kingdom's Financial Services Authority (FSA), took issue with this interpretation.1 Sir Callum confirmed that the FSA's approach is built on a framework of principles, although he noted that the FSA also has an 8,500-page rulebook to accompany the eleven principles it has laid out. But the FSA head rejected the view that their approach is "light touch." Rather, he said, it is risk-based, which means that regulatory resources and attention are devoted to firms, markets, or instruments in proportion to the perceived risks to the FSA's regulatory objectives.

In fact, as in the United Kingdom, the principles-based, risk-focused approach to regulation has had considerable influence on this side of the Atlantic as well. For example, as you may know, the President's Working Group on Financial Markets (PWG) recently issued a statement of principles--ten in this case--relating to the regulation of private pools of capital, including hedge funds.”

In wrapping up his speech on Regulation and Financial Innovation, Mr Bernanke concluded:

“Devising an appropriate regulatory response to financial innovation is challenging. I have argued today that we should strive to implement a regulatory regime that is principles-based, risk-focused, and consistently applied. Enhancing market discipline can complement and strengthen such an approach. As in the United Kingdom, a principles-based approach is not inconsistent with the use of rules, which can provide needed clarity or a safe haven from legal and regulatory risks. However, rules should implement principles rather than develop in an ad hoc manner.”

So it’s official – the UK approach isn’t a communist plot and, by extension, a UK IPO isn’t like dodging the draft.

Which leaves one big question hanging over the ambitions of many US tech companies' leaders-

If it’s kosher to list in London, and doing so gives the kind of acceleration experienced by companies like Sandvine and OCZ – what’s holding back the inspired leaders of the other 300 Nasadq Orphans in the US?

Beats the heck outta me!

Put Aim regulation myth to rest, please

London's regulatory regime has been under the spotlight somewhat over the last ten days.

Two weeks ago the FT (Financial Times) carried an article from Davos (one of what seemed like several million!) which quoted NYSE's head, John Thain, making outrageously ill-informed comments about AIM and its regulation. Remarks that were so far from the truth that students of irony can rest assured are bound to infringe some US regulation or other.

History buffs will be interested to know that I covered his comments and the facts in my earlier blog - "Do they have email in India?"

Then a few days after Thain’s folly, AIM's regulation was put to the test when a whistle blower at the company called in the boys in blue (aka the SFO or Serious Fraud Office) over alleged misdealings at a mid-size UK software company - Torex.

Torex is a proper company that has been around for some time and is a leader in retail solutions counting many blue chip names amongst its customers.

Whatever the rights and wrongs of the commercial realities at Torex, there is no doubt that their newish CEO - Neil Mitchell - and the existing Chairman - Chris Moore - have developed something of a personality clash – not to say a death wish – triggered by a recent profits warning. What started out apparently, as merely a deep rift between the men has turned into what a programmer would call a deadly embrace, with the CEO blowing the whistle on his Chairman and both of them being suspended by their Board.

The resulting headlines and personal dramas – including claims of bugging and thuggery - have captured the UK media's attention in a way that is rarely seen for a business story.

They have also captured the attention of the SFO, the Stock Exchange and the company’s broker.

The police have raised the stakes by raiding the homes of the Chairman and two of his associates. The London Stock Exchange has suspended the company’s shares and have launched their own inquiry. And even the company’s broker – Evolution – has taken action, leading to the presumably not wholly coincidental departure of their head of corporate finance.

But just as we can be sure that Torex's difficulties will send more skeletons running from their closets, it is equally certain that difficulties at an AIM company - any AIM company - will have the market's critics flapping around as moths about a flame.

Evidence of this popped up last week when, in a front page article, the venerable FT, in the process of reporting that day's episode of the Torex saga pointed out that the news was likely to add to concerns about AIM's light touch regulation. Adding fuel to the moth-baiting fire, they then quoted Thain's 110% asinine assertions about the entire absence of market oversight enabling "anyone" to list there.

The problem with the FT's action wasn't that they did it - their statement was, as any reader of the paper would expect - entirely accurate - it was its implication, namely that somehow, the Torex saga turned Thain’s sophistry into fact.

Ever vigilant, aim4tech snatched up the shining sword of truth and shot off a quick letter to the FT, pointing out that the speed and severity of the authorities’ response to Torex should give comfort that regulation is alive and well and living comfortably in London's Square Mile.

There are many good things to be said about the FT, one of which is that, as a rule – or rather as a matter of principle, they really believe in getting it right. And the weekend edition under the racy headline "Put Aim regulation myth to rest, please" carried the following letter:

Sir, There is a myth abroad that the Alternative Investment Market is either unregulated or, at best, poorly so. John Thain, chief executive of the New York Stock Exchange, compounded this myth when he asserted that Aim was " . . . where they did not have any standards at all and anyone could list" (report, January 27).

Your report "SFO opens inquiry into Torex Retail" (January 31) adds momentum to the misperception by stating that the Serious Fraud Office raid on Torex will "cause more unease about risks on the Aim market".

The inaccuracy of John Thain's remarks would merely have been annoying had the irony of his own regulatory record not been so mixed. As a member of the board when Richard Grasso's unusually large compensation was approved and as CEO of the exchange during the Refco debacle, Mr Thain knows full well that effective regulation is neither simple nor associated with institutional size.

So far as Torex is concerned, I am mystified how a share suspension followed 72 hours later by SFO raids can be represented as anything other than proof of a robust and independent regulatory regime at work!

Ken Olisa,
Chairman,
Restoration Partners,

Says it all really!

Still believe in Santa? SEC relaxes straitjacket for smaller companies!

10 days ahead of the orgy of present opening and at a time when turkeys still roam the earth, oblivious of their impending doom, the SEC delivered a wonderful present. At least it will appear wonderful to that small subset of rational adults that still believes in Santa Claus and the notion that Sarbanes Oxley is going to go away.

On the 15th of December the SEC released a new Final Rule with the snappy title of

“Internal Control Over Financial Reporting In Exchange Act Periodic Reports Of Non-Accelerated Filers And Newly Public Companies”

For the record, and the trainspotters amongst my readers, the change amends certain internal control over financial reporting requirements in Rules 13a-14, 13a-15, 15d-14, and 15d-15 under the Securities Exchange Act of 1934, Item 308 of Regulations S-K and S-B, Item 15 of Form 20-F, General Instruction B(6) of Form 40-F, and Rule 2-02(f) of Regulation S-X. We also are adding the following temporary provisions: Rule 2-02T of Regulation S-X, Item 308T of Regulations S-K and S-B, Item 3A(T) of Form 10-QSB, Item 4T of Form 10-Q, Item 8A(T) of Form 10-KSB, Item 9A(T) of Form 10-K, Item 15T of Form 20-F, and Instruction 3T of General Instruction B(6) of Form 40-F.

The headline writers of the Press were as under whelmed by the announcement’s content as any reader would be by the title.

As the Seattle Post reported

“SEC actions back-pedal a bit on post-scandal rules”

The sheer insouciance of the “a bit” bit reminds me of the famous story about the Times of London. On a no-news day early in the last century, their sub editors ran a private competition to see who could write and have published the most boring headline. Claud Cockburn won with

“Small earthquake in Chile, not many killed.”

Dig into the SEC pronouncement and you will find that the relaxation promised in the title is about as exciting as Cockburn’s headline:

“Under the extension, a non-accelerated filer is not required to provide management’s report on internal control over financial reporting until it files an annual report for its first fiscal year ending on or after December 15, 2007”

Wow!

So the SEC’s idea of making the US more attractive to smaller public companies is to postpone the inevitable date of execution for a further twelve months!

Actually, in the style of a predator that has its prey within its claws, but is reluctant to end its play, the SEC holds out the hope that execution is not inevitable. In the tantalising style only employed by the unaccountable they go on to say:

“If we have not issued additional guidance for management on how to complete its assessment of internal control over financial reporting in time to be of sufficient assistance in connection with annual reports filed for fiscal years ending on or after December 15, 2007, we will consider whether we should further postpone this date.”

So good news for “smaller public companies” no need to comply with SOX now and, depending on…….who knows what? it’s possible that you won’t have to for…… a further indeterminate period!

In an attempt to make the news sound interesting – a sort of reverse Cockburn gambit - the New York Times this week came up with their prize winning and intellectually challenging headline on the subject:

“A Push to Fix the Fix on Wall Street”

In his article, journalist Stephen Labaton questions whether the regulatory pendulum is swinging away from Federal oversight and back towards more self-regulation.

He answers his question with a quote from Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware

“Given the significant amount of change that took place, I’m not surprised that there is this counter revolution. What is significant is that there is no attempt here to throw the piano out the window. What we are seeing instead is simply a movement of the furniture around the room. The changes being made are really at the margins and there remains a broad consensus that the bigger changes that were made were reasonable ones.”

Now I’ve got to say, when I think of counter revolutions, historical events of rather greater magnitude than SarBox tweaks comes to mind. And Google agrees – type in “counter revolution” and you get pages filled with rousing tales of Bolsheviks, Sandinistas and the like.

And I don’t want to get too picky on the furniture metaphor but, from where aspiring tech IPOs sit, marginal adjustments to death penalties is horribly reminiscent of reorganizing the deck chairs on another famous symbol of poor design with a transatlantic flavor!

But, putting aside the complex mixed metaphors and the hyperbole of Elson’s comments – he’s absolutely right that on this evidence there is little or no hope of any near term correction to Sarbanes Oxley – even for the smaller company.

He is right for two reasons:

1. The Rule change is, at best, marginal. A stay of execution and not a pardon.
2. It only applies to companies with a market cap below $75m. Not anywhere near where a self-respecting tech company wants to be after IPO.

It’s good news. But only for turkeys.

Now that would make a great headline!

Merry Christmas.

CCMR Offers No Near Hope For The NOs

Yesterday the CCMR reported its findings to the world. The Committee on Capital Markets Regulation is an independent and bi-partisan group of 22 worthy men and women whose recommendations were based on the twin objectives of:
• Enhancing shareholders rights
• Reducing excessive and overly burdensome regulation and litigation.

Tech company leaders will certainly welcome the Committee's acknowledgement of "excessive and overly burdensome regulation and litigation".

aim4tech’s lens is that of the NOs – the Nasdaq Orphans who, in more rational times would already have filed for, or achieved a Nasdaq IPO.

For the NOs, the hope was that CCMR stood for Cavalry Charge for Market Reopening.

Instead it looks on first reading that its true definition is Conservative Committee for More Regulation!

The fundamental problem faced by the Committee is that it is trying to square an impossible circle – to create a rules regime that works for businesses of every size and stage of development.

And that is just not possible.

As every entrepreneur knows - building and growing a business in any market is difficult and fraught with risks and dangers. The risks are that your concept won’t work, that your staff can’t implement it, that the market won’t like it, that your careful cash planning is wrong, etc, etc – the list is a long one. The dangers are that, for reasons outside your control, your customers will go elsewhere or your competitors will deal you a fatal blow.

It is a fact of commercial life that the magnitude of these risks diminishes with time and, more importantly, scale. Ford Motors’ momentum keeps it going with a P&L and Balance Sheet that would have despatched a much smaller company to the great market in the sky.

The challenge that the US has created for itself at this particular point in the cycle is that in a laudable attempt, post-Enron, to bolster capital market investor confidence, it has created an environment that is wholly hostile to the smaller, earlier stage business whose energy is needed to build tomorrow’s wealth.

The Four Horsemen of the Apocalypse – SEC reach, Sarbanes Oxley, the plaintiffs’ Bar and Nasdaq’s inexorable – and wholly reasonable - move up market, present serious competitive challenges to large companies but are fatal to small ones.

The Committee acknowledged that smaller companies experience disproportionate effects from the present regime:

“While the high cost of compliance is a burden shared by all public companies, it has particular consequences for small firms and foreign issuers. For small firms, the problem is that compliance costs are regressive— they do not scale with company size. As noted above, compliance costs for firms with less than $700 million of market capitalization average about 0.46 percent of annual revenues. This amount is over five times greater on a relative basis than firms with greater than $700 million of market capitalization.”

The good news is that the CCMR has paved the way for reforms that make sense for the top of the tree – and it should be welcomed for that. The path to implementation is not likely to be easy though - as Eliot Spitzer’s remarks this week serve to remind us (see Spitzer Rains On Paulson's Parade ).

From aim4tech’s perspective, the CCMR's proposals have done nothing for the NOs – the Nasdaq Orphans for whom an encounter with any one of the Horseman represents a fatal threat.

I estimate that there are at least 500 to 1000 privately held technology companies in the US which have successfully survived the last 5 down years. And I’m defining “down” as a sustained period of low customer spending levels and dire capital availability.

Actually, I’m being a bit unfair by describing their state as “having survived”. What I should really be saying is that these are businesses whose leadership, business model and offerings have been proved in the face of unprecedented external difficulties, mainly:

• Risk-averse customers who would rather buy unimaginative product from big name ‘safe’ suppliers; and
• Venture capital investors whose eyes are either on investing their next fund, raising their next fund or destroying any evidence that they ever invested in their last fund.

Ordinarily, battle-proven businesses like these would have IPOed on Nasdaq and would by now be expanding abroad organically and by acquisition, en route to delivering their website’s proud boast to be a leading global supplier.

But they’re not.

Instead they’re still private, led by seriously under-water management teams, burdened by irritated Preference shareholders who are long past their sell-by date and facing the prospect of either accelerating growth with the help of expensive hedge fund money or continuing to slug it out organically.

What the NOs need – and what the CCMR didn’t address - is a market that is empathetic to their risk/reward profile and which offers the fuel for growth - capital, paper and profile.

Until three years ago that market was Nasdaq.

Nasdaq can no longer offer that environment – even if it wanted to – and there is currently no viable US alternative. One will inevitably emerge, but it will take time and experience.

And one of those experiences will be that having two sets of rules within the same market can’t work.

Take for example the CCMR’s idea that companies with a market cap below $75m won’t have to attain auditor attestation under Sarbanes Oxley’s Section 404 (although who cares about public companies below $75m market cap? They have only one purpose in life – to be bought by larger, proper companies).

Given that a smaller company’s share price can easily shift 20% – 30% within an accounting year, the $75m rule will capture businesses with market caps in a far wider range. So, a listed company with a cap of say $60m will have a perverse incentive to see its share price stay below the $75m number and one with a cap of, say $90m will have an equally perverse motive to let their price drift down to avoid attestation!

Illustrations that a one-market/two-rules solution is unlikely to deliver the vision that Hank Paulson outlined in last week's speech - ask not “whether it’s legal” but rather “whether it’s right”!

The good news is that the debate has begun and therefore, given the history of American markets, we can be sure that the problems will get fixed - eventually.

I predict that I will be achieved by the emergence of a new US domestic market with different rules and principles – and that "eventually" means in 2 or 3 years’ time.

The challenge for the US NOs is what to do for the next 24 – 36 months.

There are two options depending on the strategic needs of the tech company:

1. A company only needs capital to survive and grow.
2. A company wants to accelerate growth by gaining fresh, unencumbered capital, paper and profile

Solution #1 is to raise further VC (and suffer the dilution and strings) or go for enough pre-IPO money from hedge funds and the like to last until the new US market appears.

Solution #2 is embodied in the address of this blog – aim4tech!

Paulson outs the 4 Horsemen of the Apocalypse

Yesterday, the market savvy Hank Paulson tackled the one real issue bedeviling US tech entrepreneurs in the 21st century.

Speaking to a lunchtime gathering of the New York Economics Club, Secretary Paulson used his deep experience as a Goldman Sachs banker to bring some welcome realism to the debate about precisely what is wrong with the US capital markets."

Although he didn’t call them the Four Horsemen of the Apocalypse, (see earlier Blog on AIM4Tech.com) he did pick out four issues which are making the US unattractive to IPOs generally:

• The development of markets outside the U.S., particularly in London and Hong Kong – and the ability of U.S. investors to participate in these offerings;
• A legal system in the U.S. that exposes market participants to significant litigation risk;
• A complex and confusing regulatory structure and enforcement environment;
• And new accounting and governance rules which, while necessary, are being implemented in a way that may be creating unnecessary costs and introducing new risks to our economy.

Even more importantly, Paulson gave some hope that something will be done to roll back the choking net of regulation and litigation.

For example, he highlighted the present obsession with rules-based oversight that encourages behaviors governed by the question – “Do the rules allow it?” rather than “Is it right?”

In particular he instanced the European principles-based foundations for accounting and governance. Of those, London's “Comply or explain” principle is a great example which places the responsibility for judging a management's actions squarely with the market and not the regulator.

Yesterday Secretary Paulson said:

"A common theme in my remarks today is the desirability, where practical, of moving toward a principles-based system"

It was Winston Churchill who famously said that “You can always rely on the Americans to do the right thing. Eventually”

And it is Paulson’s clear intention to turn the much needed reopening of the US markets into policy.

I wouldn’t advise any tech leaders to hold their breath however. Yesterday's speech identified the bodies who need to join together to effect the changes - the SEC, PCAOB and others not usually known for their lightning speed - even when there isn't a requirement for bi-partisan support. 

In addition he announced that:

"The Treasury Department plans to host a Conference on Capital Markets and Economic Competitiveness early next year. We will invite participants with a wide range of perspectives, particularly the investor perspective. The Conference will cover the three primary areas I have discussed today – our regulatory structure, our accounting system, and our legal system – all of which impact our capital markets and are critical to the overall economic competitiveness of our nation. Our objective will be to stimulate bipartisan discussion and to lay the groundwork for a long-term strategic examination of these issues.

So, good news in the short term for legislators, policymakers and lobbyists.

And in the long term it will be obviously be good for the world’s tech entrepreneurs.

But the long run will be well into the next technology cycle.

Or, as a founding father of modern economics, Maynard Keynes, famously said “in the long run we’re all dead.”!

Overcoming denial - the first step to recovery

Students of Freudian psychology (you know all that stuff about sex, id, ego, superego and sex) will recall that denial is king amongst the human defense mechanisms.

And nowhere in the commercial world is it more evident than in the belief, prevalent coast to coast, that the closing of the US tech IPO window is going to reverse itself any time soon.

A friend of mine pointed out a headline in today’s WSJ Business Wins Its Battle To Ease Costly Sarbanes Oxley Rule.

His point was that following the rush of cranial blood following the election, Congress has finally seen sense about the awfulness of Sarbanes Oxley in general and Rule 404 in particular. So the need for young ambitious tech companies to IPO in London will go away.

Now that’s what I call denial!

Even if SOx 404 were the only problem, the chance of it being fixed for young companies ranks, in this time of global warming, alongside that of hell freezing over.

Firstly, it’s key to remember that SOx is only 1 of the 4 Horsemen of the Apocalypse. The others are:
- Nasadq’s relentless move upmarket;
- The Class Action Protection Racket; and
- The SEC’s regulatory entropy.

Turn back all four and the US public markets will be open for early-stage business again, but weaken only one of them and the others will just keep on coming.

The article features a graph which I have directionally copied below. It shows the reason that many legislators and exchange owners are concerned about SOx. Since its introduction, the US has been losing out on IPOs – duh!

No economist, or reader of the Economist or anyone else who has been paying even scant attention to world commercial affairs will have been surprised by the inexorable rise of the Chinese.

Once we were just worried about offshoring our jobs, now we’re offshoring IPOs.

But look - it's worse! To add insult to injury, the Empire is striking back and even the Brits have overtaken New York. Anyone who’s bought a Starbucks in London will know that the UK's not know for its cheap labor. Something pretty bad must be happening!

And it is, at least if you’re a domestic policy maker. Take a look at this:

So there you have it, and you don’t need to be an economist to spot two key trends – IPOs are going up and America’s share isn’t.

But does it matter? Who really loses out when IPOs go abroad?

Well it’s not really the shareholders of the banks and the other professionals who would have handled the missing US IPOs. Their foreign offices merely pick up the work that the domestic branches would have done.

It’s not really the investors either because, similarly, the world’s largest buyside firms like Fidelity and Goldman Sachs invest everywhere that there’s a legitimate market.

No, the losers are locals - exchanges, regulators and tax collectors plus the bankers whose bonuses have followed the Midwest’s factory workers’ wages and gone abroad.

On the other hand, squaring up against these powerful forces for change are the other equally powerful lobbies that profited from Sarbanes Oxley. The same WSJ article reminds us that in the US, public company audit fees rose 63% between 2002 and 2004 costing each public company $4.5m on average!

Who knows how that fight will end up? One thing’s for sure though – neither side is squabbling over the fate of the little IPOs. The prize on which everyone’s eyes is clearly focused are the fees that come from the really big multi-billion dollar floats. According to Dealogic of the top 20 IPOs so far this year only 3 have been in the US!

So the world’s optimists can remain in denial and take comfort that moves are afoot to reduce the cost of SOx by revising Section 404. And there's comfort even for the little guys. The SEC – as advertised in the WSJ – “hoped to tailor the rule to companies of all sizes so that small businesses, in particular, weren’t overburdened”

The world’s realists however – and that includes, by Darwinian definition, the leaders of the next wave of tech sector leaders – will rightly remain sceptical.

Realists check the small print. At the end of the Journal’s piece lies a clue on how the SEC might generously propose to accommodate the needs of the smaller, riskier business. Will they raise the size bar for qualification? Might they abolish the rule altogether for young companies?

Not a bit of it. So far their thinking is limited to “giving newly public US companies and those based outside that are listing in the US for the first time on US exchanges more time to comply with the measure.”

A message of hope for those trying to entice the next big Russian Gas company or Chinese bank to float in New York; but it is unlikely to do much for the hearts of those who know just how much $3.8m is worth.

Psychoanalytic therapists need their patients to have some degree of insight into their problems before confronting them.

Tomorrow's tech leaders don't need therapy to know the simple equation that $3.8m is equivalent to 20 software engineers, 30 salespeople, or the difference between making a profit or a loss!

Four Horsemen of the Apocalypse

I hope that my friends in the west side of the Atlantic will excuse my directness, but somewhere along the way, America seems to have lost the capitalist-entrepreneurial plot.

Once upon a time - well within my living memory - the US stood for the unfettered pursuit of opportunity.

I was vividly reminded of this on my journey from Logan to the Union Club today.

The taxi driver was a Peruvian who, having recently won the Green Card lottery, had abandoned his cab business in Lima and moved with his wife and three (no doubt beautiful) daughters to Boston.

Having arrived, he set about working 16 hour days to earn enough money to feed his family while learning to speak English - the quality of which would shame any Bostonians’ Quechua and even their Spanish! At the same time he started a travel agency and a taxi company, while his daughters set about upgrading their education. Today he is a living example of the characteristic that attracts unqualified admiration the world over – the American Dream.

He was, incidentally, the only person I met on a 10 day trip across the US who was too busy working to discuss the election!

That same drive and vision has spawned the unparalleled scale of my world – information technology. The industry in which I have spent the last 30 years, owes its very being to two fundamental US inventions. Not, incidentally, the microchip and the internet – the national origins of which will for ever be disputed – but Venture Capital and Nasdaq. At a time when most of the world, reeling from (hopefully) the last global conflict tried to drive the risk out of capital, the good burgers of Massachusetts and then California, spotting that risk is the fuse for the geometric generation of wealth, invented venture capital. Few can now remember General Doriot’s American Research & Development Corporation. But back before Bill Gates could spell Assembler they provided the seed capital for DEC and the Route 128 phenomenon was born. While around the same time, Arthur Rock was lighting the touch paper of the economic rocket that is now Silicon Valley.

By the way, if this history interests you, my book - A Brief Introduction To Venture Capital: Examining venture capital’s history, rationale and modus operandi is available on request from Restoration Partners.

As is well documented,the entrepreneurial energy released by venture capital eventually hit the earth’s surface with the creation of Nasdaq – the world’s first electronic exchange. Dismissed at first for its lack of liquidity and quirky governance, Nasdaq challenged the NYSE/AmEx establishment, growing to become the 20th century’s market of choice for VC-backed tech businesses.

But, as my book’s title makes plain – that’s all in the past.

Today, though venture capital continues to deploy billions of dollars of pension fund money in pursuit of the next Google or YouTube, the US public markets have turned their backs on the exciting, energetic and therefore unpredictable, early stage companies that made Nasdaq (and America) great.

Four evil forces are, in combination, stifling the US tech sector. These - the Horsemen of the Apocalypse - are:

• Nasdaq’s relentless move upmarket – as shown by the formation of Global Select;
• The SEC’s absolute conviction that it knows better than any mere investor can ever know and hence the need never to miss an opportunity to increase the power of regulatory enforcement;
• The Plaintiffs’ Bar which has turned the meaning of law abiding into a system that the Mafia would recognise where fear and extortion have replaced justice; and last, but not least
• Sarbanes Oxley which has successfully transformed what was once known as business judgement into something resembling a COBOL program.  An inorganic process into which meaningless analyses are inputted and out of which come invoices.

Riding in formation, the Four Horsemen have succeeded in making it hard, if not damn nigh impossible for early stage US companies to take advantage of the public markets in the way we did in the 80s and 90s.

Even though tech entrepreneurs in Europe, India and China are finding unprecedentally benign environments in which to avail themselves of the cash, profile and paper that come from a successful IPO.

So there’s something ironic here.  Hard working but otherwise undifferentiated service providers - like cab drivers - that are destined never to achieve meaningful scale, can still prosper in America by labouring 24/7. But scientists, technologists and their entrepreneurial alter egos find themselves fighting a system that seems dedicated to stifling at birth, the next generation of billion dollar corporations.

As the Peruvian cab driver would agree - the world needs it capitalist engine to be firing on all cylinders. But it isn't. Let’s hope it’s only temporary.