SECURITIES REGULATION IN LOW-TIER LISTING VENUES: THE RISE OF THE ALTERNATIVE INVESTMENT MARKET

Fordham Journal of Corporate & Financial Law, 2008 by Mendoza, Jose Miguel

Following the enactment of SOX and the burst of the dot com bubble, the regulatory costs of equity financing through U.S. capital markets skyrocketed.161 Small-cap companies were disproportionately affected by this cost increase in Europe and the U.S.162 Consequently, small firms seeking to raise capital through financial markets turned away from more traditional listing venues such as NASDAQ and started favoring exchanges which provided expeditious and low-cost access to equity financing.163 Despite the existence of several venues that specialize in small-cap firms, AIM was the first-mover in supplying the marketplace with a lower regulatory burden, while enhancing listed companies' reputations and providing access to institutional investors seeking firms with long-term growth potential.

Furthermore, as the primary U.S. stock exchanges demutualized in order to become public companies themselves, their incentive structures recalibrated into a revenue-seeking model that, to some degree, excluded risk-laden small firms trying to raise low amounts of equity through a public issuance.164 A reversal in IPO market trends also adversely impacted small-cap firms.165 These factors exacerbated the public equity funding gap, which affects companies with a low market capitalization.166 While the average market capitalization for an AIM company is close to $70 million, NASDAQ's average is closer to $1 billion; the NYSE's average exceeds both figures.167 Thus, AIM currently supplies access to the capital market vis-à-vis an increasing demand for equity funding by companies with low market capitalization.168 While NASDAQ formerly covered this market segment, particularly during the 1990s with respect to high-tech low-cap firms,169 it has since matured, shifting its focus to larger firms.170 Consequently, undersized companies in the U.S. that might have trouble obtaining a NASDAQ listing may flock to AIM.171 As of June 2007, sixty-three U.S. firms worth $11 billion had successfully completed an AIM listing.172 Figure 2 shows the different market capitalization focus between NASDAQ and AIM and what has been called the "AIM sweet spot."173

The state of affairs in Europe also contributed to a climate in which AIM has been able to prosper. In an effort to imitate NASDAQ's experience in attracting high growth companies with a relatively low market capitalization, several European stock exchanges launched specialized market segments during the 1990s. Europe's experiment with market design led to the creation of venues featuring elevated regulatory requirements, including high disclosure and conformance to international accounting standards.174 The first of these venues aimed at start-up, high-growth enterprises was the pan-European stock market EASDAQ, which began trading in November, 1996.175 Subsequent attempts to emulate NASDAQ's model led to the creation of the Neuer Markt sponsored by the Deutsche Börse, the Paris Stock Exchange's Nouveau Marché, the Italian Nuovo Mercato, the New Market of Amsterdam Exchanges, and the Euro NM Brussels, among others. Although these new markets might have temporarily reduced the public equity funding gap, their ultimate failure paved the way for AIM to capture a substantial portion of the market for small-cap funding.176 Table 2 shows the dates in which the European New Markets were launched and subsequently closed.