Monday, March 20, 2006

The appeal and perils of alternative markets - the Sandvine IPO

Shares of Sandvine will begin trading tomorrow on the Alternative Investment Market (AIM) of the London Stock Exchange. The IPO is expected to raise £20 million, or about CDN$40 million. That will make it the first significant IPO from a tech company in this area since Descartes was listed on the TSX over eight years ago. (ARISE pulled off an IPO in 2003 -- no small feat for a company in its position -- but it only raised about $1 million.)

AIM and some other international exchanges have become increasingly popular with companies in North America. In Sandvine's case, since it isn't profitable, I don't think that it would yet meet the requirements for a TSX listing, and with that option not available, AIM becomes an alternative to the TSX Venture Exchange.

The allegedly onerous requirements of the U.S. Sarbanes-Oxley Act ("SOX," as it has become known) is usually cited as the main factor in AIM's rise in popularity. Even in Canada, where we don't force companies to wear SOX, there are still several regulatory requirements around disclosure and shareholder and exchange approval of management decisions that companies -- or, more accurately, their executives -- would be happy to avoid.

I say "allegedly onerous" because I'm not convinced that some SOX consultants haven't made the requirements out to be more burdensome than they need be, but there's no question that for smaller companies, all of the public listing requirements in North America -- SOX or no SOX -- are a big drain on resources. If you ever have to prepare quarterly reports, the first thing you learn is just how quickly three months zooms by.

But, as annoying as they may be, disclosure and accountability are vital for public companies. And that brings up the question -- how little is enough? Starting tomorrow, you can buy Sandvine shares, but finding the company's financial statements might prove to be more difficult. In Canada and the U.S., you can look up every listed company's financials and other filings going back for years through SEDAR and EDGAR. You don't get that with AIM, and that does concern me. Companies with, let's say, malleable integrity, might be tempted to loosen the reins more than their shareholders would like.

Sandvine will be a very good test-drive for AIM in this area. It's a real company with solid management, top-notch investors, and real technology -- not some fly-by-night flip play like you see on OTCBB or even, at times, the Venture Exchange. We'll get a chance to see first-hand how it handles disclosure and accountability to shareholders. If it succeeds, Sandvine could make AIM look very attractive to companies in this area.

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