US capital markets remain the largest in the world, with US equity markets representing 42.6% of global market capitalisation, almost four times the size of the EU, the next largest market. America is also the world’s financial hub, offering the greatest diversity of banks, brokers, financial advisors and investment managers. For those reasons, more and more companies are exploring how they can make their shares available to the broadest pool of US investors.
Before taking the leap, however, it’s important for companies to understand that not all journeys are plain sailing, with companies often only seeing a binary choice of listing home or away to access liquidity. But this is wrong, and it doesn’t have to be that way.
How can companies be better supported on their journey?
Cost and complexity
Firstly, a common misconception in Europe is that tighter regulatory standards are driving away listings. However, the US in fact has its own complex regulatory regime.
Foreign companies that decide to shift to a US exchange listing must meet extensive ongoing reporting and compliance requirements that often surpass those required by their home exchanges. SEC registration and adherence to Sarbanes Oxley is onerous, and expensive, and includes costs such as converting financial reporting into US GAAP. Put simply, this can add millions of pounds a year in costs with no discernible shareholder value. In their IPO filings, ARM made public US$86 million in legal and accounting fees just to become listed, which doesn’t include the ongoing cost to remain compliant.
Companies looking to list are drawn into a laborious and extensive legal, regulatory and compliance process, which isn’t always enough to offset a marginal increase in valuation multiple, especially if the issuers’ revenues and operations are outside the US.
Best of both worlds
But there is a lesser-known regulatory jewel available to non-US issuers that provides all the benefits of being listed in the US, at a fraction of the cost and without additional regulatory complexity.
Through what is known as SEC rule 12g3-2(b), companies can safely support their securities trading in the US without the cost and complexity of listing on a national securities exchange such as NYSE or Nasdaq.
To benefit from this exemption, non-US issuers leverage their home market listing and disclosure requirements and cross-trade on the OTC markets in the US. This allows companies to access a new distribution channel, share their story and connect with the larger population of US investors.
Companies of all sizes look at the adventure of US markets, but with some of the challenges facing them, it’s important to list smarter, not harder
Many foreign companies, including well-established multinationals such as Roche, Adidas and Heineken have already leveraged this exemption to have their ADRs and foreign ordinary shares traded in the US.
This is transformative for companies seeking to tap into the US capital markets, providing an easy and compelling option for improving valuations, increasing trading volume and reaching more US investors, without losing their home listing.
Wider investor pool
One of the most important decisions a company makes is where to have its shares traded. A company’s public market can affect its liquidity, transparency and investor visibility.
Much of the buzz around the US falls into the narrative that to access liquidity and its breadth and depth of investor pools, companies must leave their home markets.
It doesn’t have to be home or away. Cross-trading is the alternative route that allows global companies to remain national champions in their home market, driving value at home, whilst building value in the US and enhancing liquidity.
By unlocking the potential to attract a significant US investor pool, companies can tap into investment banks, managed accounts, family offices and the broad segment of retail investors, including a segment of high net-worth individuals.
Once considered more difficult to attract, this latter group tends to be long-term shareholders, essentially reducing volatility in the security as there’s less churn. Adding this new pool of investors drives liquidity back to the home market, narrows the valuation gap and supports shareholder and stakeholders from around the world.
By delivering this via cross-trading, companies can achieve US access at far lower cost and without needing to deviate from their home market’s regulatory rules. Whether companies are operating in an underserved geography, untapped emerging market, or feel the need to diversify amid global markets’ upheaval, these international companies are continuing to look to the US for shareholder expansion opportunities.
Setting sail
Companies of all sizes look at the adventure of US markets, but with some of the challenges facing them, it’s important to list smarter, not harder.
As companies look to their first steps in their US journey, cross-trading should be considered as an opportunity to test the waters, without facing cumbersome SEC reporting requirements, cost and compliance burdens that moving listings from their home market would incur. By doing this, companies can grow and diversify their shareholder base and improve global liquidity, while raising their profiles among US investors and investment professionals in a cost-effective way, all whilst maintaining their primary listing at home.
Jason Paltrowitz is executive vice-president, corporate services at OTC Markets Group, a US-based cross-trading platform that acts as a global gateway to US public markets for international issuers.
This article expresses the views of the author and not necessarily those of Euromoney.