New York’s Loss, London’s Gain

NASDAQ’s failure to acquire the London Stock Exchange (LSE) highlights the damage done to US financial markets by Sarbanes-Oxley (SOX). Because of SOX, foreign companies now avoid listing in the US, and NASDAQ was trying to regain their business by diversifying to less-regulated London. Unfortunately, investors there see NASDAQ as a trojan horse for SOX, so the deal never had a chance.

When I took part in an IPO on NASDAQ six years ago, it was the only show in (any) town. Here’s how the train wreck happened (my ellipsis):

… US legislation was signed into law by President Bush in 2002 after a string of corporate scandals that left many investors penniless. The collapse of Enron, the bankruptcy of WorldCom and the corruption at Tyco – added to a disintegration of trust in corporate America and the sense that investing in Wall Street was akin to handing over money to executives who were happy to steal and lie with no thought for small retail shareholders.

SOX (was)…designed to change all that. It imposed additional layers of regulation and requirements to ensure investors were protected. Estimates suggest companies have paid tens of billions of dollars in compliance fees.

Perhaps the most contentious part is Section 404, which demands each annual report carry an “internal control report” stating that management is responsible for an adequate internal control structure. In addition, that report must be examined by external auditors who must attest to its accuracy.

What that means is that if there are any errors in the accounts, management faces jail and evisceration by trial lawyer. SOX also effectively eliminates the use of stock options as a compensation tool. Since taking risks and using options to conserve cash are two key weapons in the entrepreneur’s locker, SOX is poison to startups. So:

…last year for the first time, London surpassed New York as the market of choice for international IPOs, while Europe as a whole overtook the US in terms of the value of all new listings. In an LSE survey of international firms, some 90pc said the demands of SOX made listing in London more attractive.

The numbers confirm this (hat tip New Economist):

Daily foreign-exchange turnover in London is £432 billion, 31% of the world total. About 70% of the eurobond trade is in London. London dominates global turnover in foreign equity — companies quoted outside their country of nationality — with 43% of the total.

…London has increasingly been taking business from the New York Stock Exchange (NYSE). Non-UK flotations on the LSE raised more than £9 billion last year; non-US flotations on the NYSE raised only £2 billion.

Six of the 10 biggest floats in London last year were registered abroad… So far this year there have been only two non-US initial public offerings on the New York exchange. There have been 32 non-UK listings in London.

I don’t see US lawmakers fixing SOX until the horrors of Enron, WorldCom and Tyco have faded from investors’ memories, so London should go from strength to strength. Still, at least it keeps world’s finances in the Anglosphere – Frankfurt and Paris have been left in the dust!


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