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When Houston exploration-and-production company Frontera Resources Corp. went public in 2005, it raised close to $90 million in an initial public offering on the Alternative Investment Market in London instead of on the NASDAQ stock exchange in New York City. Frontera had a number of reasons for choosing the London Stock Exchange’s AIM over NASDAQ, says Scott Harper, Frontera’s general counsel. One important consideration was the ability to avoid the cost of complying with U.S. Securities and Exchange Commission rules as well as Sarbanes-Oxley Act of 2002 (SOX) regulations that apply to public companies in the United States. Frontera also was attracted to the pool of sophisticated investors who participate in AIM offerings, Harper says. That was particularly important to Frontera, he says, because the company is drilling for oil in the Republic of Georgia, a former Soviet republic located between Russia and Turkey, and AIM investors are more likely to understand the risks of that project. “In Texas, it is more of a retail investor. You could get small mom and pop-type investors, where over there [in London] it’s more institutional-type investors who are more willing to accept the risks associated with an oil and gas project in that part of the world, and are more willing to give credit for more than proven reserves,” Harper says. The 10-year-old AIM, which is part of the London Stock Exchange and which targets early-stage companies, provides an alternative for small Texas companies seeking to go public. Frontera Resources is the first and, so far, the only Texas company to go public on the AIM. But as more Texas companies look at the AIM option, it also provides a potential new source of business for firms with lawyers who handle IPOs. Haynes and Boone, for instance, has a dozen lawyers in Houston, Dallas, New York and San Antonio on the firm’s team who work on AIM offerings, says Bryce D. Linsenmayer, a Houston partner who worked on Frontera’s IPO. Linsenmayer says six other clients are working through the process of going public on the AIM. Two of the offerings may go forward by September, he says. Texas clients of other firms, including Vinson & Elkins and Locke Liddell & Sapp, also are talking about pricing their IPOs on the AIM. “Two years ago, we didn’t have anyone talking about an AIM offering. Now I myself have four or five clients, [and] others within the firm have people looking at that possibility,” says Bill Swanstrom, a corporate securities partner in Locke Liddell in Houston. “It remains to be seen how many of these companies get across the finish line. The entry bar has been raised just because the AIM has become more popular.” Some of that interest is due to word of mouth, but some comes from a marketing effort in the United States by the AIM, including seminars in March in Houston, Dallas and San Antonio sponsored in part by Haynes and Boone and the London Stock Exchange. Anne Moulier, the London Stock Exchange’s business development manager for North America, says she targets companies with a market capitalization of less than $500 million that want access to investors in London. “Companies that are truly U.S. businesses, U.S. operations . . . U.S. clients � that would be a bit difficult to go public in London. But it’s for U.S. businesses with U.S. management [that have] the ambition to expand outside the North American market or expand [their] presence in Europe,” Moulier says. Richard Webster-Smith, a spokesman for AIM, says 34 U.S. companies are listed on the AIM. In 2005, 19 U.S. companies, including Frontera, went public on the AIM, he says. Why London? Frontera was the first Texas company to go public on the AIM, says Linsenmayer, the Haynes and Boone lawyer who worked on the IPO. “The AIM market was so enticing to them, having this international aspect to their business,” he says. Linsenmayer says he’s seeing increasing interest in the AIM market among small U.S. companies, because the process is easier and somewhat less expensive than going public on the NASDAQ, the investor base is sophisticated and ongoing compliance requirements are less rigorous. “You only have to report your earnings semi-annually. You don’t have all of the SOX compliance cost,” he says. Linsenmayer says fees total up to 9 percent of the proceeds on an AIM offering, compared to up to 15 percent of a domestic offering. “All the little things add up to make it an easier business environment,” he says. T. Mark Kelly, co-head of the corporate finance and securities section at V&E, says a few of the firm’s clients also are talking about going public on the AIM, primarily to avoid the “whole regulatory environment with the SEC” and its costs. “For small companies that are out there and growing, to spend $3 [million] or $4 million on the requirements is a heavy burden,” Kelly says. But Swanstrom, who notes that Locke Liddell is working with four U.S. companies and a Canadian company on prospective AIM offerings, says the popularity of the AIM market is making it a bit more time-consuming and a bit more expensive than it was two or three years ago. He says the nominated advisers known as nomads � financial advisers who sponsor the AIM offerings and vouch for a company � are becoming more discriminating. “They do want to see more of a revenue history and, if not a revenue history, a really good story on why that company will be successful,” says Swanstrom. Swanstrom says three of the five Locke Liddell clients considering an offering on the AIM are oilfield services companies. Linsenmayer says the six Haynes and Boone clients in the same situation are in the biotechnology, nanotechnology, chemicals, industrial manufacturing, natural resources and oilfield services industries. John Heine, a spokesman for the SEC, says he’s not aware of any statement by the commissioner on the AIM, however, he says the SEC sponsored a roundtable discussion on May 10 on the impact of SOX on the U.S. investment markets. But not all Texas lawyers see immediate potential for Texas firms stemming from AIM offerings. “From the statistics I’ve read there are only 19 companies in the U.S. that have done this last year, so I have tended to view this as something very nascent,” says L. Steven Leshin, a corporate and securities shareholder in Jenkens & Gilchrist in Dallas. Leshin says he is aware the London Stock Exchange has been marketing the AIM in the United States, but he is not convinced it’s the best route for small U.S. private companies to go public, particularly when compared to the alternative of going public through a venture capital-backed IPO. Leshin also points out that it’s not necessarily a good thing that the corporate compliance/regulatory aspects are not as strict on the AIM, when compared to U.S. requirements. For example, companies listed on the AIM don’t need to have outside directors on their boards of directors, which is a requirement in the United States, and they only are required to issue financial statements twice a year, instead of quarterly. “It sounds seductive. Whether it will materialize to be something of more significance, time will tell,” Leshin says, adding that if AIM offerings become widely accepted and requested by clients, he would like to work on one. G. Michael O’Leary, co-head of the corporate securities practice at Houston-based Andrews Kurth, says lawyers at his firm have not worked on an AIM offering yet, but he sees circumstances when it would make sense. “If a company is going to be a somewhat smaller public company � in my view $150 million market cap or less � it can make sense, because you don’t get a big following here in the states. The analysts tend to follow larger companies for the most part,” O’Leary says. “You might find you get more attention.” AIM is attractive to companies from the United States and from elsewhere because of the ease of access to the London capital markets, says Fred Heller, partner in charge of Akin Gump Strauss Hauer & Feld’s London office. Heller says natural resources companies, including energy companies, can do well on the AIM, because the institutional investors who buy AIM stock are interested in the energy business. “Typically an energy company is able to list in an earlier stage in its development than they could in New York,” he says. “Some have good production and some of them don’t have anything but a business plan and a license.” Heller says Akin Gump has not completed an AIM offering for a U.S. company, but the market is growing, and it will happen eventually. Meanwhile, Frontera announced on April 27 it had completed horizontal drilling on a well in its Taribani Field Unit in Georgia and production testing will continue for about three months. Linsenmayer says money from the IPO funded the drilling. Harper, who became general counsel at the company in May 2005 after working on the AIM offering as an associate with Haynes and Boone in Houston, says he has fielded inquiries from a number of private companies in Texas and from elsewhere in the United States about the process of an AIM offering and whether it might be a good idea for those companies. Notes Harper, “I just explain the story and [say] we have seen it as a great success story.”

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