In the past few years, more and more European companies have opted for a NASDAQ listing, either through a private placement or a public offering of securities.
Recent Belgian examples, including Galapagos (more than €200 million), Materialise (€87 million) and Celyad (€88 million), show that the pull of NASDAQ is stronger than ever. There are obvious reasons for this.
However, there are just as many reasons why some companies have avoided a listing on the other side of the Atlantic. In fact, there are quite a few pitfalls to bear in mind.
Preparing a US IPO is a lengthy and costly process. In the ideal case scenario, a minimum lead time of three to four months can be expected, but in practice lead times are often longer, even up to 12 months. It goes without saying that this type of project requires a lot of time and energy from the European issuer's management team, which must also remain focused on the company's core business.
Not only the company's CEO and CFO but also its general counsel and technical and scientific officers must take time out of their busy schedules. When preparing for an IPO, the importance of a strong management team should not be underestimated.
In the pre-IPO stage, transaction costs tend to be much higher in the US than in continental
Europe. This is due mainly to the higher fees charged by the US bank accompanying the issuer and the other parties involved in the offer of securities as well as to higher consultancy fees due to the involvement of auditors, accountants, lawyers and other advisors from various ju-risdictions.
A different legal system
US IPO documents systematically provide for extensive disclosure requirements, like the lengthy summary of risk factors in the registration statement or the so-called red herring prospectus. Another time-consuming and expensive exercise which issuers often face is the reconciliation of their figures to US GAAP, if IFRS figures are not (yet) available and the issuer only has Belgian GAAP figures.
From a legal perspective, the differences between the common law system in the US and the civil law system in Belgium and other continental European countries should not be underestimated.
Differences between legal systems are often exacerbated by the interpretation of specific legislation by the competent regulatory authorities - the SEC in the US and the FSMA in Belgium - which may have diverging views on prevailing market practices.
In order to ensure consistency in the documentation and correctly inform investors, the SEC's comments on the registration statement must often be incorporated into the Belgian listing prospectus and vice versa. While it is reassuring that both regulators do their homework properly and thoroughly, in practice, finding an acceptable compromise between their views can be a time-consuming task for all advisors involved.
Once the shares or American Depository Shares (ADS) of the European issuer are listed on NASDAQ, the issuer will be subject to, and must abide by, the US regulatory framework. This is why it's important to comply with the corporate governance requirements of the Sarbanes-Oxley Act. The SEC's stringent accounting, transparency and reporting requirements will also add to the issuer's workload.
A litigious culture
Finally, European issuers must bear in mind the prevailing adversarial culture in the US. In general, there is a higher risk of shareholder claims in the US, more litigation than in continental Europe, and higher damages awards. Yet this situation should not be blown out of proportion. An issuer that conducts careful checks, follows the appropriate procedures and respects the applicable transparency, reporting, legal and regulatory requirements will rarely find itself the target of shareholder claims.
In view of the foregoing, the following points are essential when considering a NASDAQ listing:
- The issuer should have a strong management team, with the necessary time and resources to get the ball rolling
- The management team should clearly identify the pros and cons of a US IPO and, on this basis, decide whether to continue with the American adventure.
- The issuer should have a robust equity story, adapted to the US market.
- The right (financial) advisors should be involved.
- Early in the process, a strategy for a successful US IPO should be developed with all parties involved, including an indicative timetable (which takes into account the issuer's financing requirements) and the results (including research results) to be achieved.
- There should be open communication between all parties involved on the progress being made and any new information or obstacles.