International Stock Exchanges – An Overview

Finding a Better Place to Go Public - Life360

Leaders at Life360 knew it was time to go public, but listing on one of the major US stock exchanges didn’t seem like the best fit. Based out of Silicon Valley, Life360 had produced the popular app that allows family members to track each other and stay connected. By May 2019, Life360 had raised $100 million from US VC funds and established a customer base of 20 million monthly active users, located primarily in the southern United States. After so much success, Life360 leaders knew it was time to take the next step by going public, but they decided to explore an alternative to listing in the US—listing on the Australia Stock Exchange. When relating the story in an interview with CNBC, ¹ Life360’s CEO, Chris Hulls, explained his initial reservations and why he ended up changing his mind about going public on an international stock exchange:

I was highly skeptical going in […] Why would I fly 7,000 miles? No, thank you. I initially had that reaction. But as I peeled back the onion and met the investors, I really got excited about it.

Hulls was on vacation in Australia when he decided to meet with ASX representatives to consider an IPO in Australia. Hulls had been concerned that a Life360 IPO in the US wouldn’t generate the interest and buzz he wanted because of the other large tech companies in the US markets. Speaking of the US exchanges Hulls said, “We could go public here, but we don’t want to be in this swirl of noise.” This caused Hulls to consider other opportunities. In the end, Hulls was specifically drawn to the ASX because it presented a way to avoid late-stage US investment firms that offered a lot of money in exchange for unfavorable terms for founders. Adding to the potential benefits, the ASX also has robust capital from large superannuation funds (pension funds) and a hunger for more high-growth tech companies. All of these factors together led Hull and Life360 to go public on the ASX.

General Considerations of Issuances on International Stock Exchanges

Life360’s experience is not unique. Many US companies have found foreign stock exchanges to be more attractive for a variety of reasons. For companies considering an IPO, there are several factors they should consider when determining whether an international exchange is a better option than a domestic exchange. Regardless of the exchange a company chooses, considering an international IPO requires firms to weigh several factors including the–

• Size of Exchange
• Size of the Listing Company
• Exchange’s and Country’s Regulatory Requirements
• Exchange’s Currency
• Exchange’s Primary Investor Base
• Exchange’s Surrounding Economy
• Out-of-Pocket Costs of Listing Internationally

From the outset, it is important to note that despite this article’s emphasis on the potential benefits associated with international exchanges, US markets are the ideal choice for many IPO firms. As mentioned in our article Foreign Listings on US Exchanges, US markets are the IPO destination for hundreds of domestic and foreign IPOs due to their robust capital, liquidity, and credibility. While International IPOs are gaining traction for US companies, they are much less frequent than cross listings. Cross listings occur when US companies list shares on foreign exchanges after they have issued shares on a domestic exchange.

International Stock Exchange Considerations

The United States is home to the two largest stock exchanges in the world, but for some US companies, bigger doesn’t necessarily mean better. In recent years, dozens of US companies have chosen to forgo the NASDAQ and NYSE to issue their first public shares on international stock exchanges. The following sections explain the factors that US companies should consider as they evaluate whether an international stock exchange is a better fit for their needs.

Size of Company

Small and mid-sized entities are often lost among the billion-dollar companies that go public on the NYSE and the NASDAQ and fail to draw the necessary attention from investors. Another difficulty for small IPOs on popular US stock exchanges is the extensive set of requirements to list on the NYSE and the NASDAQ. Each exchange has an extensive set of rules that go beyond the requirements imposed by the Securities and Exchange Commission (SEC). For example, to list on the NYSE a company must have a minimum market capitalization of $40 million and to list on the NASDAQ, a company must have a minimum market capitalization of $15 million; and these requirements are only the beginning of the regulations imposed by these exchanges. Many small companies might not have the resources or capabilities to stay compliant with these extra regulations. For more information on the difficulties faced by small companies, see our article on delisting and deregistering. Because of how difficult it is for firms to comply with all of the exchanges’ regulations, most companies that list on the NYSE and the NASDAQ are relatively large. The fact that investors, underwriters, and analysts have larger companies to focus on often leaves smaller companies with less attention than they might otherwise receive or even deserve.

In contrast to the US exchanges, the investors, underwriters, and analysts in international stock exchanges are more accustomed to, and pay greater attention to, smaller IPOs. International stock exchanges often have less stringent IPO size and market capitalization requirements. For example, the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) has no minimum capitalization requirements, and the Australian Stock Exchange (ASX) has a minimum size requirement of $4 million (AUD) in net tangible assets or $15 million (AUD) in market cap. ² Thus, companies that do not meet the size requirements for the NYSE and the NASDAQ can still go public on international exchanges. Beyond the lower IPO size requirements, the investors, underwriters, and analysts of international stock exchanges are accustomed to valuing and analyzing smaller entities, which could mean that the company will be able to generate more interest and receive a more accurate valuation.

Investor Base

Behind every exchange is an investor base with certain characteristics. International exchanges will have investor bases with different specialties, interests and experiences. By finding an exchange with the type of investor base that is excited about or experienced with a particular firm or industry, IPO firms have the potential to generate more interest and more accurate valuations. For example, if a US mining company wants to go public, then the Australian Stock Exchange, which currently lists many mining companies, may have an investor base that better understands the mining industry better than the investor base for the NASDAQ, which is more technology focused. When considering whether an international stock exchange has an investor base that understands a particular company or industry, firms can analyze whether competitors or other firms in their industry have listed on the same exchange.

A firm may also find more success on the foreign exchange of a market where it does a substantial amount of business or is popular and well known. This is especially the case if a firm is relatively more successful in an international market than it is domestically.

As mentioned earlier in the article, investors in international exchanges can also be more familiar with the IPOs of small-to-medium-sized companies than the investors associated with the NYSE and the NASDAQ. Therefore, investors in international exchanges may be better equipped to consider the additional risks and analyses that are necessary when dealing with smaller companies.

Regulatory and Reporting Requirements

Each international stock exchange and its corresponding country will have different regulatory and reporting requirements. These requirements impact the nature and timing of financial reporting and compliance during and after the IPO. For example, foreign stock exchanges have different accounting standards, reporting periods, and reporting deadlines. However, there are also exceptions that may allow companies to avoid these potential changes. For example, some foreign exchanges, such as the ASX and LSE, will allow US companies to submit audited financial statements in accordance with US requirements instead of each exchange’s specific requirements. Additionally, if US companies meet the requirements of Regulation S or 144a offerings, which are described later in this article, they may be able to report according to the foreign stock exchange’s reporting requirements instead of the more stringent SEC requirements. US companies may also be able to report in US GAAP, but do so semi-annually instead of quarterly when they are trading on international exchanges. Such is the case with the Alternative Investment Market (AIM).

Despite the potential changes in a company’s reporting requirements, many companies might be able to lower the overall cost of meeting regulatory and reporting requirements by listing on a foreign exchange. The costs of meeting regulatory and reporting requirements in the US can become a heavy burden for small companies after their IPOs. These expenses are relatively less impactful for large companies on US exchanges, but they can be material for companies with a post-IPO market capitalization of less than $100 million. One study calculated that the reporting costs for a $200 million company on the NASDAQ were $1.4 million higher than the annual cost for a company listed on the AIM. ³ Thus, companies might be able to reduce reporting costs by a significant margin by listing in markets with less burdensome requirements. However, while listing internationally might help reduce regulatory requirements and decrease reporting costs, companies should be careful not to signal that they needed looser restrictions because of weak internal financial reporting controls. Sending such a signal can hurt a company’s reputation, and thus its IPO valuation.

Another important consideration is the litigation risk and cost associated with an IPO on an international stock exchange. Historically, litigation risks have been very high for public companies listed on US stock exchanges, making this risk highest in the US. That being said, there has been a recent increase in class-action lawsuits by foreign investors against foreign companies. Thus, while an international listing might lower the risk of litigation, it is not a guarantee of safety from expensive lawsuits.

Currency

IPO proceeds from an international IPO may be in foreign currencies. In the case of Life360, the IPO proceeds for this US-based company were in Australian dollars. Accordingly, companies may need to utilize foreign currency instruments such as forwards, futures, or other hedging instruments to convert proceeds into their domestic currencies depending on their plans for the use of proceeds. This transaction introduces a level of currency risk, however, which will need to be managed as part of the IPO. For more general information about currency risk see our corresponding article.

Size of Exchange

The size of the international exchange will impact the number of investors and the level of funds available for potential IPOs. Smaller markets will have fewer investors and less capital to purchase IPO shares and maintain the liquidity of the shares after the IPO. Because of this, some highly valued companies may have capital needs beyond an international stock exchange’s capacity. That being said, most of the principal global stock exchanges are large enough to provide the necessary IPO capital and maintain liquidity. ⁴ In contrast to larger firms, smaller firms will have more freedom to consider smaller international exchanges that might still be suitable to their needs.

Economic Factors

Many economic factors are also important to consider when a firm decides where to list its shares. A variety of economic shocks could cause fluctuations in a company’s stock price. For example, a local economic downturn could cause investors to pull their funds from that country’s exchange, impacting company share prices even if the company’s operations are located elsewhere. This exact behavior was exhibited in Britain where worries about Brexit caused the IPO market in London to slow. Other factors that could impact stock prices include civil unrest, political upheaval, or natural disasters. Thus, a company should understand the local socio-economic factors of the country where it is listing because those factors might impact its stock price in the long run.

Valuation

While many researches have studied the topic over the past 50 years, listing on a foreign stock exchange has not been shown to have a significant impact on company valuation in one direction or the other. Firms won’t find one particular market where they are guaranteed to receive the highest possible IPO valuation. This relative parity is due to the fact that international stock exchanges have sufficiently developed their investor bases so they generally arrive at similar valuations compared to those in US markets. ⁵ For similar reasons, the returns on a company’s stock do not vary dramatically across different exchanges. ⁶

EY, however, adds an interesting perspective to the effect of exchanges on a firm’s valuation:

If a company’s selection of exchange doesn’t have a clear connection to its business that makes sense to investors, its valuation will likely be reduced. The selection of an exchange is a long-term strategic decision that should be determined primarily by a company’s business drivers. ⁷

As this statement makes clear, companies should have a clear reason to choose the stock exchange on which they list. Lack of a significant connection will raise significant doubts from investors. This connection could be through the various factors this article has detailed including investor base, the size of the exchange, or the economy of the country where the exchange is located. Failure to make a clearly advantageous, strategic choice of stock exchange will likely decrease a company’s market valuation.

Out-of-Pocket Costs

In addition to the other long-term strategic considerations, companies will also face upfront out-of-pocket costs that depend on their choice of stock exchange. Each international exchange will have different issuance costs, underwriting fees, and professional fees that companies should consider before pursuing an international IPO. McKinsey & Company states that while the out-of-pocket costs differ across exchanges, these differences may not be enough to give companies a compelling reason to select one location over another. ⁸ This is often the case for large companies that go public; but for smaller companies, these costs can have a larger impact.

While professional and listing fees differ among global stock exchanges, the net differences are usually negligible. ⁹ However, the differences in underwriting costs can have a material impact on a small company’s IPO. Underwriting fees on European exchanges average 3%–4% percent of the issuance while US underwriting fees are closer to 6.5%–7% of the issuance. With an IPO of $50 million, that is a difference of $1,625,000.

Regulation S

US companies considering an offering on a non-US stock exchange should consider the impacts of Regulation S. Regulation S of the Securities Act grants an exclusion from the SEC registration requirements for stock offerings made outside of the United States. For a company to be eligible for Regulation S, it must (1) offer or sell stock in an offshore transaction and (2) make no “directed selling efforts” in the United States. A directed selling effort is any activity that conditions the US market for the overseas securities. This could include having a roadshow for the stock in the United States, making offers to sell the stock to identifiable groups of US citizens in foreign countries, and advertising the stock offering in publications that are generally circulated within the United States.

The purpose of these eligibility requirements is to prevent companies from selling securities in the United States and escaping SEC registration requirements. Therefore, Regulation S imposes distribution compliance periods over which issuing companies and equity resellers cannot sell shares to US persons. The length of the distribution compliance period depends on how likely it is that a company will sell shares to US persons. These likelihoods are organized into three categories which are described below within the context of international IPOs:

For US companies that go public abroad, Regulation S provides safe harbor from the registration requirements of the Securities Act; however, this comes with increased complexity for issuing shares. For example, companies under the protection of Regulation S must adjust their offering memoranda and stock certificates to explain that the securities cannot be sold to US persons within the distribution compliance period. Also, company offerings unregistered with the SEC that fail to comply with Regulation S may be subject to liability under the Securities Act and the Exchange Act.

Regulation S offerings are often done in conjunction with 144A offerings which allow companies to privately sell their stock to qualified international buyers (QIBs) and avoid SEC reporting requirements. In return, QIBs must trade the stock among themselves and not with unqualified institutional investors.

Case Studies

In recent years, two US companies have taken advantage of the IPO opportunities available in international stock exchanges. In 2017 Boku, Inc. went public on the LSE’s AIM. In 2019, Life360 went public on the ASX. Both companies had a variety of factors that motivated their decision to list on an international, rather than a domestic, exchange.

Boku, Inc.

Boku, Inc. (Boku) is a technology company that enables mobile phone users to buy goods and services while charging them to their phone bill. Incorporated in Delaware and headquartered in San Francisco, Boku grew prior to its IPO by acquiring two UK companies, purchasing an Indian carrier billing company, and collaborating with Sony’s PlayStation console to allow for mobile phone purchases of Sony content. By 2017, Boku was supporting over $1 billion in carrier billing transactions with digital retailers such as Microsoft, Google, Apple, and Spotify.

Prior to its IPO, Boku had raised $86.8 million in funding from several different VC firms including Andreessen Horowitz, Benchmark, and Index Ventures. Regarding the timing of its IPO, Boku CEO Jon Prideaux stated that successive private funding rounds were becoming complicated and Boku was at a point when an IPO, which would lead to homogenous shares, would also lead to a cleaner balance sheet. ¹⁰ In addition, Boku was trying to secure funding to grow in the Indian market. On November 20, 2017, Boku sold 76.2 million shares of its equity for close to $60 million on the AIM with a 24.6% pop. Its post-funding market capitalization was $166 million. Through Regulation S and 144A offerings, Boku is not required to report with the SEC. Instead, Boku produces financial statements under IFRS accounting rules and submits semi-annual financial reports per AIM’s reporting requirements in London.

Boku decided on AIM of the LSE for various reasons. First, Boku was a smaller technology company in the Bay Area. Compared to giants like Facebook, Apple, and Google, Boku, Inc. found it difficult to stand out in US markets. The AIM provided an exchange focused on smaller, growing companies. Second, Boku already had ties to the UK through its early acquisition of two UK companies. Third, Boku’s technology had a customer base centered in emerging economies. Carrier billing transactions were less common in the US but were a growing payment method in India, and the AIM provided an investor base that was more familiar with Boku’s international customer base. Finally, one of Boku’s chief competitors, Bango, was already listed on the AIM. For all of these reasons, Boku was able to complete a successful IPO.

Life360

Much of Life360’s story about listing on the ASX is detailed at the beginning of this article. After deciding to list on the ASX, Life360 listed 30 million shares for an IPO of $104 million and a post-funding market capitalization of $494 million on May 10, 2019. Through the use of Regulation S and 144A offerings, Life360 is exempt from SEC reporting requirements and instead prepares its financial statements in accordance with US GAAP while reporting semi-annually with the ASX. In summary, Life360’s decision to list on the ASX was strategic in that it allowed Life 360 to avoid unfavorable terms for its founders, to receive increased attention from its investor base, and to ease its reporting requirements. These factors allowed Life360 to complete a successful IPO in Australia.

Conclusion

International stock exchanges can provide exciting IPO opportunities for US companies, particularly the small to mid-sized companies that struggle to go public in the US. While listings on foreign exchanges are not ideal for all US companies, the increased publicity, specialized investor bases, and different reporting requirements make international exchanges a promising alternative. Many companies that consider the possibility of listing internationally might discover the same thing as Chris Hulls from Life360—that as they peel back the “onion” of this opportunity, they discover that they really do have something to be excited about.

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