Section 404 was adopted with little controversy in 2002, and for good reason. It simply mandated that public companies report on the effectiveness of their internal financial controls, and that auditors render an opinion on them.
Since the law already required companies to maintain effective controls — and had done so since 1977 — it seemed unlikely that would increase costs much for any company that was already in compliance. And it was crystal clear that controls either did not exist, or were evaded, at WorldCom and Enron.
Most chief executives of Aim companies will argue that their shares are undervalued, while investors will complain that small company stocks are illiquid. Both sides have a point, but the situation is even worse for the US companies that join the junior market.
They have usually come to Aim to avoid the burden of Sarbanes-Oxley – but the land of the free has a long regulatory reach. It has been felt by Protonex, a US fuel cell company that floated on Aim in June last year. Whole weeks, if not months, have passed without a single share trading.
Part of the reason is Regulation S of the US Securities Act of 1933. It effectively stops UK listed shares in a US-based company, which does not file accounts with the US Securities and Exchange Commission, from being traded through the Crest electronic settlement system.The restriction, which lasts for two years, stops US retail investors from buying the shares. At the same time many UK private client brokers refuse to deal in shares that have to be traded through an old-fashioned paper trail.Scott Pearson, Protonex’s chief executive, is unhappy with the liquidity of the shares. Not unreasonably, he believes that further value would be unlocked “if only we can get the shares trading”.