Of the 26 small-cap IPOs done through the end of October, the average valuation was $244M and the average IPO size was around $120M. 

The fact that IPOs are getting done is very encouraging, however a noticeable shift is occurring in the IPO landscape. Companies considering an IPO today have an increasing number of stock exchanges around the world from which to choose and must now decide if listing on a U.S. exchange is the best decision for their company and shareholders.

Stronger markets have emerged across the globe, specifically in developing economies that present high-growth potential and lower regulations for public stock listing. With IPOs in emerging nations returning about 15 times more than in developed countries, companies from China to Brazil to India are increasingly choosing to list on their local exchanges or on foreign exchanges outside of the U.S.

But why would public companies be loosing their zeal for listing on America exchanges?

For one, regulators outside the U.S. are less strict overall compared to American regulators. The Alternative Investment Market (AIM) of London is the paragon example. The AIM does not require a company to have a minimum market capitalization, stockholder’s equity, trading volume, or share price, unlike in the U.S. Nor does it require the lengthy, costly regulation procedures required to make a company public. The AIM uses “Nominated Advisors” that handle the prospectus, gain admittance for the company into the market, and provide coverage and research. This process is considerably cheaper and faster than traditional government regulations. There are also fewer regulatory filings on AIM, no U.S. governmental reviews of the prospectus, and of course, no Sarbanes Oxley (SOX) compliance laws.

Over 1,300 companies are listed on the AIM with a combined market cap of about £57 billion ($94 billion). The AIM was hit hard when the market crashed in March 2009, but it is still an attractive option for small-cap companies wishing to go public. HipCricket, a US mobile marketing company, chose to list in 2007 on the AIM. With revenues of just $860,000 and a loss of $2.39 million for the six months through June 2007, HipCricket had little hope of listing on an American exchange, but in London on the AIM, the company raised $17 million and sold only 11% ownership. (Note: HipCricket de-listed from the AIM earlier this year when the market crashed.)

Asian companies similarly have found more reason to list on exchanges outside of the U.S.

This year alone, 134 Chinese small-cap companies went public; only 10 of them listed on an American exchange, according to  Dealogic.

Unlike in the U.S., Chinese markets are geared more towards helping innovation grow and succeed, rather than just attaining capital and liquidity. For instance, on October 30th, 2009 the Shenzhen Stock Exchange launched ChiNext, a new market platform intended for China’s 10 million small to mid size companies. According to the Shenzhen website, ChiNext utilizes its own unique mechanisms of financing, investment and risk management and applies them at various stages of a company’s development, rather than attributing them to size alone.

The ChiNext got off to a roaring start with many stock prices of the 28 initial listings rising over 100%.  In fact, the market capitalization of the 28 listed companies reached $20.5 billion with an average price to earnings (P/E) of 111x earnings on its first day of trading. This stratospheric result has attracted 188 companies have submitted applications to seek a listing on the board.

In a financial system that has been geared towards large, state-owned enterprises, the ChiNext represents a new strategy for small but growing Chinese companies looking to list on a stock exchange. And Chinese innovation for alternative stock exchanges does not end at ChiNext. Shanghai launches an international board, expected next year, according to Reuters. The international board has already attracted global giants like the UK’s HSBC Bank plc and even other stock exchange companies including the NYSE EuroNext and NASDAQ.

While other countries are creating new and interesting ways to invest in emerging companies, the U.S. has taken a different route by creating new and interesting ways to place further regulations on listing and investments. The Sarbanes-Oxley (SOX) Act of 2002 set new or enhanced standards for all U.S. public company boards, management and public accounting firms. Section 404 of SOX requires companies to file a management assertion and auditor attestation on the effectiveness of internal controls over financial reporting. The Financial Executives International’s 2004 survey of costs related to Sarbanes-Oxley reveals that total costs of first-year compliance with section 404 costs an average of $2 million for small-mid size companies. Hardly a low hurdle for a small start-up company looking to go public.

Furthermore, on December 11th, the House of Representatives passed a new bill that would create a Consumer Financial Protection Agency (CFPA). This interagency council would oversee and regulate financial firms and activities that could “threaten” the financial system. If the Senate approves the bill next year, U.S. listed companies could see their already high regulation costs increase even further. With such a welcoming set of rules and regulations, is it any wonder foreign companies are opting for domestic exchanges?

Stock exchanges around to world must now compete for new business and the U.S. exchange giants of NYSE and NASDAQ can not rest on their laurels if they wish to attract quality listings. So to must investors develop a far-reaching vision of world markets in order to capitalize on what once could be achieved only in America.