Invu, the £27m market cap document management software provider, has blazed a trail for US companies listed on AIM that want to simplify their share structure and allow for their shares to be traded on CREST. FD John Agostini talks us through it.

Where and when did it all begin?

Back in 1998, Invu was a small, UK-based document management software company that had a vision of being a global company.

At that time, arguably the best technology stock market to be on was Nasdaq. The CEO and his advisers decided the best chance for Invu to raise money would be to get on Nasdaq, so they reversed into a Nasdaq shell company and got onto the OTC Bulletin Board.

I joined the company on 1 February 1999 and went through all the rigmarole of learning quarterly US reporting to the SEC and annual filings. It was a bit onerous but not that bad.

Then within a few years we had Enron, WorldCom and Sarbanes-Oxley. We also found that it was difficult to raise money in the US. We were a very early-stage document management software company selling to the SME market. The story wasn’t compelling enough.

We even had trouble raising money in the UK in the early days for exactly the same reason. The potential investors just didn’t believe that there was a market at the smaller business level for this type of product. Fortunately, we received considerable backing from a few individual investors, including Daniel Goldman, whose father David founded Sage software.

After approximately five years of trying, we realised that the only place to raise the money, since we were effectively a UK company in everything but name, was the UK.

When did you join AIM?

In January 2004, we raised £3m via a private placement in the UK and we got admitted to AIM. That led to certain issues. Because we did the raise in the UK, under Regulation S, the new shares issued as part of the fundraising couldn’t be traded electronically via CREST – the electronic settlement and registration system. However, the original shares issued in the US could be traded electronically. Therefore, we were forced to have two ticker symbols on AIM. This confused existing and potential investors alike.

Added to that, we had been able, because of our size, to suspend our US reporting but, as the company was growing, it was only a question of time before we had to resume US reporting. At our current rate of growth, we knew that by the end of this financial year – 31 January 2008 – we would almost certainly have had to report in the US and comply with Section 404 of Sarbanes-Oxley Act. That regulation could almost be considered the small company killer in terms of compliance costs.

A rough estimate for next year’s US reporting cost, under that regime, would have been at least $1.5m.

That’s a lot of cash. How did you escape something like that?

We had been looking to extricate ourselves from the US since the AIM floatation and we initiated a concerted effort in the middle of 2006. The classic route for doing this is merging with a UK company whereby the UK company survives.

To do that you would normally have to file what’s called a registration statement in the US with the SEC. It’s very expensive and incredibly time consuming. It’s an enormous document; a recent statement done by a company of a similar size to ours ran to 600 pages. The SEC reviews all of it and can constantly come back to you and query it.

With our US shareholders representing less than five per cent of our total shareholder base, it seemed like using a sledgehammer to crack a nut. It would have cost us something in the region of $2m to have done all of it. So, the registration statement route was not for us.

In the event, we didn’t actually save much on the fees but once we decided what we were going to do, we did save ourselves a lot of time.

Was there another way to do it?

We, along with our lawyers Addleshaw Goddard, came up with an alternative. It was still a merger but with the US resident shareholders receiving cash compensation for their shares. Non-US persons would have the opportunity to have a share-for-share swap.

On the face of it, it seemed to be a very simple transaction. Sadly, it was not quite that straightforward.

Why is that?

The simple plan that we first proposed had to be very rigorously reviewed at every step because there were potential US and UK tax liability issues. At the same time, because Invu Inc was quoted and it was then going to be replaced by a new UK quoted company, we had to take the US company and merge it with a US private company, with the private company surviving. The US sub-merger had to be done first.

As a consequence of that first merger, we had to ensure that there were no income or capital gains tax issues at a corporate level or personal level. We also had a significant amount of VCT investment in Invu, which meant we had to ensure that all their tax advantages were safeguarded post-merger.

The merger also had to be done in a way that at no point would it trigger any gains. It was absolutely crucial that the merger was completed in a certain sequence. If we had got any part of the step plan wrong, it could have triggered a gain immediately on some or all of the shareholders and potentially also on the company.

Did everything run smoothly?

We started the actual process at the back end of September last year and completed the transaction on 7 December 2007.

Part of the tax process meant clearance letters had to be written to HMRC and we had to take tax counsels’ opinion on a number of issues. It took us seven months to actually get to a step plan with which everyone was comfortable; one we felt would work for all cases and not collapse in a horrible mess leaving us stranded in the US.

It was something like a 13-step plan where companies and sub-companies had to be formed and other companies had to be merged at certain times to ultimately lead to a brand new UK plc top company being placed over the existing group and that top company being floated on AIM.

We had only one real hiccup. When our brokers, Arbuthnot, went to the AIM regulators and told them what we were doing, the AIM regulators dropped a bit of a bombshell. They pointed out that the directors of Invu Inc, the original US holding company, were also going to be directors of the new Invu plc holding company, and therefore would be related parties. Hence, any shares controlled, or potentially controlled, by them could not be used to vote at the EGM that was required to approve the merger.

We discovered this quite late in the process. It was the only thing we’d missed and while we had to get a 50 per cent plus shareholder vote to approve the merger, we had effectively just lost 22 per cent of our voting power.

What did Invu do? Stay tuned for the second instalment.

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Tags: nasdaq, aim-listed, us company, document management software company, capital restructuring, john agostini, invu, aim, crest, trading shares electronically, private placement, fundraising, sarbanes-oxley act, aim floatation, addleshaw goddard, tax liability, uk quoted company, merger, hmrc, shares, shareholder,

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