By JOHN GITTELSOHN,(The OC REGISTER)

The appeal of the London Stock Exchange isn't limited to U.S. companies planning an IPO – it also offers opportunities for American investors.

Rather than put money in individual stocks, Chip Hanlon, president of Delta Global Advisorsin Huntington Beach, suggests investing in exchange traded funds based on stocks or currency.

Some examples:

•CurrencyShares British Pound Sterling, which earns interest off investments on deposits in British pounds, at www.currencyshares.com

•MSCI United Kingdom Index Fund, an ETF that provides exposure to the price and yield performance of publicly traded securities in British markets, at www.ishares.com

•Vanguard European ETF, which invests in a basket of European corporate stocks, more than one-third of which are British-based at www.vanguard.com

When Irvine-based Gatekeeper Systemsneeded capital, it didn't go to Wall Street. It went to London.

Gatekeeper, an Irvine company that makes shopping-cart tracking and locking devices, raised $15 million in its initial public offering on the London Stock Exchange's Alternative Investment Market in December 2004.

"We went there in disbelief, but we came away very impressed," R.J. Brandes, chairman of Gatekeeper Systems, said of London's small cap market. "It replicates what was going on in the '80s with Nasdaq when it funded small start-up companies."

Compared to Wall Street, going public in London is faster, cheaper and has less red tape, advantages that led London to surpass New York in the number and value of initial public offerings this year.

So far, IPOs in London this year exceeded $50 billion compared to $40 billion combined on the New York Stock Exchange and Nasdaq.

"The money and the market were there," said Lionel Simons, president of Kleenair Systems of North America, an Aliso Viejo company that went public on London's AIM in March. Kleenair, which makes retrofit kits so old diesel engines can meet new clean-air standards, raised 2.5 million pounds, or almost $5 million, in its IPO.

A big factor in Kleenair's decision to go public in London is what Simons called a hostile atmosphere toward small public companies in the wake of the Sarbanes-Oxley Act of 2002.

"Sarbanes Oxley has been just dreadful and the (Securities and Exchange Commission) is extremely unfriendly to small companies," Simons said.

Congress passed Sarbanes Oxley in the wake of accounting scandals at companies like Enron, stepping up accounting requirements and penalties for corporate officers who misreport finances. The law made going public so expensive for small companies that they looked beyond Wall Street to raise capital.

CanaccordAdams, a Canadian investment banking firm, estimated a $50 million IPO on Nasdaq would cost $5.2 million in fees and services compared to $3.9 million on London's AIM. Annual compliance costs and other fees would be $2.3 million on Nasdaq compared to $922,000 on AIM, CanaccordAdams reported.

But Simons and Brandes caution that London's advantages are eroding. They say the London market faces "indigestion" from so many IPOs that smaller companies risk becoming traded so thinly that their equity stops growing. They also say that the U.S. regulatory environment, which drove small companies overseas, is improving.

Pressure is rising for U.S. markets to be more competitive. This week, the Committee on Capital Markets Regulation, a group formed with the endorsement of U.S. Treasury Secretary Henry Paulson Jr., recommended 32 changes to ease the cost of compliance.

SEC Chairman Christopher Cox, a former congressman from Newport Beach, has pledged to help smaller companies with new compliance guidelines.

"The overarching objective of these significant changes will be to reduce the cost to investors while increasing the benefits in terms of investor protection," Cox said in a Nov. 16 speech to international securities regulators in London.

Going to London's exchange, though, offers benefits beyond the costs and paperwork, especially for American companies looking to expand in Europe.

"In Europe, it affords us more stature being a public company," said Mike Lawler, Gatekeeper's President and CEO.

Since going public in London, Gatekeeper Systems has acquired subsidiaries in France and Canada and seen foreign sales grow from negligible to more than one-third of its market.

Kleenair's Simons said London is the future for his company's diesel products, because the city is imposing strict emission requirements in 2008.

In fact, one key for success on London's exchange is being oriented to doing business overseas, said Dan McClory, managing director of Hunter Wise, an Irvine investment banking firm that has advised 18 companies in various stages of listing on AIM. Companies need a good business plan and a story to sell to investment funds, he said.

"Don't think you can just go there and take the money and run," McClory said. "Only one or two of every 10 companies that come to us are legitimate candidates."

Many British funds are barred from investing in companies without a headquarters or main office in Europe. Experian, a credit-reporting company that derives 60 percent of its revenue from the United States and has its U.S. headquarters in Costa Mesa, went public in London in October, because its parent is British.

"All of our shareholders, or the vast majority, are U.K. based," said Chris Callero, chief executive officer of Experian Americas, whose company is listed on the FTSE 100 for the London exchange's biggest companies. "The view of the board was if we didn't list on the London Stock Exchange, we'd create great leakage."

Andrew Karolyi, a professor of finance at Ohio State University, urged companies to ask about more than fees and filing requirements when they consider where to go public.

•Which market would be able to attract more analysts?

•Which market would attract more institutional investors?

•Which market would attract higher volumes of trading to make a stock less vulnerable to manipulation?

"These intangibles should more than outweigh the cost of continuous fees," Karolyi said.

The AIM market is also starting to lose some of its momentum.

Trading of Kleenair on the AIM has dropped to a trickle in recent months, which Simons attributes to the glut of newer and bigger public offerings.

"I think AIM is suffering a bit of indigestion," Simons said. "My impression is investors in London and AIM are more selective about foreign companies than they were two years ago."

Brandes said Gatekeeper also suffers from feeling ignored by investors. Despite doubling revenue, the stock has remained flat. If Gatekeeper went public today, he said, it might not be the right time to go to London.

"Life is always about timing," he said. "Why should this be any different?"