With a Democratic Congress now in place, it is unlikely that the scandal imposed regulatory regime in the United States relating to internal controls and in particular Sarbanes-Oxley will lighten significantly, if at all, in the next few years. Consequently, fast growing companies seeking public money are looking elsewhere to avoid the need to incur disproportionate expenditure on regulatory compliance issues. The junior market of the London Stock Exchange, AIM, has seen a vast increase in the number of U.S. companies considering listing on AIM. This article sets out some information on AIM.
AIM is a market owned and operated by the London Stock Exchange and is the world's leading market for smaller growing companies. Companies listed on AIM range from young venture capital businesses to more established businesses looking for finance and liquidity to expand their operations. Since AIM opened in 1995 more than 2,200 companies have been admitted and more than U.S. $45 billion of new monies have been raised (source: The London Stock Exchange).
The Chairman of the London Stock Exchange, Chris Gibson Smith, has stated "we believe AIM's destiny is to provide Europe with its growth market." Maybe he should reconsider and add the "world."
Out of the 2,200 companies that have been admitted to AIM, over 250 are non-UK domiciled and drawn from countries as diverse as Australia, Canada, China, Cyprus, India, Israel as well as North America. In total, there are companies from over 22 different countries and 33 business sectors that are non-UK domiciled on AIM, and between them they have raised over $5 billion in new monies. Of the non-UK domiciled companies, 12.8 percent are U.S. incorporated and a further 15.6 percent are from Canada. Twenty-five percent of international companies are in the mining sector, the next largest being the oil and gas sector followed by finance. Other key sectors from an international perspective include support services, pharmaceutical, bio-technology and software and computer services. It should be noted that recognising the fact that AIM is a market for smaller growing companies, there is a distinct lack of international engineering and manufacturing based companies on AIM, (a reflection of the new world order?). In 2005, AIM had a record year with over 500 new companies admitted to AIM. As at the beginning of October 2006, approximately 350 new companies had been admitted. In total, in the calendar year 2005, AIM listings represented over 50 percent of all European IPOs in that calendar year, the Deutsche Borse represented only 3 percent. The UK as a whole represented 70 percent of European IPOs. It is this author's view that the proposed linkup between the NYSE and Euronext will make little difference to these percentages.
Admission to AIM allows international companies access to a deep pool of capital and opportunities to create liquidity and raise their profile. International companies can join AIM through the standard admission route or, if they are already quoted on certain specified overseas non-UK markets, via the AIM Designated Markets route.
Recognising the international nature of AIM, AIM has formed links with a number of non-UK investors, intermediaries and companies, and the London Stock Exchange have been involved in a number of specific lectures tours in the United States, China, India and elsewhere.
It takes approximately four months from inception to list on AIM which compares with, for example, the Shanghai's Exchange process of up to three years.
Unlike the UK main market, AIM does not stipulate minimum criteria in relation to company size, track record or the number of shares to be held in public hands. In summary:
1. there is no minimum percentage of shares which need to be held in public hands;
2. there is no trading record required;
3. admission documents are not vetted by the London Stock Exchange or by the United Kingdom Listing Authority (equivalent to the SEC in America) - unless the admission document is caught by the European Prospective Directive, in which case the UKLA will review the document to ensure that it complies with such directive; and
4. there is no minimum market capitalisation.
Every company must however have a nominated advisor. The nominated advisor's role is to assess the company's suitability for AIM, project manage the flotation process and advise on regulatory requirements. In addition to the advisor a company must have a broker. This can be the same organisation as the nominated advisor. The broker's role is to assist in identifying and promoting the company to investors and preparing research on the company.
Typically, the market is looking for a strong management team, a viable business plan, market appetite for the sector, transparency of ownership and accounting, good corporate governance, a long term commitment from shareholder directors and when looking at a non UK domiciled company, the fact that the relevant company is operating in international markets and has the ability to expand internationally.
Importantly, it is not a requirement of AIM or the AIM rules to make public certifications in relation to internal controls. Companies still have to report on internal controls but only to confirm that their board is satisfied that the appropriate risk factors are being dealt with. There is not the same vetting of annual reporting.
While the AIM rules do contain a number of specific announcement requirements where an immediate market announcement is required, these are relatively light compared to what might be required on the main market of London Stock Exchange or through NASDAQ or the New York Stock Exchange. The most significant of those announcements is that there should be an immediate announcement of a material change between the company's actual trading performance or financial condition and any profit forecast, estimate or projection made public on its behalf.
Unlike in the U.S., there is no requirement for quarterly reporting, so in effect there are two reporting periods during a financial year, one an interim unaudited report on a company's activities and the profit and loss for the first six months of the financial year which must be issued no later than three months after the end of the period to which they relate and secondly, the company's annual report and accounts which must be issued within 6 months of the end of the financial period to which they relate.
In terms of obligations to report on corporate governance, while it is a requirement of the UK main market for listed companies to state in their annual report and accounts how they have applied the main principles of the UK Combined Code on corporate governance, the AIM rules do not require AIM companies to have regard to the Combined Code. Nevertheless, it is considered good practice and indeed often imposed by institutional investors that AIM companies will comply with the Combined Code. The Combined Code is a lot less stringent than the Sarbanes-Oxley rules. It contains broad statements which allow interpretation by the directors. For example, the Combined Code states that each company should be headed up by an effective board which is collectively responsible for promoting the success of the company and that the board should have a grasp of the strategic aims, its values and standards and ensure that its obligations to shareholders and others are understood and met.
Further, a board should have a high level statement of matters specifically reserved to it for decision and should ensure that it meets regularly.
Non-executive directors are expected to consider, challenge and contribute to the development of strategy, to scrutinise management performance to satisfy themselves on the integrity of financial information and that the financial controls and risk management systems are robust and defensible.
There is an encouragement that the post of Chairman and Chief Executive are split and that the Chairman should be regarded as independent of the Executive.
Directors are required to submit themselves for re-election every three years though non-executive directors serving longer than 9 years should be subject to annual re-election. The Rules allow companies to be non-compliant but require them to state that they are non-compliant and give reasons for such non-compliance. The Combined Code encourages the setting up of remuneration and audit committees. As in the same way for a typically U.S.-listed company on NASDAQ or the New York Stock Exchange, the audit committee monitors the integrity of the financial statements and any significant financial reporting judgements, reviews the internal financial control and risk management control systems and reviews the scope and effectiveness of the audit and the independence and objectivity of the auditors. However, unlike a company governed by Sarbanes-Oxley regulations, the board simply needs to report that it has reviewed the effectiveness of all internal controls and assessed and put in place appropriate steps to deal with business risk.
According to Hemscott, Eversheds is the advisor to more AIM companies than any other firm with over 48 clients listed on AIM. A typical role for Eversheds in assisting clients to realise the benefits of AIM are:
1. conducting due diligence;
2. advising and implementing on any necessary corporate restructuring;
3. preliminary advice on the planning and preparatory steps;
4. advising and assisting on drafting the admission document;
5. advice on compliance with the AIM rules and regulatory environment;
6. negotiating the key underwriting and related legal agreements;
7. advising on implementing employee incentive arrangements; and
8. guidance on UK corporate governance regime and continuing advice following admission.
The sweet spot for companies on AIM is around the $40 to $150 million market capitalisation range. AIM is an exciting and dynamic market and represents by far the largest source of capital in Europe in the public markets. It is a must to look at for companies which do not have a significant regulatory or other reason to be required to raise money through the public markets in America.
It has been a great success story since 1995, and there is no reason why it won't continue. Inevitably, AIM regulation will come under tighter scrutiny but it still remains a relatively unregulated market particularly compared to NASDAQ and the New York Stock Exchange and should be an attractive option for companies seeking to raise public funds which have a strong viable business plan and are looking to grow fast.
Robin Johnson is a Partner in the London office of Eversheds LLP, where he specializes in M&A, private equity, purple book and joint venture work with a strong emphasis on technology and healthcare. He is also a member of the American Bar Association International Task Force and of the Canadian Chamber of Commerce.