The AIM Market of the London Stock Exchange (AIM) is a useful platform for smaller companies to gain access to the UK capital markets. But what are the legal hurdles to be overcome to gain an AIM quotation? Here is an overview.
If you have a company or business and want to see it grow, you may wish to consider floating it on AIM.
Since AIM was established in 1995 by the London Stock Exchange, new and growing companies have raised more than £42 billion, just one of the benefits of public listing. There are currently more than 1,700 companies quoted on AIM.
A recent survey of AIM-quoted companies indicated some of the benefits as:
- raising profile in the City;
- gaining access to institutional investors;
- increasing credibility for the company; and
- facilitating long term growth.
There are no formal restrictions to being admitted to AIM except that a company should be appropriate to be admitted and its shares must be freely transferable. The company and the directors must comply with the AIM Rules, but these are less stringent than the rules of the full market and, in particular, the disclosure requirements for a company making substantial acquisitions are more relaxed, enabling the company to grow more easily. In addition, there is no requirement for a trading record.
Finding a NOMAD
Every company must appoint a nominated adviser (“NOMAD”). He is both your friend and your policeman. His powers are delegated from the London Stock Exchange and he is there to advise and guide you. NOMADs are carefully chosen by the London Stock Exchange and at the moment there are over 70 of them – all reputable brokerage or corporate finance houses.
Every company must have a broker and so the question often raised is whether it is better to have a broking house which can act as a broker as well as a NOMAD or have two houses acting for the company as broker and NOMAD. There are arguments both ways. The most important thing is to find someone you relate to and who understands your business and what your company is trying to achieve. The company must always retain a NOMAD and, if the NOMAD resigns, the company’s shares will be suspended unless a new NOMAD is appointed within a month.
The company must select its NOMAD carefully, ensuring that the NOMAD fully understands the company's business and works well with the management team.
Appropriate for AIM?
The NOMAD has to confirm to the London Stock Exchange that a company is appropriate for AIM. For him to do this, he undertakes his own commercial due diligence and will ask the company’s lawyers to undertake legal due diligence.
A reporting accountant is engaged to prepare a number of reports for the protection of the NOMAD and the company. In some cases the NOMAD will require a long form report, which will deal with the financial due diligence and a short form report dealing with the trading history of the company together with the working capital report. The latter, prepared in conjunction with the directors, confirms the company has sufficient working capital for at least 12 months from admission. If the company’s business involves a complex technical process, the NOMAD may require a report by an independent expert or competent person.
Admission document and verification
The admission document is the key document for prospective investors. Following the introduction of the Prospectus Directive on 1 July 2005, the admission document will have to take the form of a prospectus and be approved by the UK Listing Authority if it includes a significant retail offer (to more than 100 people who are not qualified (i.e. sophisticated investors) and amounts to more than €2.5 million. Such a prospectus needs to contain full disclosure as required by the FSA’s Prospectus Rules, including accounts drawn up in accordance with International Accounting Standards (or equivalent). If a prospectus is not required, because, for example, money is only being raised from institutional investors, then the content requirements set out in the AIM Rules are more relaxed and no approval is necessary. However the watchword is still disclosure. The investor must be able to make an informed assessment of the ‘assets and liabilities, financial position, profits and losses and prospects’ of the company and the securities being offered.
The information provided must be ‘warts and all’ to ensure that an investor can balance the good points about the company against any bad before he invests. A due diligence exercise should be carried out on the company to establish what should be included. Where there are generic or specific risks, these must be stated in the document.
If the company is not raising money it will still require an admission document which must comply with the AIM Rules. Companies that are already listed on AIM-designated markets (such as the UK Official List, Euronext, Deutsche Bourse, Nasdaq, New York Stock Exchange and Australian Stock Exchange) may join AIM without providing a full admission document under special rules.
The admission document is normally divided into:
- company history;
- risk factors;
- expert’s or competent person’s report;
- accountant’s report; and
- statutory information.
The information in the admission document should be presented in as easily analysable and comprehensive form as possible. The temptation to produce an overblown or exaggerated marketing document must be resisted. Your investors are relying on the information and the admission document may also be used in a secondary funding.
It cannot be overemphasised that the directors are personally responsible for the contents of the document and are potentially liable if there are false or misleading statements in it. Some measure of protection is given by the verification process.
Verification divides the entire contents of the admission document (including any statements made, factual or otherwise), into questions and requires an answer to be given to each question by the person responsible for making the statement, usually the directors. Wherever possible, the answers should be supported by independent documentary evidence. Where the statements are those of directors’ belief or opinion, they must show they took reasonable care in reaching that belief or opinion. It is a tedious but vital part of the admission process. The verification notes are the board’s insurance policy.
Placing agreements and lock-ins
The company will expect its stockbroker to use his contacts to ‘place’ the shares with institutional or other investors. In return for his efforts, the broker will charge a fee and commission on the shares issued in the placing. The company and the directors will have to enter into a placing agreement with the broker and the NOMAD.
The directors will, in turn, be required to give warranties and indemnities to the broker and the NOMAD to support all the information about the company provided during the admission process.
This is a second tier of liability for the directors in addition to their liability for the admission document.
The placing agreement is the one point where the interests of the company and the directors and that of the NOMAD and the broker diverge. The NOMAD will want to set the directors’ liability under the warranties to the full amount of money raised in the placing. The directors will want to limit their liability to a reasonable amount and, in the case of non-executive directors, may not wish to give any warranties or indemnities at all. It is important to have the placing agreement at an early stage in the process so pressure is not applied to the directors to agree to its terms very late in the day.
If a company has not been earning revenue for two years before admission, the AIM Rules require the directors and parties connected with them not to dispose of any of the company’s shares for one year from admission. Even if the company has been earning revenue, the NOMAD and the broker may require a lock-in agreement for at least one year and, for the second year, may specify disposals can only be made with their consent. This is to maintain an orderly market and to give comfort to the investors that the directors, in whom they have placed their trust, are not going to dispose of their shares immediately following admission.
The process will take approximately three months but the timetable will be governed by the amount of due diligence required and also by the broker’s ability to raise funds.
As with all transactions, there is a cost both financially and in management time. Following admission there will be retainer fees for the NOMAD. The directors will be open to more public security and will be accountable to external shareholders as a result of the company’s increased disclosure requirements. These points may be outweighed, however, by the advantages of giving the company access to long-term investment, the opportunity to make acquisitions, increased public profile and greater investor confidence.