In 2005, following widespread concern that too many cash shells were admitted to AIM, the London Stock Exchange (the "LSE") published new AIM Rules applicable to investing companies. The new AIM Rules required investment companies seeking admission to AIM to raise at least £3m in cash on admission and, until an acquisition was made, to obtain annual shareholder approval for the continuation of the company's business.
On 18 December 2008, following further concerns regarding the range of companies (in particular, closed-end funds) that have been admitted to AIM since the AIM Rules were amended, the LSE published AIM Notice 30/08 (the "Notice") setting out proposed changes to the AIM Rules for Companies (the "New Rules") and a new AIM Note for investing companies (the "Note") with the intention of specifically tailoring the AIM Rules and the regulatory framework applicable to investing companies.
Pursuant to the proposed New Rules, it will be necessary for an investing company to have a precise and detailed investing policy (as opposed to the existing requirement for an investment strategy) so that the company's parameters for investment are clear to investors, unless shareholders approve otherwise.
The new proposals also aim to regulate investment managers for externally managed investing companies by introducing specific disclosure requirements thus both reflecting the key role that managers perform but also recognising that the managers are currently not directly covered by the AIM Rules.
In particular, the Notice includes the following proposals:
(i) Investing Policy
The existing AIM Rules require an investing company to have an investing strategy at all times. The LSE proposes to change this to a requirement on an investing company to have an "investing policy" that it will follow in relation to asset allocation and risk diversification.
The policy will have to be sufficiently precise and detailed in order to be clear, specific and definitive. It will need to include details on the following, as a minimum:
- the business sector(s), geographical area(s) and type of assets or companies in which it can invest;
- the means or strategy by which the investing policy will be achieved;
- whether such investments will be active or passive and, if applicable, the length of time that investments are likely to be held for;
- how widely it will spread its investments and its maximum exposure limits, if applicable;
- its policy in relation to gearing and cross-holdings, if applicable;
- details of any investing restrictions; and
- the type of returns it will make to shareholders and, if applicable, how long it can exist before making an investment and/or before having to return funds to shareholders.
Any proposed material changes to the published investing policy will need to be approved by shareholders in a general meeting. The LSE has suggested that in determining what constitutes a "material change", consideration must be given to the cumulative effect of all the changes made since the last shareholder approval of the investing policy or, if no such approval has been granted, since the date of admission.
In addition, in the event that an investing company has not substantially implemented its investing policy within eighteen months of admission, it will need to seek the consent of shareholders of its investing policy on an annual basis. The LSE has suggested that it would consider "substantial" implementation to equate to an investment of substantial portion (usually at least 75%) of all funds available to the investing company in accordance with its investing policy.
If shareholder approval is not obtained in relation to either a material change or non-implementation of an investing policy, the existing policy will continue to be effective and the investing company will be expected to propose further amendments to its policy and to seek approval for those further changes as soon as possible. If consent is again not obtained then the investing company should consider either returning funds to shareholders or another resolving action in conjunction with the company's nominated adviser and the LSE.
Investing companies already admitted to AIM will be expected to update their existing strategy in order to bring it into line with the new investing policy requirements as soon as possible, obtaining approval from shareholders if required at the next available opportunity.
(ii) Types of Investing Company
The LSE has clarified the types of investing companies that it expects to be appropriate for admission to AIM and, in addition, requires nominated advisers to take into account an investing company's ability to exist within AIM's regulatory framework when assessing the appropriateness of such a company for AIM.
Typically, the LSE would expect an investing company to be a closed-ended entity of a similar nature to a UK public limited company, thus, not requiring a restricted investor base. An investing company should be straightforward and not complex in terms of its structure, securities and/or investing policy and should issue primarily ordinary shares (or the equivalent). Partly paid or non-voting securities or securities that are not redeemable on an open basis or which form part of a stapled unit are not likely to be considered appropriate for admission.
(iii) Investment Managers
The LSE has proposed the introduction of specific disclosure requirements in relation to investment managers for externally managed investing companies. In addition, an investment manager and any of its key employees that are responsible for making investment decisions in relation an investing company will be treated as a "director" for the purposes of AIM Rules 7 (lock-ins), 13 (related party transactions), 17 (deals by directors) and 21 (restrictions on dealing).
(iv) Independence and experience
The LSE has introduced provisions aimed at ensuring that:
- the board of directors and the nominated adviser to the investing company are independent of both the investment manager and any substantial shareholders or investments (and any associated investment manager) comprising over 20% of the gross assets of the company; and
- the investment manager and the board of directors have sufficient and appropriate levels of experience for the investing company and its investing policy.
In addition, the New Rules require that an investing company have in place adequate safeguards and procedures to ensure that the board of directors retains sufficient control over the company's business.
Any issues in relation to the independence requirement will need to be disclosed in the investing company's admission document or notified in accordance with the AIM Rules as appropriate.
(v) Admission Document Requirements
An investing company will be subject to stricter requirements than standard issuers in relation to the information it must disclose in any admission document it publishes, including the following additional disclosures:
- the information required by Annex XV of the Prospectus Rules;
- the expertise the investment manager and the investing company's directors have, as a board, in respect of the investing policy; and
- a summary of the key terms of the agreement(s) with the investment manager including fees, length of agreement and its termination provisions.
(vi) Corporate Transactions
The LSE has not proposed any formal changes to the AIM Rules governing corporate transactions (Rules 12 to 16), however, guidance on the application of the class tests to investing companies is included in the New Rules and the Note, in particular:
- Rule 12 (substantial transactions) - an investment made by an investing company that is in accordance with its investment policy and only breaches the profits and turnover tests contained in the class tests will be considered as being on of a "revenue nature in the ordinary course of business" and would, therefore, not require disclosure as a "substantial transaction";
- Rule 14 (reverse take-overs) - an acquisition (which includes an investment in a company or the acquisition of assets) by an investing company which exceeds 100% in any of the class tests may be considered a "reverse take-over" pursuant to AIM Rule 14 notwithstanding that such acquisition was made in accordance with the company's investing policy. However, such an acquisition will not be considered to be a "reverse take-over" if it:
- is made in accordance with the company's investing policy;
- only breaches the profits and turnover tests; and
- does not result in a fundamental change in the investing company's business, board or voting control.
- Rule 15 (fundamental change of business) - the Note suggests that a disposal by an investing company which is within its investing policy will not be subject to the requirement under Rule 15 to obtain shareholders' consent on the basis of a circular. However, where an investing company disposes of all, or substantially all, of its assets, the investing company will be required to obtain renewed shareholders' consent for its investing policy and will have twelve months in which to implement the new policy.
The LSE has provided guidance to clarify that the condition of admission to raise a minimum of £3 million via an equity fundraising on or immediately before admission should be satisfied from independent investors and not "related parties" unless the related party is a "substantial shareholder" only and also an "authorised person".
The formal consultation period in relation to the new AIM Rules will end on 13 February 2009.
A full copy of AIM Notice 30/08 can be found on the LSE website.