AIM FOR US COMPANIES THE AIM MARKET OF THE LONDON STOCK EXCHANGE

Transcription

1 AIM FOR US COMPANIES THE AIM MARKET OF THE LONDON STOCK EXCHANGE

2 AIM - THE AIM MARKET OF THE LONDON STOCK EXCHANGE This Memorandum provides a brief overview of the AIM Market of the London Stock Exchange ( AIM ), its development as the world s leading international equity market place for small and mid-cap companies, and identifies some of the reasons for its success. This Memorandum also highlights some of the reasons for AIM being chosen by an increasing number of US businesses as a route to the capital markets, and their market of choice for the raising of development capital. Background The London Stock Exchange launched AIM in 1995 as a secondary market for small, growing companies which had not yet reached the stage where they were ready for a main market listing. The rules and regulations applicable to AIM companies were deliberately designed to strike a balance between providing an environment in which a small, growing company could focus on developing its business rather than applying disproportionate resources to regulatory compliance, while also providing a level of regulatory control to ensure the integrity of the market. The structure adopted, and the level of regulation applied, have contributed to AIM developing as a highly successful IPO and fundraising market regarded by investors and other market participants as a safe place to undertake business. The Development of AIM Some thirteen years after its launch, initially with just a handful of companies, the number of businesses on AIM has grown rapidly, particularly over the last three years, with the number of companies listed now standing at approximately 1,700 - more than London s main market. In fact, AIM is being chosen as the market of choice not only by new entrants, but also by a steady stream of companies which have moved from the main market to AIM. In the last three years alone, approximately 1,200 companies have joined AIM. While there has been a slight moderation from the huge number of companies coming to the market in the gold rush years of 2004, 2005 and 2006, this does not reflect any diminishment in the attractiveness of AIM but rather reflects its growing maturity, and the quality and size, of businesses adopting an AIM strategy. The amount of funds being raised on AIM continues to increase. Indeed, in 2007, while the number of IPOs was significantly lower than in 2006, the amount of funds raised was higher. In 2007, more than double the amount of funds was raised by AIM companies than was raised by a considerably larger (almost double) number of companies in The total market capitalisation of AIM now stands at close to $200 billion, and there are some 20 companies with an individual market capitalisation of more than $1 billion. Despite recent challenging market conditions, companies are continuing to flourish on the AIM market, and returns from good businesses have outstripped other markets by a margin. While AIM has been the target of an amount of largely politically-generated negative comment in the last twenty four months, particularly from those connected with the US capital markets, reality is reflected in the increasing flow of capital to AIM companies. These negative comments are almost invariably wholly misplaced and ill-informed. The true picture of AIM is provided through the increasing, strong growth in institutional money being invested in AIM stocks, with much of this growth being driven by US investors. For example, in 2006 Fidelity, the largest institutional investor in AIM securities, increased its investment in AIM companies by some 67 per cent. and US institutions generally are among the most active players in the AIM market. The institutional investors which dominate AIM 2

3 are highly sophisticated firms which clearly see AIM as a market on which they are highly comfortable to undertake investment transactions. It is also worth noting that, while there have been more IPOs on AIM than on the US markets put together for several years now, in 2006 more money was raised on AIM than on Nasdaq for the first time. London and New York were close to equal. International Expansion Although AIM began life as a largely domestically-focused market, in recent years - and, in particular, over the last three years - there has been exponential growth in the number of international (i.e. non-uk) businesses floating on AIM. There are now well over 400 non- UK businesses (pushing up towards one-third of the total, in fact) listed on AIM, from some thirty or so jurisdictions around the world. Well over 30 per cent. of new admissions are now by international companies and the proportion is continuing to grow. The amount of money raised by international companies is also generally higher than for domestic businesses and the average size of an AIM company is increasing strongly - average market capitalisation now exceeds $100 million, up from $60-$80 million less than twenty four months ago. Another development has been the growth in secondary fund raisings. While secondary fund raisings have been very familiar territory on the AIM market for many years, with companies often returning to the market repeatedly for further funds with relative ease, 2007 saw significantly more funds being raised through secondary issues than in IPOs and this trend has continued in This is another of AIM s key attractions - the ability to return to the market for further funding as required without onerous filing or approval requirements. Provided a company has sufficient authorised share capital, it can seek further funds from investors at any time very simply, without having to go through the procedures generally encountered on the larger markets, in a speedy and cost-effective way. The Growth in US Company Admissions At the same time as AIM has been developing as a highly attractive market for smaller, growing companies, the US capital markets have increasingly moved away from such enterprises, creating a far less hospitable environment for these companies to successfully operate in. While the US capital markets remain the largest and deepest in the world (London is second), the focus of the investment and advisory community in the States has moved up the size scale to the point where companies with a market capitalisation of less than $500 million will find it at best challenging and at worst impossible to elicit any meaningful interest from the investor and analyst communities, and both fundraising ability and share price support have largely evaporated for companies of a size which, by contrast, have been able to flourish on AIM. While the focus of the US markets has increasingly been on larger enterprises, the entire structure and fabric of the AIM market has been focused on small and mid-cap companies, with both the institutional investors and the AIM advisors targeting this specific sector of the market extremely successfully. In addition to these challenges for a US business wishing to access the capital markets, and either failing to do so altogether, or capital market funding only being available at an inappropriate cost in the United States, increasing regulation in the US has compounded matters, particularly as a result of the Sarbanes-Oxley legislation. Although the US regulators have made some moves towards easing the burden of Sarbanes-Oxley for smaller companies, the US regulatory environment remains generally adverse for smaller businesses 3

4 and, even without this additional burden, there is still effectively no IPO environment for smaller companies on the US markets in any event. This seems unlikely to change for the foreseeable future and it is considered to be for these reasons - a lack of focus on the US capital markets on small or mid-cap companies, the consequent inability to raise capital effectively, and the regulatory burden imposed on those companies in the United States - that we have seen a rapid increase in US company admissions on AIM. Three years ago there were just 5 US businesses on AIM. Now there are more than 70. The pipeline of new business is also growing strongly and the number of US companies deciding the adopt an AIM strategy is increasing rapidly. It should be noted that the US is not the only jurisdiction from which the growth in international companies on AIM is being driven; strong growth is also being seen from Canada, China, India and mainland Europe. Indeed, many of the international businesses coming to AIM have chosen London in preference to New York for the same reasons as US businesses are forming this view. The Structure of the Market The success of AIM has, to a large extent, been driven by its underlying structure including: the absence of onerous admission criteria its balanced regulatory system its simplified admission process its simple secondary fundraising procedure its easier acquisition rules the nominated adviser system Admission Criteria The AIM rule book sets few eligibility criteria for companies wishing to join the market. So, for example, no trading record is required, there is no minimum requirement for a particular percentage of shares to held in public hands and there is no minimum market capitalisation. This contrasts with other leading markets although it should be noted that in order to admit to AIM, a company will in practice need to demonstrate a sound financial position and strong future prospects to satisfy the gatekeepers of the market that it is suitable for admission. The gatekeepers of the market are the nominated advisers and the brokers, who are highly selective in the companies they are prepared to bring to the market. So, the market, rather than a regulator, dictates which businesses are strong enough to join. Nominated Advisers Nominated advisers (Nomads) are corporate finance advisory firms who are responsible for pre-vetting companies wishing to list on AIM. A company s Nomad is required to confirm to the London Stock Exchange that, having undertaken extensive due diligence, the company is suitable for admission. The London Stock Exchange has effectively delegated to the Nomad community responsibility for ensuring that only companies which are appropriate for public life, and which have been thoroughly examined by a Nomad, are allowed to get 4

5 through the gate. Nomads are governed by a specific rule book dictating the steps that they are required to take in order to fulfil their pre-vetting responsibilities. This task is taken extremely seriously by the Nomads and their role supplants that normally carried out by the regulator on other markets. This system is one of the principal advantages of AIM in terms of the cost and timing of an AIM listing compared to a listing on one of the main markets, whether those in New York, London or elsewhere. Most major markets require pre-vetting and approval by a regulatory body (in the US, the SEC) and the process of vetting and approval is generally burdensome, expensive and usually results in a long timetable for an IPO. The AIM Admission Process The AIM admission process is governed by the AIM rules. AIM admissions are generally accompanied by some form of fundraising to institutional investors. As part of the admission process, an admission document is prepared by the Nomad in consultation with the company and its other advisors. The overall transaction is very similar to most other listing processes, the main difference being the absence of regulatory pre-vetting and approval. The cost and timing of an AIM admission are generally less and shorter than on other principal markets. Where fundraising activities are also carried out, there is also a significant cost difference in terms of commission rates between the US and the UK. In the US, commissions of 7 or 8 per cent. are usual while, for an AIM fundraising, commission will normally be in the range 3 to 5 per cent. The overall cost of an AIM IPO can be expected to be in the range of 7 to 8 per.cent of funds raised, but can be higher or lower, depending to a large degree on the size of deal, as the brokers commission is a fixed percentage. Liquidity AIM is often criticised for being an illiquid market. This is a misplaced comment. It is true that the lower end of the market is relatively illiquid, but this contrasts with the upper level of the market where liquidity is strong. A good business of a reasonable size, with sufficient shares in public hands (free float), can expect greater trading liquidity than a small company whose shares are held by only a small number of shareholders Trading volumes have been increasing steadily in recent years. However, AIM is not a market for short term investors. The institutional investors who invest in AIM stocks generally do not invest in order to flip their holdings. As noted above, these institutional investors - from the UK, Europe, the US and elsewhere - are highly sophisticated investors who invest in AIM stocks for their growth potential. These are not short term investments. Consequently, the institutions are generally not in the market to buy and sell, buy and sell - they take a position because they believe that the companies they invest in will deliver their growth potential. That is not to say that AIM does not provide an exit for investors. In many cases, founder or early stage investors may cash out at least a part of their holdings at IPO. This is particularly relevant in the case of private equity investors who have supported the company for some time but who wish to realise at least some of their investment at IPO. Conclusion AIM is a market that has gone from strength to strength and continues to develop strongly. US companies, both private and existing public companies - including many on the OTC BB - are recognising an AIM strategy as far more appropriate for them in their development 5

6 plans than listing in the United States. King & Spalding is actively involved in a number of transactions for US businesses seeking an AIM listing and would be pleased to provide assistance and advice to any business which wishes to consider AIM as an option for their own development. Jonathan Martin Partner King & Spalding International LLP Direct: +44 (0) Fax: +44 (0) jmartin@kslaw.com Spring