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COMMUNITY UPDATE

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At 15 years old, the Alternative Investment Market (AIM) is the most successful junior market in the world, having raised £68 billion in that time and boasting a community of over 1,200 companies. Much celebrated in its early years, AIM has, like many other markets, taken a beating throughout the financial crisis. There has been a steep decline in listings since January 2008 when, at its peak, there were 1,700 companies on the market. 
 
However, the market is bouncing back with 2010 seeing year-on-year growth and a sharp increase in listings. By May 2010, 28 new companies had entered the market compared to 10 in the same period of last year. 
 
It is clear that AIM holds many benefits for dynamic, growing companies, providing a platform for them to issue shares that they would otherwise not be able to. Further, the lighter touch to regulations and application of the ‘comply-or-explain’ rule makes the market attractive to such companies. Also, unlike the Main Market, there is no three-year track record requirement or the need for a proportion of the shares to be in public hands. 
 
Like any other market, or types of financing, there are clear reasons for listing on AIM.
 
Mark Robinson, Chief Executive Officer, Advanced Power Components plc says, “It’s clear that AIM offers advantages to quoted companies in terms of reduced bureaucracy and therefore reduced costs when compared to the full list, but I feel that one should consider the underlying reasons for listing in the first place when considering ‘if and where’. If the reason is genuinely to gain ongoing access to capital for growth, then that’s why the markets exist and AIM offers a great option for a dynamic business anticipating raising funds on an ongoing basis. Likewise, for a large business requiring substantial funding then the Main Market fits the bill. 
 
“If, however, listing is a short-term way of achieving a partial exit, as has been the case in the past, then AIM becomes less and less appropriate owing to increasing evidence that investors are just not interested in companies operating without real ambition.”
 
“An AIM listing isn’t for everyone,” says Iain Ferguson, outgoing CEO of The Mission Marketing Group. “Although relatively compliance-light, it is, rightly, still demanding of its constituents. But, for younger, smaller companies, moving quickly and needing lower costs and greater flexibility, it has provided a useful access route to investors. It can provide a number of benefits including a breadth of institutional participation and guidance, a widespread of risk and potential sources of primary and secondary funds, and, in strong markets, a currency for management alignment and M&A activity.”   
 
Criticaleye asked Tom Nicholls, Partner at Lawrence Graham LLP, to give an overview of the benefits of being on the market. 
 
“It is around secondary issues that the biggest advantage of AIM is to be had,” he says. “A further fundraising can usually be done (provided there is no offer to the public) simply on the back of the placing agreement and an announcement and it is here that the significant time and cost savings can be made. The AIM Rules are also less prescriptive than the Listing Rules when it comes to substantial transactions.  Shareholder approval (and the associated time/cost requirements of producing a circular) is required for Main Market companies whenever a proposal transaction triggers a result in excess of 25 per cent in the class tests. On AIM such a requirement is only triggered at the 100 per cent level.”
 
AIM organisations are more nimble and able to react to opportunities as they have shifted away from the Association for British Insurers (ABI) guidelines relating to directors’ authority to allot further shares for cash. The ABI recommendations state that, for the Main Market, this authority (to allot shares for cash) be limited to 5 per cent, with anything over that requiring shareholder approval at the time of issuance. “AIM companies regularly reserve higher levels of authority of 10 per cent, 20 per cent or even higher. This means that their ability to move rapidly and take advantage of market conditions is maintained without needing to seek shareholder consent to amend board authorities. Thus the speed and cost of raising further funds is again minimised,” continued Tom.   
 
Illiquidity, the expense of listing and advisors have all been cited as reasons why listing on AIM can feel like ‘peeing in your pants – a relief at the time but regretted later!’, resulting in some companies de-listing. There is also no doubt that the increase in Capital Gains Tax relating to AIM shares, effective in January 2011, might also drive companies away from the market.
 
Gavin Oldham, CEO of Share plc, gives the following recommendations for improving AIM:
 
Companies need to get a wider spread of shares at primary issue
Personal investors should be encouraged
Prospectus requirements should be simplified
Listing costs should be reduced
Companies with market capitalisation of less than £100 million should be exempt from Stamp Duty
CGT benefits for business assets (inc. AIM companies) should be re-introduced 
AIM shares should be able to be included in ISAs
 
“Although a number of micro-cap ($50 million - $300 million) companies have delisted over the past 24 months,” says Tom, “it is significant that AIM continues to provide a platform for companies to attract capital and grow. During the same period, there has also been a steady flow of companies which, having successfully used AIM as a stepping-stone, have developed and grown sufficiently to enable them to move up to the Main Market and, in a number of cases, directly into the FTSE 250.  This growth platform is precisely what AIM was designed for and its success in this area is significant.”
 
That is precisely what SportingBET plc did. Having been listed on AIM during the growth phase, the company moved up to the main market earlier this year. Jim Wilkinson, Group Finance Director for SportingBET, explains how AIM supported them. “The AIM market suited us during the development phase as it allowed the group to operate with all the responsibilities and benefits of public share ownership, whilst retaining sufficient flexibility to cope with the vicissitudes caused by a slowly regulating marketplace. This was particularly important when raising additional equity to fund acquisitions as debt facilities were not available to the company. In addition, the flexibility offered by AIM in compensating employees helped promote growth and underpinned the more difficult phases by keeping the staff together in one team.”
 
Like any other listing, or type of financing, there are pros and cons to listing on AIM. It is apparent from the CEOs and AIM experts that we spoke to that, to make an AIM listing work, you must work at it and have very specific reasons for being there in the first place.   

Please get in touch if you have any comments about the issues in today's update. 

I hope to see you soon,  

Matthew