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Formally known as the Alternative Investment Market, AIM was founded in 1995 and is the London Stock Exchange’s junior and less regulated market. AIM is internationally recognized, raising considerable funds for companies and attracting a diverse variety of companies from all business sectors across the world.

According to statistics available on the AIM website, a total of 17 companies with the USA as their country of origin had their shares admitted to trading on AIM in 2006, bringing the total number of AIM-listed US companies to 39. Compared to 2003, when there were only 3 US companies on AIM, this statistic provides a clear indication that US companies are now viewing AIM as an attractive alternative to markets that are closer to home.

Why is AIM attractive to US companies?

There are a number of reasons why AIM has emerged as a popular trading platform for US companies, although some are more widely commented on than others.

The burden of “SOX”

Perhaps the most frequently cited reason for companies in the US making the decision to float “across the pond” is the burden of domestic regulatory control and compliance requirements, in particular since Sarbanes-Oxley (or “SOX” – the well-known US law passed in response to a number of major corporate and accounting scandals including those affecting Enron and WorldCom). The introduction of SOX in 2002 signalled a fundamental change in corporate governance and regulatory requirements for US companies, a change which meant greater and often prohibitive compliance costs. Smaller companies were affected most and the cost of going public was enough to force many such companies (sometimes called “Sarbox refugees”) to look elsewhere for viable options.

A sensible, not stifling, level of regulation

In contrast, AIM offers an attractive level of regulation – pitched with the needs of smaller-growth companies in mind – combined with a reputation for first-class corporate governance standards. For a company to float on AIM, there are no minimum requirements in respect of market capitalization, shareholder equity, trading volume or share price (as there are in the US), and as a result it is seen by many to be more receptive to smaller companies. Furthermore, there is no requirement for the company in question to have an operating history which, again, is an attractive feature for companies that are just starting out.

Although European companies are now required to use International Financial Reporting Standards for the Admission Document, US companies can continue to use US GAAP. The ongoing obligations of a company listed on AIM (which are set out in the AIM Rules) are also less burdensome and more manageable than those of a company listed in the US. One of the most noticeable differences in the two regulatory regimes is the flexibility that AIM companies can enjoy in relation to transactions, which only require shareholder approval in very limited circumstances (namely where a transaction equates to a “reverse takeover” or results in a fundamental change of business). Again, a young company wishing to grow by, for example, conducting a series of rapid acquisitions can usually do so without the costs (and delay) of convening a general meeting of shareholders in order to seek prior approval for the transactions.

The role of the Nomad

Companies looking to IPO on AIM have to find a sponsor, called a Nominated Adviser or “Nomad” and are required to retain a Nomad at all times. The Nomad (a bank or corporate finance firm) is responsible for ensuring that the company is suitable for a listing on AIM (indeed, its reputation could be irreversibly damaged should it support a “bad egg”) and is also responsible for ensuring it complies with the various rules and obligations to which it is subject under the AIM Rules. The Nomad is an expert in the market who can advise and guide the company through the various stages of its life from the IPO and beyond. An AIM-listed company is encouraged (and often contracted) to consult with its Nomad before embarking on various projects.

The Nomad will also make sure that the company is aware of and concerned with its compliance with the “Combined Code” (which is a code offering guidelines as to the corporate governance policies and procedures the company should have in place). In such a fast-moving and competitive market, the reputation of a Nomad is absolutely key. The Nomad’s concern with its own reputation creates a system that is, to a certain extent, “self regulatory” (thereby counter-balancing the relatively relaxed level of regulation on AIM). In addition, since February 2007, Nomads are subject to the new AIM Rules for Nomads which, in many ways, codify what is currently seen as “best practice” and reaffirm and highlight the importance of the Nomad role.

Although the AIM market has received criticism for its level of regulation (most recently from the New York Stock Exchange) there are many supporters of AIM who would argue that the lack of hard rules and regulation has actually urged players in the market to maintain strict policies of good behavior; a “risk-based culture” where it is in everybody’s interest to adhere to best practice guidelines.

Due diligence

The level of due diligence and verification of the Admission Document (effectively the “offering document”) insisted upon by the Nomad is often a laborious and time-consuming task, but, ultimately, this checking process serves as protection for both the Nomad and the directors of the company (who should be conscious of the dangers and liability surrounding inaccurate or misleading statements to investors).

A deeper pool of investors

Another reason that perhaps receives less attention than the “relaxed regulation” argument is the simple fact that London is an excellent place for small to medium-sized companies to raise money. As well as targeting smaller companies than the US stock markets, AIM has the unique ability to introduce these smaller companies to a wide pool of institutional investors and a generously liquid market stretching beyond London and into Europe. The growing number of overseas companies coming to AIM illustrates the more global attitude that UK investors are taking to their portfolios.

Greater analyst coverage

Smaller US companies have often bemoaned the fact that it is difficult, almost impossible, to achieve serious interest and consistent coverage from analysts in the US if a company has a market capital of less than a few billion dollars; many of the larger companies that are thriving on AIM would simply not be noticed in the US capital market environment. The US Venture Capital Association has reported that there has been a decline of 59% in US listings for small to medium-sized companies in the US. As a result, US corporate advisers are “dusting down” their AIM Rules and getting to grips with a new list of options for smaller clients that wish to raise funds. In contrast, the AIM market offers broad analyst coverage for companies of all shapes and sizes and a very open-minded approach to new businesses starting out.

Watch out!

There are, of course, a number of special considerations for US companies opting for AIM as their market of choice. Securities law in the US is notoriously tricky and companies and their advisers must be fully aware of the various requirements and restrictions. One important “trip wire” to be considered is the rule that if a US company has over 500 shareholders worldwide, US reporting requirements and the SOX regulations are triggered anyway; a lack of awareness could result in the advantages of AIM being fundamentally undermined. Settlement issues would also need to be addressed in the light of US securities restrictions, as the UK’s CREST system (which is the paperless electronic means by which stocks are traded on AIM), cannot easily accommodate legended stock. The directors must also be prepared to make various trips to the UK throughout the due diligence, verification and marketing process, as well as on an ongoing basis post float.

Conclusion

Not all US companies will be appropriate candidates for AIM and generally those with international sales and operations are more attractive to AIM’s institutional investors. However, as Clara Furse, the Chief Executive of the London Stock Exchange, said recently, “small innovative companies are a powerful engine of economic growth and regardless of geography or sector, such companies are welcome in London”.

For more information about AIM, please contact:
Lance Feaver at Lawrence Graham LLP
Tel: +44 (0)20 7759 6685
E-mail: lance.feaver@lawgram.com

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