Weighing the pros and cons of listing on AIM

The Alternative Investment Market (AIM), the London Stock Exchange’s international market for smaller companies, has grown into the world’s most successful market for smaller, growing companies. Since its launch in 1995, over 2,600 companies from varied industries have joined AIM and it has proven to be a robust market, with £6.46 billion ($12.62 billion) raised via IPOs on the exchange last year.

Despite this success, less than one-fourth of the companies listed on AIM are non-U.K.-based companies. Of the international companies listed on AIM in December 2006, 16% were based in Australia, 14.4% in Canada and 13.1% in Ireland. U.S.-based companies comprised only 12.4% of the non-U.K.-based companies listed on AIM.

Many of the U.S.-based companies currently listed on AIM have taken advantage of the “fast track” admission process, which allows companies that have had their securities traded on an AIM Designated Market (such as the New York Stock Exchange and the NASDAQ) to apply to be admitted to AIM without having to produce an admission document. However, there are also U.S.-based companies that list exclusively on AIM. Among these are the U.S. venture-backed companies Burst! Media Corp. and Protonex Technology. Burst! Media listed on April 21, 2006, after closing a $15 million round of private equity financing exclusively led by Summit Partners in 2002. Protonex Technology listed on July 3, 2006, after raising its first institutional round in 2004, with participation from Conduit Ventures, SAS Investors, Solstice Capital and Commons Capital.

The most prominent difference between AIM and other markets is AIM’s pared down regulatory regime, but AIM is unique in several other ways, including admission process, cost, enforcement and exclusive focus on small, growth-oriented companies.

To join AIM, companies are not required to demonstrate a particular financial background or trading record. In fact, there are no requirements with regard to company size, proportion of shares in public hands or transferability of shares. AIM’s rules consist of a 44-page document, devoid of legal jargon, which sets forth a regulatory framework designed to provide the ease of admission and flexibility that one might expect in a market geared toward small, growing companies.

Depending on the amount of due diligence required, the admission process to join AIM lasts typically only three to four months. Costs associated with joining include AIM’s admission fees, currently £4,340 ($8,500), as well as commissions and fees for the various required advisors. Generally, fees total less than 10% of the amount raised.

The most prominent difference between AIM and other markets is AIM’s pared down regulatory regime, but AIM is unique in several other ways, including admission process, cost, enforcement and exclusive focus on small, growth-oriented companies.”

Jeffrey R. Houle, Senior Partner, Greenberg Traurig LLP

U.S. executives have taken notice of AIM’s cost-effective options. After his company’s IPO, Scott Pearson, CEO of fuel cell developer Protonex Technology, told the Boston Globe that it cost him about $1 million a year to trade in London for things like compliance reviews and mailings to investors, compared with $3 million on the Nasdaq.

The AIM model appears to be working. According to Thomson Financial (publisher of VCJ), there were more public offerings on AIM in 2006 than there were at the exchanges of New York and Hong Kong—including a number of IPOs by companies in the environmental technology and software and computer networking sectors. Contributing to this trend is the perception of many high-tech entrepreneurs that European investors are less skeptical about high-tech startups than are North American investors because they were not as negatively impacted by the bursting of the dot-com bubble.

Post-listing, AIM’s less burdensome reporting requirements are also considered an advantage to potential listers. Beyond the cost and time considerations associated with reporting requirements under U.S. law, the ability to report financial results every six months can be an advantage. The additional time gives a startup that may have an erratic revenue stream considerably more breathing room that it would have under other reporting regimes. From the perspective of a fledgling company, the emphasis on growth rather than reporting and governance may make AIM a good market in which to mature.

It bears mentioning that companies listing on AIM may not be able to completely escape the U.S. regulatory scheme. Regulation S establishes criteria pursuant to which U.S. companies are permitted to conduct their initial public offerings outside the country without registering under the Securities Act of 1933. To comply with Regulation S, a company must put in place protections to ensure that its shares sold overseas don’t “drift back” into the U.S. During a required “distribution compliance period” of one to two years, the company must refuse to transfer the shares sold in the IPO to U.S. investors and require sellers and buyers of those shares to certify that they are not being transferred to U.S. investors. As a result, unless an applicable exemption from registration is available, it may be more difficult to sell the company to a U.S. acquirer during this time.

There are, of course, disadvantages inherent to AIM’s approach. With a more lax regulatory regime comes a decrease in transparency and, potentially, investor confidence. Concerns about the quality of offerings on AIM stem largely from the fact that companies primarily report to LSE-approved financial advisors known as Nominated Advisors (or Nomads) and such reports are not necessarily reviewed by an enforcement agency or readily available for public review.

The low standards for admission have also been criticized as providing insufficient protection to individual and non-institutional investors. In a speech on Dec. 1, 2006, SEC Commissioner Roel C. Campos cited the lack of admission requirements related to minimum public share distribution, trading record, prior shareholder approval of transactions and minimum market capitalization as detractors from the overall quality of AIM offerings.

Many of the advantages of listing on AIM, including ease of admission, time to market, minimal reporting burden and lower cost, may be balanced by the disadvantages of lesser quality, lower trade volume and decreased transparency.”

Jeffrey R. Houle, Senior Partner, Greenberg Traurig LLP

Commissioner Campos also pointed to a number of recent AIM IPOs as indicative of the lower quality AIM’s regulations tolerate. In particular, the privatization of state-owned businesses in Russia and the former Soviet Union through AIM IPOs has provided ample fodder for the market’s critics. Campos cited Kazakhmys and Sistema, both of which would have been ineligible for listing on U.S. markets because of the concentration of ownership in the hands of a few company executives. Such issues are, of course, not unique to privatized businesses but the point, according to critics like Campos, is that AIM provides “little to none of the minority shareholder protections that investors expect under U.S. regulations and listing requirements.”

Companies listing on AIM are subject to continuing obligations to publish price-sensitive information and to file semi-annual reports and annual financial statements. However, these reports (referred to as “notifications”) are less extensive and detailed than the quarterly reports on Form 10-Q and annual reports on Form 10-K required under the Securities Exchange Act of 1934. In addition, unlike under the U.S. market regime, the company’s Nomad is the primary enforcement body at AIM. Despite the potentially conflicting duties of the Nomad—which serves both the company that appointed it and the LSE—suspensions and de-listings occur with some frequency and, as yet, there have not been any scandals associated with the Nomad’s dual role.

Ultimately, the strength of the market may be the biggest detractor from AIM’s appeal. Critics are quick to point to overall investor gains on the U.S. indexes in 2006, while investors on AIM suffered a loss in market capitalization in the same period.

Finally, trading volume has also been a concern for AIM-listed companies, primarily because most AIM investors are institutional investors who bring a longer-term approach to the process than typical investors in the U.S. markets. In 2006, for instance, there were fewer than 300,000 trades in all but the first five months of the year. As a result, private venture capital investors must weigh the relative advantages presented by the AIM model (including AIM’s recognition and approval of VCs using an offering to sell some or all of their venture stock) against some of the liquidity issues associated with AIM’s thinner trading volume.

In sum, many of the advantages of listing on AIM—including ease of admission, time to market, minimal reporting burden and lower cost—may be balanced by the disadvantages of lesser quality, lower trade volume and decreased transparency. Nonetheless, for companies with a particular E.U. or U.K. nexus, those operating within certain niches or without sufficient market value to justify the costs associated with U.S. stock exchange listing, and companies seeking a more friendly regulatory environment from an issuance perspective, AIM remains a viable international financing option providing access to the capital, liquidity and profile of the London capital markets.

Jeffrey R. Houle is a senior partner with Greenberg Traurig LLP and focuses on venture capital, public offerings, mergers and acquisitions and other liquidity and financing transactions. Sara J. Magner, an associate in the corporate practice group of Greenberg Traurig, contributed to this article.