Canada: AIM: Gateway to European Capital Markets

Reprinted with Permission from the 2006 issue of the Lexpert/ALM Guide to the Leading 500 Lawyers in Canada. (c) Thomson Carswell."

Since its launch in 1995, the AIM Market (AIM) of the London Stock Exchange (LSE) has become a leading market for companies from all over the world to raise funds for growth and development. AIM is now in its eleventh year of business and at the end of December 2005, there were over 1,300 companies trading on AIM with a market capitalization in excess of £56 billion. Of these, more than 200 were overseas companies.¹

Canadian companies represent a significant number of the overseas companies admitted to AIM. As at December 30, 2005, 34 companies organized in Canada had been admitted to AIM with a market capitalization totalling in excess of $6 billion. First Calgary Petroleums Ltd., Canaccord Capital Inc., Oilexco Incorporated, Centurion Energy International Inc., Kirkland Lake Gold Inc. and YM Biosciences Inc. are just a few of the AIM-listed Canadian companies operating in a number of business sectors, including mining (18), oil & gas (8), biotechnology (2), security & alarm services (2) and financial services (2).

Companies admitted to AIM (AIM companies) gain all the benefits of flotation on a public market in addition to the extra advantages of being quoted in London, including:

• Internationally respected regulatory standards

• Increased exposure to institutional investors

• Exposure to one of the deepest pools of capital in the world

• The opportunity to widen their shareholder base through dual listings

• The ability to make further share issues and to make significant acquisitions and disposals without the need for the costly public documentation and shareholder approval that would be required on main international markets

• International investment expertise

• Potentially greater liquidity with the introduction of the FTSE AIM 100 Index and FTSE AIM All Share Index in 2005 An AIM admission will generally be the most appropriate and advantageous for Canadian companies that:

• Conduct business in a sector that is more highly valued in Europe, such as gaming, versus North America

• Anticipate making foreign acquisitions, as having a European listing may make their stock more desirable to a wider range of European and international targets
• Have operations or customers in Europe, as an AIM admission will give the company a higher profile in Europe
• Have assets or operations in foreign jurisdictions that may be undervalued in the Canadian market

Canadian companies considering an AIM admission would ideally benefit from having a regular presence in the UK and/or Europe and will need to build and maintain relationships with the London institutions that comprise the majority of AIM investors. Public relations (PR) and investor relations (IR) contribute significantly to a successful admission, and a company seeking admission to AIM should have a PR and IR strategy for the UK and/or Europe.

AIM’s success is in no small part due to the fact that it has a simplified regulatory environment. Although originally designed for the needs of smaller or growing companies, more established companies are increasingly seeking AIM listings. A key difference between AIM and other markets, including the TSX, is that rather than being regulated directly by a securities regulator (in the UK, this is the Financial Services Authority [FSA]), AIM companies are supervised by a nominated adviser (Nomad). Generally, a Nomad is a securities firm that is regulated by the FSA and approved by the LSE. Nomads act as the principal quality controllers for the market and lend their reputation to the companies for which they act. The LSE’s rationale for entrusting Nomads with the oversight of AIM companies as well as the admission process is that Nomads are best placed to monitor their client companies’ performance and compliance with the AIM rules published by the LSE (AIM Rules).

The listing and disclosure rules applicable to companies listed on the official list of the LSE (the Main Market) do not apply to AIM companies. Instead, the main body of rules that govern the admission process and ongoing obligations of AIM companies are set out in the AIM Rules, which generally impose significantly fewer and less-onerous obligations on AIM companies than the Main Market rules or the rules of other main markets such as the TSX.

AIM’s simplified regulatory environment begins with its admission requirements and procedures. Unlike the rules of most other markets, including the TSX, the AIM Rules do not stipulate minimum criteria in relation to a company’s size, track record or set number of shares in public hands for eligibility for admission. The main requirement contained in the AIM Rules is that the applicant company must be "appropriate" for the market. This judgment is made by the company’s Nomad, which will make a declaration to this effect to the LSE. The Nomad will in turn rely on various legal, financial and technical reports, declarations and comfort letters from the applicant company, its directors and advisers involved in the admission process and preparation of an admission document, which the Nomad will insist are addressed to it as well as to the company.

In addition to satisfying this "suitability" requirement, there are specific admission criteria that a company must meet in order to be admitted to AIM that are set out below under the heading "Admission Requirements." Since May 2003, companies admitted to a designated market, including the TSX (but not the TSX Venture Exchange), for a period of 18 months prior to the date of admission to AIM can utilize a "fast-track" admission procedure. Under this procedure, an applicant company need not produce an admission document and instead issues a preadmission announcement that must contain prescribed information relating to the company 20 days before the expected date of admission following a working capital review. The fasttrack procedure is not typically used if funds are being raised.

AIM’s simplified admission procedures generally result in savings in time and cost for an AIM admission as compared to a Main Market or other listing. The standard admission procedure for AIM usually takes about three months. Costs to an applicant company comprise:

• Fees for the AIM admission including an initial admission fee of $4,000 payable to LSE plus an annual fee of $4,000 payable to the LSE

• Fees for the various members of the admission team for advising on and producing the admission document and ancillary documents. Absent exceptional circumstances, this currently varies in aggregate from about $200,000 to $400,000 before applicable taxes

• A broker’s commission of between four to six per cent on any funds raised

Certain fees may be lower for Canadian-listed companies that have already produced public disclosure documents in satisfaction of Canadian primary and continuing disclosure requirements. It is common for the Nomad to take a warrant over between 1 and 4 per cent of the enlarged share capital on admission.

There are a number of significant requirements applicable to a company seeking an AIM admission.

An AIM company must retain a Nomad at all times, including during the application process prior to admission. At the preadmission stage, the Nomad’s role is to:

• Assess whether a company is appropriate for AIM

• Explain the AIM Rules to the company’s board of directors and ensure that all directors are aware of their responsibilities and obligations

• Coordinate the admission process alongside the company and its other advisers such as lawyers and accountants

• Assist in preparing the admission document

Once a company has gained admission to AIM, the Nomad advises and gives guidance on the AIM Rules on a continuing basis. The Nomad is appointed by the company but also has a duty to the LSE to ensure that the company complies with the AIM Rules. In addition to retaining a Nomad, an AIM company must retain a broker. The broker is a securities house that is a member of the LSE and is responsible for trading in the AIM company’s admitted securities. Often the same securities firm that provides nominated adviser services to an AIM company also acts as its broker.

Generally, an applicant company must prepare an admission document drawn up in accordance with the AIM Rules and make it publicly available for a period of one month from admission to AIM.

An admission document is not vetted unless it also constitutes a prospectus under the EU Prospectus Directive as implemented in the UK pursuant to amendments to the Financial Services and Markets Act 2000 (FSMA) and implementation of the prospectus rules by the FSA (collectively, the amendments to FSMA and the prospectus rules are referred to as the PD Rules). Under the PD Rules which came into effect on July 1, 2005, a company may not make an offer to the public in the UK without producing a prospectus that is first approved by the United Kingdom Listing Authority (UKLA), a division of the FSA, unless such offer is "exempt." To be exempt, the offer must satisfy one or more of certain prescribed criteria, which include making the offer to not more than 100 persons, other than "qualified investors" as such term is defined in the PD Rules.

In practice, an applicant company’s Nomad and broker will generally seek to ensure that prospectus exemptions are available for an offering to European investors in connection with an AIM admission so that a PD Rules–compliant prospectus is not required, since the time and cost associated with clearing a prospectus with the UKLA will generally be a "deal breaker." Therefore, in almost all cases, the applicant company will only be required to produce an admission document compliant with the AIM Rules, which exempt the inclusion of certain information in an admission document that would be required in a PD Rules–compliant prospectus.

An admission document must include prescribed information on the company and its activities, directors and management and historical financial information. In addition, it must contain any other information which the applicant company reasonably considers necessary to enable investors to form a full understanding of its assets and liabilities, financial position, profits and losses, prospects, the securities being admitted, the rights attaching to those securities and any other matter contained in the admission document. The style of the document is generally less formulaic and presented as much more of a "selling document" than a Canadian prospectus. The front end of the document will, usually, be written by the Nomad together with the company and its counsel. In the case of a Canadian-listed company, its existing annual information form (if any), management’s discussion and analysis and other publicly available disclosure will form the basis for the front end. If the company is raising funds by way of a public offering in Canada and a placing in Europe to European institutional investors, it will generally use its Canadian prospectus as the basis for its admission document and include any additional disclosure required under the AIM Rules in a UK wrapper.

An admission document must contain a "responsibility statement" that to the best of the knowledge of and belief of the directors (who have taken all reasonable care to ensure that such is the case) the information contained in the admission document is in accordance with the facts and does not omit anything likely to affect the import of such information.

The verification process is intended to enable the directors to make this statement and establish a due-diligence defence for the directors with respect to statements made in the admission document. To minimize the risk of inaccuracies in the admission document, the company’s counsel prepares verification notes, comprising a series of questions and answers that provide a formal record of the steps taken to check accuracy and ensure that all responsible persons focus on particular statements. Much of the verification procedure takes place informally during the many drafting meetings; statements that cannot be verified will not be included in the admission document. In addition, it is customary for each director to sign a responsibility letter, which will authorize the issue of the admission document containing the responsibility statement.

The procedure applied to verify an admission document is significantly more onerous than the general due-diligence procedures that Canadian companies utilize in connection with the preparation of a prospectus under Canadian securities laws. This is because generally every single statement contained in the admission document is verified. Counsel to an applicant company should take care to prepare management in advance for the verification process and explain its necessity in light of the liability that they and the company may face. Despite this, a more pragmatic approach to verification of an admission document prepared in connection with the admission to AIM of a TSX-listed company is evolving, having regard to the company’s existing public disclosure record.

In addition to the verification process, the company, its counsel and the reporting accountants issue comfort letters to the Nomad in respect of the admission document confirming generally that there are no matters of which they are aware that would make any statement in the admission document incorrect or misleading or that should be contained in the admission document in order to comply with the AIM Rules.

The admission document must contain a "working capital statement" by the directors that, in their opinion, having made due and careful enquiry, the working capital available to the company and its group will be sufficient for its present requirements, i.e., for at least 12 months from admission. In determining the available working capital, the amount of any concurrent placing may be taken into account.

The company’s directors will prepare working capital projections, which are reviewed and confirmed by the reporting accountants. This is a time-consuming and expensive process, but has become the practice to verify the working capital statement and ultimately to provide the directors and Nomad with a due-diligence defence around the working capital statement. Although the AIM Rules require that the working capital available to the company and its group be sufficient for at least 12 months from admission, a company’s Nomad will generally require a longer period, with the norm being 18 months.

If an applicant company’s main activity or business has not been independent and earning revenue for at least two years, the AIM Rules require that all "related parties" and "applicable employees" enter into lock-in agreements pursuant to which they agree not to dispose of any interest in the subject securities for one year from admission. "Related parties" include directors, shareholders owning 10 per cent or more of the voting shares of the company and their respective families; and "applicable employees" are those employees who, along with their family members, hold 0.5 per cent or more of the securities being admitted.

Even if lock-in arrangements are not required under the AIM Rules, a company’s Nomad and broker may require that directors and others (which may include a wider group than those who would be required to be locked in under the AIM Rules) enter into lock-in arrangements for a period of time in order to maintain an orderly market for the AIM company’s securities post-admission. A Nomad will, however, generally not require such orderly market lock-ins where the directors and other insiders of a Canadian-listed company are not subject to escrow requirements under Canadian securities laws.

Currently, the AIM Rules require that an AIM company publish annual audited financial statements prepared in accordance with UK or US generally accepted accounting principles (GAAP) or international accounting standards (IAS). It is currently acceptable for Canadian companies to provide financial statements prepared in Canadian GAAP with notes reconciling the differences between Canadian GAAP and either UK or US GAAP or IAS. Starting in January 2007, AIM companies from the UK and Europe will be required to report in IAS. It is not yet known what the position will be for Canadian companies, although it is expected they will either have to provide notes reconciling differences between Canadian GAAP and IAS or provide some other form of additional qualitative disclosure.

Generally, an AIM company must ensure that electronic settlement arrangements through the CREST system are in place for its admitted securities. CREST is a multicurrency electronic securities settlement system for the UK and Irish markets (most trading in the UK market is done in electronic or uncertificated form). UK legislation that establishes CREST does not permit the securities of overseas companies to be held in electronic form in CREST, and, accordingly, depositary interests in such securities are created which are then settled through CREST. For Canadian companies, CREST settlement can occur via the Canadian Depository for Securities Limited (or CDS).

A company and its directors will enter into a nomad agreement and a flotation agreement or, if funds are being raised, a placing agreement in connection with admission. The nomad agreement will govern the relationship between the company and the Nomad on an ongoing basis while the flotation or placing agreement will govern the relationship of the company and the Nomad and broker in relation to the admission and any concurrent placing. Under each of these agreements, the applicant company and its directors will typically give warranties (subject to limitations) and, in the case of the company, indemnities to the Nomad and broker in relation to the company and the admission document.

If a company chooses to raise funds on admission, a "pathfinder" admission document will be prepared. This document will be the final version of the admission document with the date, pricing information and offering size "bulleted." It is similar to a Canadian preliminary prospectus except that it is not vetted and, generally, no substantive changes should occur to the document other than the insertion of the bulleted information. A Canadian company that is completing a public offering in Canada will typically use a UK-wrapped preliminary prospectus as its pathfinder.

The company and broker will market the placing in the UK using the pathfinder, with the admission document being finalized once pricing has been agreed. There are no rules in the UK similar to the general prohibition on pre-marketing activities applicable to Canadian public offerings. In the UK, it is common for brokers to approach potential investors to gauge their interest in a particular financing prior to its announcement. These potential investors become "insiders" of the company until the financing is announced and are subject to UK insider-trading rules.

In addition, there are differences in the practice of publishing research or making announcements prior to the announcement of a financing. Accordingly, issues may arise with respect to coordinating the publication of research or other announcements as Canadian practice generally requires a longer "quiet period" in advance of the announcement of a financing; UK market practice can vary from a "quiet period" of six to eight weeks to a matter of days, depending on the Nomad and broker involved.

There is potential civil liability under the general common law in respect of inaccuracies and omissions in an admission document, giving rise to claims for damages for misrepresentation, possibly involving the subscription of shares being set aside. It is rare for claims to be made in connection with an admission document, provided appropriate steps have been taken to verify the information in the document. In addition, although the UK has class-action legislation in place, class actions are less common, in part because the threshold for certification is higher than in Canada. Misstatements or omissions in an admission document can also constitute a criminal offence under FSMA, as can engaging in a course of conduct that creates a false or misleading impression as to the market in or the price or value of securities.

A company and its directors may also be exposed to liability under the personal warranties and indemnities given to the Nomad and broker under the nomad agreement and flotation or placing agreement.

Once admitted, AIM companies are subject to continuing obligations in order to retain their AIM quote. Generally, these are much less onerous than the requirements of the TSX and include:

• Publishing price-sensitive information without delay (in order to preserve an orderly market in the AIM company’s shares)

• Obtaining shareholder approval where an acquisition would result in a "reverse take-over" or a disposal would (when aggregated with other disposals made in the previous 12 months) exceed 75 per cent in any of certain specified tests

• Producing and filing half-yearly financial statements (within three months of the end of the period)

• Producing and filing annual financial statements (within six months of the year-end)

Although the AIM Rules do not distinguish between domestic and foreign companies, they generally result in the rules of a company’s home jurisdiction governing. Therefore, in most cases other than in connection with European financings, Canadian companies will be able to file their Canadian documents prepared in accordance with Canadian rules in satisfaction of their ongoing AIM obligations.

Other than the requirement to file annual and interim financial statements (which a Canadian company satisfies by filing its Canadian financial statements with any relevant note reconciliation), an AIM company is not currently subject to any annual filing requirements such as annual information forms, management’s discussion and analysis and technical reports.

Securities of an AIM company may not be traded by its directors or "applicable employees" during a trading "close period." In this context, "applicable employees" are those employees likely to be in possession of unpublished price-sensitive information in relation to the company because of their employment with the company, a parent company or a subsidiary.

In addition to any period when the AIM company is in possession of unpublished price-sensitive information (or where it is reasonably probable that such information will be required to be publicly disclosed), a close period includes:

• The period of two months immediately preceding the preliminary announcement of the company’s annual results (or, if shorter, the period from the relevant financial year-end up to and including the time of announcement)

• If the company reports on a quarterly basis like TSX-listed companies, the period of one month immediately preceding the announcement of the quarterly results (or, if shorter, the period from the relevant financial period-end up to and including the time of the announcement) The LSE may permit the sale of securities by a director or applicable employee during a close period only to alleviate a severe personal hardship. Nomads will insist that an AIM company adopt an insider-trading policy to comply with the above.

The AIM Rules differ from Canadian securities laws on the disclosure of trading by directors and other insiders in a company’s securities. Unlike the Canadian rules, which give directors and other insiders 10 days after a trade to file an insider report, trades by directors in an AIM company’s securities must be announced without delay by the company upon its obtaining such information (in practice by the close of business on the day following the trade, as the trade will generally be pre-cleared under the company’s insider-trading policy).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.