UK: AIM - The First XI

Last Updated: 3 August 2006
Article by John Cowie

AIM is 11 years old this month. It has enjoyed some outstanding publicity recently, which is no doubt one of the reasons why Deutsche Börse, NASDAQ, Euronext and Macquarie have been circling the LSE with interest. Some background might help to explain the phenomenon.

The Alternative Investment Market, as it was then known, was set up in 1995 to help those companies looking for public capital which were too small or at too early a stage in their development to join the LSE’s Official List. Those responsible for its formation cleverly reasoned that a market which encouraged smaller, less developed businesses to float and granted them access to public capital would flourish in time. To do this, they decided to allow these companies to come to market with no trading record, no requirement to sell shares to the public and no minimum market capitalisation.

Even the tax authorities looked favourably at the market and – to encourage the grass-roots investment which the market set out to attract – deemed the shares of its participants unquoted for tax purposes. This allowed private investors to enjoy capital gains and inheritance tax reliefs. To help with the administration of the market, LSE came up with a unique solution – let the market regulate itself (albeit with a network of independent Nominated Advisers [Nomads] to police that regulation). This family of Nomads forms the backbone of AIM’s reputation and success. Yet despite this the junior market’s supporters have had a tough job convincing everyone of its credibility.

There were ten companies on the market at the outset; it had some bad press, few institutions gave AIM a second glance in the early years and private client brokers were key to raising capital at that time. But even with an inauspicious start and a few tough years, AIM, as it became called, gradually started to win favour. The number of companies joining AIM and the funds those companies raised showed steady growth, as shown below.

With a combination of attractive tax breaks for private investors and Venture Capital Trusts, a lighter touch regulatory framework, and a critical mass that generates its own momentum, AIM’s place seems assured. Even the cynics have stopped scoffing. However, with a public image and much vaunted success comes public scrutiny when things go wrong.

No-one could have missed the debacle which was Regal Petroleum. And what really happened to allow investors to lose so much money on Langbar International? Clearly, market forces will be what they will and companies cannot control which industry sectors fall in and out of favour. What seems obvious to us though is that AIM’s success depends principally on its reputation. That reputation, uniquely among stock exchanges, relies in large part on the family of Nomads to whom responsibility for much of the interpretation and application of the AIM Rules is devolved. This is a function of what AIM set out to do: to offer a more lightly regulated market to assist smaller, growing, emerging companies to find growth capital in the public markets.

If a problem arises, the first port of call should be the Nomad to determine whether they fulfilled their responsibilities. Were they duly diligent in bringing the company to AIM? Did they continue to monitor the company’s adherence to the Rules? If AIM is to continue attracting publicity (which it needs to do if it is to continue flourishing), then Nomads need to ensure that their job is done methodically and diligently. They should then have nothing to fear from AIM’s prodigious growth but a rapidly increasing workload!

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.

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