UK: Path To AIM

Last Updated: 7 March 2008
Article by Nick Foster

AIM has been a runaway success since its launch in 1995. It has fulfilled the unique role of providing a trading platform which attracts companies from all over the world with a relatively "light touch" but effective regulatory regime. Since its launch in 1995 it has enjoyed considerable success and over 2,500 companies have joined AIM, raising approximately £34 billion.

AIM has built itself a reputation as a recognised mainstream asset class attracting investment from almost every major institutional investor. It is therefore a key source of raising equity for smaller growth companies.

The common question posed by the majority of companies is: how do we get admitted to AIM?

Advisers

In order to be admitted a prospective company must comply with the AIM Rules for Companies, published by the London Stock Exchange (LSE). Aiding the company comply with the AIM Rules and helping it achieve Admission will be a team of professional advisers which includes:

  • Nominated Adviser – each company seeking Admission must appoint and retain, at all times from the date of Admission a Nominated Adviser (Nomad) in order to comply with the AIM Rules. The role of the Nomad is twofold: Firstly to assist the company in ensuring that the AIM Rules are complied with. Secondly, the Nomad has responsibilities and owes a number of duties to the LSE, including making sure that the company is "appropriate" for admission to AIM.
  • Broker – the AIM rules require a company to appoint and retain a Broker. The Broker acts as an agent for the company finding purchasers for the securities that are to be sold.
  • Legal Advisers – solicitors for the company will aid with, amongst other things, restructuring and grooming a company for market (including any acquisitions or mergers), completing due diligence, verification, drafting directors' service contracts and drafting the Admission Document. Solicitors will also aid the Nomad and Broker.
  • Accountants – will be required to conduct financial due diligence into the company and produce a number of reports (including working capital) which are used in the Admission Document.
  • PR consultants – will advise the company on the best methods of promoting and raising its profile with investors.

Eligibility

To be eligible for Admission a company must:

  1. be a public company – this may require the company to re-register from a private to a public company and adopt new articles of association and memorandum of association. Registration as a plc will permit the company to offer its shares to the public;
  2. have no restrictions on the transferability of the ordinary shares in the company;
  3. be eligible for settlement of its securities in electronic format (CREST); and
  4. be considered appropriate by its chosen Nomad – a number of factors will be considered when deciding this but a great deal of attention will be on the directors of the company and the manner in which it is managed. It is widely recommended that as a principle of good corporate governance the company should appoint non-executive directors to deal with audit, remuneration and nomination to the board.

Due Diligence

Due diligence is a very important, investigatory exercise which is carried out into the commercial, financial and legal affairs of a company and any of its subsidiaries which are seeking Admission. Legal due diligence is commenced with a due diligence questionnaire which sets out a number of questions about the affairs of the company. Commonly it will cover areas such as: share ownership, directors and their service contracts, business premises, intellectual property, employees, subsidiaries and any outstanding claims or potential litigation.

The reporting accountants will conduct financial due diligence with a view to preparing the Long and Short Form reports of the company. The Long Form report is a detailed examination of the company's financial affairs and will usually include a description of the management, reporting structure of the company, the accounting policies and audit issues, details of cash flow patterns and the assets and liabilities of the company. It will also deal with the cash flow projections and the status of the company's tax affairs. The Short Form report includes a profit and loss statement, balance sheet and statement of cash flow together with the auditors' report on these statements.

The collection of this information flushes out any problems or potential problems which could affect the company and its share price when it comes to securing investment. This provides the company with the opportunity to correct any issue that arises at an early stage.

Prospectus or Admission Document?

An early consideration will be the form that the admission document will take. The two options which are available are either by way of producing a prospectus or an admission document. A prospectus will require the inclusion of information required by the Prospectus Rules. An admission document requires less detail than a prospectus and is subject to inclusion of information required by the AIM Rules. If it is possible, an admission to AIM will be structured to avoid the need to prepare a prospectus due to the increased expense of doing so.

A company will have to issue a prospectus where the marketing of its securities constitutes an offer to the public. There are a number of relevant exemptions which a company can take advantage of - if they do so they will not be required to prepare a prospectus and will instead produce an admission document. One of these exemptions is for any offer to be limited only to "qualified investors" who are typically institutional investors or high net worth individuals.

An admission document complying with the AIM Rules will commonly include:

  • Company details – the history and development of the company, a business overview, the markets in which it operates, reasons for the Admission, the use of the proceeds and details of all directors;
  • Risk factors – details of any risks which apply to the company or the market in which the company operates;
  • Financial information – historical financial information dependent on the period for which the company has been trading. If the company has been trading for 3 years or more it must provide audited accounts for the latest 3 year period. If it has been trading for a period less than 3 years, audited accounts must be produced for the period of trading;
  • Any additional information – this is a broad catch all that requires any information which it considers necessary to enable an investor to form a full understanding of the "assets and liabilities, financial position, profits and losses and prospects of the applicant and its securities being sought, the rights that attach to those securities and any other matter contained in the admission document".

To ensure that all the relevant information is incorporated into the Admission Document there will be a good deal of consultation between the company and its advisers to make certain that all the rules are complied with. The LSE has also set out a number of requirements which are specific and must be included if relevant to the company and the Admission:

  1. a statement that the directors believe that in their opinion the working capital available to the company is sufficient and will be for at least 12 months from the date of Admission;
  2. where a profit forecast, estimate or projection has been made it must be accompanied with a statement from the directors that it has been made after due and careful enquiry. This should be accompanied with conformation from the Nomad that the directors have acted in that manner;
  3. prominent warnings to investors on the first page of the document that AIM is designed for smaller companies, which generally attract higher risk, that AIM securities are not admitted to the official list (main stock exchange), that investment should only be made after careful consideration and receiving appropriate professional advice and that the LSE has not examined or approved the document;
  4. details of any lock-in agreement;
  5. details of all directors and future directors of the company including the names of companies or partnerships that each director has been involved with in the past 5 years, details of any receiverships, compulsory liquidations, creditors voluntary liquidations or administrations where the director was a director at the time or within 12 months preceding the event, details of any unspent convictions and details of any public criticisms from statutory or regulatory bodies;
  6. the name of any person (except advisers) who within the last 12 months has received or will receive fees totalling £10,000 or more, securities worth £10,000 or more or any other benefit valued at £10,000 or more;
  7. the name of any director or member of the director's family who has a related financial product referenced to the company's securities and any details about that product.

Other Documents

In addition to the admission document a number of documents will be created during the process of Admission.

The Placing Agreement will be entered into between the company, the Nomad and the Broker. This will govern the appointment of the Nomad and Broker to act as agents to place the securities being offered by the company to the subscribers.

A Lock-in Agreement may be required under the AIM Rules (where the applicant's main business is one which has not been independent and earning revenue for at least two years) or by the Nomad and Broker (to provide comfort to future investors). The effect of a lock-in will be that certain people will not be allowed to sell, or dispose of their interest in the securities for a specified period of time.

Verification Notes are prepared by the solicitors to the company. The purpose of these notes is to check that the statements made in the Admission Document are true, accurate and not misleading in any way. They are created for the benefit of the company and its directors so as to avoid any potential criminal or civil liability.

Placing Letters are used to subscribe for securities in the company seeking Admission. These letters will describe the type, amount and price of the securities which are being sold.

Powers of Attorney are generally executed on behalf of each director. These allow a fellow director to sign on behalf of another in his absence. It is often the case that there is a need for directors to sign documents relating to the Admission process. If a director is not available, a power of attorney is executed to allow the process to run smoothly.

Responsibility Memoranda will set out and advise the directors of their responsibilities and continuing obligations as directors of a public company quoted on AIM.

Responsibility Letters are signed by the directors in which they acknowledge their responsibility for the Admission Document.

The above is merely an outline of some of the issues and documents that should be considered. For more detailed guidance, please contact the author.

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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