A fundamental attraction of AIM as an alternative to more mainstream investment markets has been its flexibility resulting from its lighter regulatory regime. So, it perhaps was not surprising that the advent of the EU Prospectus Directive in July 2005, designed to harmonise securities offers across the European Economic Area (EEA), was greeted with a degree of trepidation as a result of fears about the negative impact this additional level of regulatory requirement would have on the market.
Under the new regime, any company either making an application for its securities to be admitted to a regulated market, or looking to make a public offering, must publish a prospectus, approved by its national securities regulator. Any prospectuses prepared by AIM, Ofex and unquoted public companies now need to be vetted and approved by the UK Listing Authority (UKLA). Furthermore, companies considering moving to the Official List no longer have the option of using the AIM fast-track procedure and instead must prepare a full prospectus.
This sparked concerns that ambitious, high-growth companies, which previously favoured AIM as an attractive fundraising option, might rethink plans to go to the market and look for investment elsewhere.
In reality, there has been no noticeable interruption to deal flow since the directive’s implementation. From 1 July 2005 to 30 June 2006, there have been 302 IPOs on AIM, raising in excess of £8.5bn.
This has been aided by steps taken by the London Stock Exchange aimed at helping those companies looking to join AIM by turning it into an exchange-regulated market, rather than a pure regulated one. What this means in effect is that while a public offering on AIM requires a prospectus, making an application to be admitted to the market does not. Although an AIM admission document still has to be prepared.
It is also possible to avoid the need for a prospectus where the total consideration payable for the securities being offered is less than E2.5m (£1.71m). Other exemptions include offers made to fewer than 100 non-professional investors per EEA member state. As this is generally the situation with such flotations, it is a valuable concession that advisers can use to structure AIM IPOs as private placings.
The need for a prospectus is more likely for secondary issues. The requirement for UKLA approval inevitably means the timetable and costs are adversely affected. This now has to be factored into transactions. Issuers with a shareholder base large enough to trigger the need for a prospectus are increasingly opting for non-pre-emptive placings, as companies move away from traditional rights issues and open offers in an attempt to avoid delays and costs.
However, these downsides are balanced by a number of benefits, including lower costs for certain activities and improved access to new markets. For example, the ability to file an annual shelf registration document presents the possibility of financial savings for those looking to make share offers on a regular basis.
In addition, a principal objective of the Prospectus Directive is to allow a company that has prepared a prospectus approved by the UKLA to market its securities offering across the EEA. This gives those companies access to capital in lucrative areas, such as Paris and Frankfurt, without the need for further documentation.
The continuing flurry of AIM activity has been given added impetus by the growing interest among US companies. Realising that the US public markets are no longer interested in the size of company Nasdaq was originally established to support, smaller but growing companies in the US are increasingly taking advantage of higher valuations and a more benign regulatory environment on AIM.
A key factor driving US companies to London is a desire to avoid the cost of complying with Sarbanes-Oxley – a piece of legislation that makes the Prospectus Directive pale into insignificance in terms of regulatory burden.
One year on from the Prospectus Directive implementation, AIM continues to enjoy record activity levels. While the directive has necessitated extra time and financial resources in certain cases, this has been balanced by some significant benefits that have helped spread its appeal beyond these shores for fast-growing, ambitious companies looking to raise funds.