UK: AIM Changes

Over the last 18 months or so the AIM Rules have seen many changes, and more are about to come. There was the 2005 spring clean of "investment companies" when the Rules were changed so that cash shells that had not effected a reverse transaction by April 2006 were to have their listings suspended and then cancelled - and 30 companies were duly de-listed for this reason in October 2006. The Rules were also changed at that time to require shareholder approval for disposals constituting 75% of, inter alia, a company's net assets and any new non trading companies wishing to list now have to raise at least £3,000,000 in cash - in other words, listing a new cash shell or converting into one have both become more difficult. The reputation of cash shells and AIM was not helped when in November 2005 Kroll's report on cash shell Langbar said that it "has not been able to establish the existence of, nor verify the company's entitlement to, any of the relevant assets at any time in the company's history."

Then in March 2006, in the light of Regal Petroleum raising funds not long before announcing that its oil reserves might not exist in commercial quantities, the Rules were tightened up with the introduction of guidelines for mining, oil & gas companies (which account for nearly half of the number of companies on AIM). The guidelines required Nomads to tick more boxes to ensure that the resource does in fact exist; this included the requirement for a site visit by the Nomad and also ensuring the competence and independence of the "competent person" retained to value the resource.

The LSE is keen to protect the integrity of this ever more internationally visible market. AIM is possibly on the cusp of another leap in numbers as more and more overseas companies become attracted to the relative ease of raising funds via AIM. The US "spacs" and other Sarbanes Oxley refugees are increasing in numbers. Indeed, US interest is such that NASDAQ has recently increased its stake in the LSE to 29% in connection with a takeover offer. No one is quite sure as to whether AIM would wither or flourish if NASDAQ became the new owner. Further potential growth is also evidenced from the Indian businesses (mostly via offshore holding companies) that are coming to AIM. And, of course, there is a seemingly endless supply of mining, oil and gas companies from former Soviet-bloc countries.

However, another statistic that has mushroomed is the number of Nomads registered to hold the hands of fledgling flotation candidates - there are now more than 80, and some are arguably as small and speculative as the companies they float. The quid pro quo for AIM's "light touch" regulation is that the company must retain a Nomad and broker to keep it on the straight and narrow. However, some of the smaller Nomads possibly don't have sufficient time and resource to properly monitor and assist their AIM company clients as proactively as they should. Also, and this applies to both small and large Nomads alike, the real income is earned from the broking commission on raising funds and not from the annual retainer for acting as Nomad or broker.

The LSE no doubt welcomes the anticipated wave of companies joining AIM, but it also recognises that the Nomad self-regulation model needs to be shored up to deal with this. To this end, on 20 October a consultation was launched to overhaul the AIM Rules, and companies and advisers alike will soon have to look to two sets of rules: the AIM Rules for Companies, and the separate AIM Rules for Nominated Advisers. From the company's perspective, the changes are mostly not material - e.g., they must now maintain a website with certain information and links to their recent accounts and admission documents. There is, however, a new Rule 31, which states that an AIM company "must have in place sufficient procedures, resources and controls to enable its compliance with these Rules", and also compelling the company to seek advice from its Nomad and to take that advice into account. There is also increased disclosure on identifying shares not held in public hands (e.g. which would exclude, for example, shares held by related parties).

The real consequence of these new rules is for the Nomads because conduct that was previously good market practice has now been codified in a set of principles and ongoing responsibilities that give specific examples of how a Nomad should assess the appropriateness of a company and the suitability of its board, of how it should oversee due diligence and the preparation of the admission document, and of how it should maintain regular contact and monitor trading after admission. Performance against these principles will also be measured as the Nomads will now have to make an annual return to the LSE on the work they perform and this will assist the LSE when they undertake compliance visits.

The new rules for companies and Nomads are expected to come into force in early 2007, but if the recent past is anything to go by, there are still more changes to come.