What can the industry expect from the LSE's review of AIM rules?
Since its launch in 1995, the London Stock Exchange's Alternative Investment Market (AIM) has experienced many ups and downs.
As recently as two years ago (the market's 20th anniversary), investors had little to celebrate as 72% of the companies that had been admitted to trading on AIM over the past two decades reportedly never delivered a return for IPO investors.
In the past, the AIM has received criticism for its light-touch regulation, including the comments from the SEC in 2007 describing it as a "casino", the range of quality of nominated advisers (nomads) and brokers, and being "clogged up by a large amount of sediment" at the bottom end or small companies with largely illiquid shares.
As of June 2017, there are 963 companies on the AIM, compared to 1,694 in the peak year of 2007 before the financial crisis, but 53% of those companies now have a market capitalisation of more than £25m, compared to 33% in 2000, and this year AIM's investment returns have beaten most UK stockmarket indices.
The nomad market has consolidated and a number of weaker advisors have left the market. The AIM has matured and the LSE seems determined to adapt the rules governing AIM companies and nomads to this development and raise standards.
Review of AIM rules
In a discussion paper, published on 11 July 2017, the LSE identifies the following key areas of its review of the AIM Rules for Companies and the AIM Rules for Nominated Advisers:
As AIM has matured and the market capitalisation of AIM companies and the average amount of capital they raise have increased over time, the London Stock Exchange (LSE) is considering whether to introduce a minimum free float requirement and a minimum capital raising threshold.
Based on the size of fundraise by new AIM applicants between 2014 and 2016, the LSE asks for feedback on possible minimum fundraising levels.
Early notification process
Currently, nomads are only required to approach the LSE at an early stage of an application if there are unusual features or potential issues that may be of concern to the LSE.
The LSE proposes to require early confidential discussions for allproposed admissions in order to reduce the risks of a delay, postponement or withdrawal of a proposed admission and to avoid issues towards the end of the application process.
Assessment of appropriateness
The LSE is proposing to include in the AIM Rules for Nominated Advisers a non-exhaustive list as guidance to nomads of the factors they should take into account when assessing the appropriateness of a company prior to its admission to AIM.
The LSE emphasises that each of these factors, in their own right, can be of such importance as to render a company not appropriate for AIM.
The LSE is examining whether the current corporate governance disclosure requirement in AIM Rule 26 remains sufficient or whether it should make it mandatory for AIM Companies to annually comply and explain against existing codes of governance, such as the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies and the UK Corporate Governance Code.
Impact on AIM companies
The LSE's discussion paper on the review of its AIM rules is its most significant reform plan to date and is a welcome, possibly overdue, initiative to raise the entry bar and boost the image of what remains Europe's most powerful and effective market for growth companies.
Any change to the rules must strike a difficult balance between improving the quality of new entrants to London's junior stock market with the need for accessibility.
The QCA/RSM Small and Mid-Cap Investors Survey 2017 shows a majority of investors are resistant to any kind of enforced minimum, either by value of company or size of shareholding floated.
A minimum free float requirement and minimum capital raising threshold would do much to help reduce the number of unsuitable micro caps that are too small to raise money and whose shares rarely trade.
However, the realities of costs of remaining on the market can also serve to achieve this.
Any free float requirement would prove to be problematic where the shares in an AIM companies are still largely held by founders. However, brokers could agree an orderly market reduction in stake size over a period of years.
In terms of the level of equity fundraising, the vast majority of AIM applicants (over 70%) raised more than £6m in 2016: a threshold set at that level would have affected around 15 new applicants.
Impact on nomads
The LSE's proposals regarding extending the early notification process to all proposed admissions and the adoption of a list of factors nomads should take into account when assessing the appropriateness of a company prior to its admission to AIM would be welcome as it would demonstrate the LSE taking more responsibility for its market, rather than abdicating this to nomads.
Further clarity will render the admissions process more straightforward which in turn should shorten the amount of time and resources nomads spend on an applicant, thus improving their cost basis. Nomads should therefore welcome the proposed changes.
The deadline for submitting feedback to the LSE's discussion paper is 8 September.
This article was first published in Investment Week on 7 August 2017.