The Alternative Investment Market of the London Stock Exchange
By Arthur S. Berner, Bryce D. Linsenmayer, and Francesca Cinotti

The Alternate Investment Market (or “AIM”) of the London Stock Exchange opened in 1995, and currently has approximately 1,400 listed companies. About 220 AIM-listed companies are non-U.K. based, and represent a total market capital of more than $42 billion. A growing number of small- to mid-cap companies have opted to access the capital markets through AIM in order to take advantage of its streamlined listing process, mildly regulated market, and lower transactional fees.

Unlike the U.S. Securities and Exchange Commission, the London Stock Exchange and the U.K. Listing Authority generally do not review or approve AIM listing documents. Instead, the London Stock Exchange places the burden on “Nominated Advisors” (known as “Nomads”) to prepare the offering document, file the actual listing, and ensure that the issuer is not only suitable for AIM listing but also compliant with applicable AIM rules.

Adding to its appeal, AIM requires no minimum market capitalization, stockholders’ equity, trading volume, or share price for listing purposes. This is very attractive to companies with small earnings, and also to issuers that plan to direct the proceeds of an offering to their pre-listing investors. Finally, since the majority of AIM investors are institutions, investment decisions generally are based on an issuer’s long-term prospects rather than short-term earning performance, resulting in a more stable environment for AIM-listed companies.

This article is designed to serve as a preliminary guide for U.S. companies planning to list on AIM, and includes certain U.S. securities law considerations to be noted as companies embark upon such listing transactions. Because each transaction is different and involves distinct legal issues, it is important that legal counsel be consulted at the early stages.

Preparing for AIM
Listing Preliminary discussions

In order to assess the appetite of the market for a company’s business and to make contact with the many Nomads registered with the London Stock Exchange, companies wishing to list on AIM should plan a preliminary visit to London.

Selecting a Nomad

After its preliminary visit, the company will select and appoint a Nomad to assist in the AIM listing process and, following admission, with continuous compliance with the AIM rules. The choice of a Nomad is strategic, and represents a long-term commitment by both the company and the Nomad. The selection process should be deliberate and careful, especially given that each Nomad has its own particular industry expertise, research capabilities, and other attributes.

There are approximately 100 firms that are licensed by the London Stock Exchange to act as Nomads. The Nomads include large international investment bankers such as Morgan Stanley or Jefferies & Co.; well-known U.K. bankers such as Close Bros., Oriel, and Evolution; some accounting firms such as Grant Thornton; and some less well-known U.K. entities. As is true with U.S. investment bankers, Nomads often have advisory as well as offering size specialties.

Nomads generally receive a fixed fee for carrying out their Nomad duties. In addition, the Nomad’s firm often carries out brokerage duties, for which it receives a percentage (usually 3–5%) of the offering.

The Nomad is responsible for warranting to the London Stock Exchange that the company and its securities are suitable for listing on AIM. As a result, the Nomad’s reputation is very much on the line in bringing a company for listing, and its appetite for diligence and comfort will be substantial. Nomads will assess suitability through a thorough due diligence review of the company. However, unlike the U.S. due diligence review, review done in the U.K. requires independent verification by the Nomad and its counsel of virtually every assertion the company makes in its admission document. In fact, this due diligence and verification process is significantly more detailed than comparable U.S. underwriter due diligence because of the Nomad’s role in vouching for the company and the fact that there is no regulatory review to offer comfort.

Following admission, companies rely on their Nomad for advice on compliance with the AIM rules. The Nomad also reviews the company’s trading performance against the projected performance contained in the AIM admission document, and is responsible for any notice required to be delivered to the London Stock Exchange. If the Nomad ever resigns or is terminated, trading of the company’s securities on AIM will be suspended until a new Nomad is appointed. Most Nomads also are brokers, but the two functions are generally performed by two different entities. It is important to keep in mind that, while a company may change its broker, it rarely changes its Nomad.

The offering document

After selecting a Nomad, the company and the Nomad produce an offering document (either an admission document or, less frequently, a prospectus) that is made available to potential investors. The offering document is similar in size and scope to a U.S. prospectus or detailed private placement memorandum, and must contain all such information as investors would reasonably require and reasonably expect to find in such a document for the purpose of making an informed assessment of the business, financial position, and prospects of the company and the securities being offered.

While it is very unusual for U.S. companies seeking to list on AIM to sell their securities to more than 100 people, if the company’s securities are offered to the public, the company must file a prospectus with, and seek approval from, the U.K. Listing Authority, in which case the U.K. Prospectus Rules will apply. As with the AIM rules, the Prospectus Rules outline the information required for disclosure with respect to, among other things, the company’s business, its management team, its financial condition, and the offered securities.

AIM deals often are placed with only 15 to 40 qualified investors. In these cases, a prospectus is not required and the offering document consists only of an “admission document” prescribed by the AIM rules. No review or approval will be necessary. The admission document must be available to the public, free of charge, for at least one month from the admission of the company’s securities to AIM.

It is the company’s responsibility to draft the offering document, and under the AIM rules, the company is responsible for the accuracy of the disclosure. The company also is generally charged with the responsibility of addressing any inaccuracies in or significant changes to the offering document by issuing a supplement. However, since the Nomad will conduct intense due diligence because it must put its reputation on the line when it vouches for the new applicant, there is a high degree of comfort that nothing material is omitted or misstated.

Pre-admission announcements

At least ten business days before the expected date of admission, the company must provide the London Stock Exchange with certain information, including a brief description of its business, the number and type of securities being offered, the names of its directors, its Nomad, the expected admission date, an indication of whether the company will be raising capital on admission, and where the admission document will be available. Companies that qualify for an expedited admission process (available to companies whose securities are listed on “designated markets” including the Australian Stock Exchange, Deutsche Börse, Johannesburg Stock Exchange, NASDAQ, NYSE, the Official List, and Toronto Stock Exchange) must provide similar information at least twenty business days before the expected date of admission. At least three business days prior to the expected date of admission, the company will pay the AIM admission fee (currently £4,190, or approximately $7,500) and deposit six copies of the admission document with the London Stock Exchange. Listing becomes effective only when the London Stock Exchange issues a dealing notice to that effect; then trading in the company’s securities may commence.

Clearance and settlement

The AIM rules require AIM-listed securities to be eligible for electronic settlement through a clearance and settlement book-entry system called CREST. However, the London Stock Exchange will grant exemptions to this requirement where the company’s local law prohibits such a settlement system. As discussed below, most U.S. companies seeking admission on AIM will not be able to trade their securities on CREST for at least twelve months following admission. U.S. companies generally rely on an exemption from registration under the Securities Act that requires the exempted securities to bear a legend for twelve months, which necessitates the use of certificated securities during that period.

Post Listing
Corporate governance

AIM-listed companies should be well advised of the listed company requirements in the U.K. Generally speaking, U.S. issuers are not subject to laws governing U.K. companies, such as the U.K. Companies Act or the U.K. Takeover Code. However, common practice is to comply with equivalent standards in order to satisfy investor expectations. In fact, Nomads often will encourage foreign issuers to comply with these standards, and our clients have found them to be familiar and palatable.

Reporting requirements

Following admission, all AIM-listed companies will have an obligation to disclose material information that is comparable to the obligation imposed on public companies in the United States. Under AIM rules, companies disclose the required information by issuing “notifications” to the London Stock Exchange though their Regulatory Information Service provider. Additional disclosure is required to be made with respect to any significant corporate transaction involving 10% or more of any class of the company’s securities; a related party transaction (involving 5% or more of any class of the company’s securities); and other significant corporate changes, including any transactions by directors in the company’s securities. In addition, AIM-listed companies need to prepare and submit:

• no later than six months after the end of each fiscal year following admission, audited financials prepared in accordance with U.S. GAAP, U.K. GAAP, or Inter-national Financial Reporting Accounting Standards, and
• no later than three months after the end of each relevant period following admission, half-yearly reports.

These “notifications” are less extensive and detailed than the quarterly reports on Form 10-Q and annual reports on Form 10-K required under the Securities Exchange Act of 1934.

Maintenance fees

The maintenance fee for continued listing on AIM is currently a flat £4,190 (approximately $7,500) irrespective of the number of shares listed.

U.S. Securities Law Considerations

U.S. federal and state securities regulations govern, among other things, the capital-raising efforts of domestic issuers, whether those efforts are directed within the United States or abroad. U.S. companies will, therefore, be subject to U.S. federal and state securities regulation even if their securities are offered on AIM.

U.S. federal securities regulations

U.S. companies wishing to have their securities admitted for listing on AIM generally seek to qualify for an exemption from registration with the SEC under the Securities Act of 1933. An exemption from registration enables the issuer to complete its offering without going through the SEC review process, minimizing the time delays and costs usually associated with such review. In addition, AIM-listed U.S. companies are not subject to the periodic filing requirements of the Securities Exchange Act (including the filing of annual reports on Form 10-K and quarterly reports on Form 10-Q), or to the accounting, certification, and other requirements of the Sarbanes-Oxley Act, unless, among other things, the company has more than 500 shareholders.

Regulation S. Most U.S. companies rely on the transaction exemption provided by Regulation S under the Securities Act, which exempts the company from filing a registration statement with the SEC provided, among other things, that no offer is made in the United States, no U.S. person may purchase the securities, and the securities bear an appropriate restrictive legend indicating that the securities cannot be transferred to a U.S. person during the one-year period after the offering. Only certificated securities can bear the required legend, so the securities will not be available for CREST trading. After one year, the restrictive legends can be removed from the certificates, and the company can begin electronic settlement on CREST.

Several of our clients have completed this process and are relying on electronic settlement, which has the benefit of increasing trading volume and liquidity in their stock. While the physically settled approach is not initially attractive to certain institutional investors, our clients have not faced significant issues in placing their securities in the U.K.

Private placement in the United States. It is becoming more common in AIM placements to have a significant U.S. offering component to the AIM offering. While the AIM securities cannot be offered or sold in the United States given the requirements of Regulation S, the company may, in conjunction with its AIM listing, conduct a simultaneous offering of its shares in a private placement solely to ac-credited investors, satisfying the exemption requirements of Regulation D under the Securities Act. Most Nomads and brokers view this placement of shares in the United States as a sign of the company’s strength and attractiveness to investors, both in the United States and the U.K. Regulation D private placement rules must be strictly observed, including the preparation and filing of a Form D with the SEC following the placement. In addition, the company should obtain the appropriate investment representations of the accredited investors. The Nomad and U.K. broker should not be involved in the U.S. transaction, nor should they receive any commissions or fees for the sales to the U.S. investors.

Resale of securities. Even if an exemption from registration under the Securities Act is available to the company, the company’s securities still will be subject to resale restrictions generally applicable to all U.S. private placements.

Sarbanes-Oxley Act. Compliance with the requirements of the Sarbanes-Oxley Act often is a substantial and costly regulatory burden for small- to mid- cap companies and a key factor in a U.S. issuer’s desire to pursue an AIM listing. However, any U.S. company will be required to register with the SEC under the Exchange Act once it has annual revenues of $10 million or more and attains 500 or more shareholders of record. This number includes total shareholders of record, both in the United States and abroad. Upon crossing this threshold, a U.S. company is subject to all U.S. public com-pa ny reporting requirements, including those promulgated under the Sarbanes-Oxley Act.

Given that AIM listings generally are placed with relatively few institutional investors, most U.S. issuers on AIM do not immediately face the issues associated with the 500-shareholder threshold. However, the company must monitor subsequent issuances of its securities to employees and acquisition targets and in subsequent offerings, as well the after-market in its stock, in order to avoid an inadvertent crossing of the 500-shareholder line.

U.S. state securities regulations

In addition to the U.S. federal regulatory scheme, each U.S. state has its own securities, or “blue sky,” laws, which are designed to protect investors against fraudulent securities practices. These laws generally require a security to be registered with the securities commission of the state where the company is incorporated or domiciled or where the securities are to be offered, or satisfy requirements for an exemption from such registration, before being offered, sold, or resold in that state. Generally, a properly structured AIM listing transaction does not subject the company to U.S. blue sky laws.

Conclusion

Our clients have found AIM to be a welcome alternative to the U.S. capital markets. The combination of a sophisticated shareholder base in a reasonable regulatory environment represents an excellent source of capital for small- and mid-cap companies. Moreover, we have found the London Stock Exchange to be an enthusiastic alternative and powerful ally in bringing U.S. companies to market.

About the Author

Messrs. Berner (Arthur.Berner@haynesboone.com) and Linsenmayer (Bryce.Linsenmayer@haynesboone.com) are partners in the Houston office of Haynes and Boone, L.L.P., and Ms. Cinotti (Francesca.Cinotti@haynesboone.com) is an associate in the firm’s New York office.