AIM in 2006: The New NASDAQ?
Interesting opportunities for 2006 are happening on the London Stock Exchange. Despite the recent volatility in the global public equity markets, AIM (formerly, the “Alternative Investment Market”), the junior stock market of the London Stock Exchange (“LSE”) has continued to attract new issuers, investors and investment bankers. This past year has seen another record year in the AIM market’s growth story with over 450 new admissions, raising around £4.5 billion in equity capital. Of those new admissions, approximately 22% were international companies, of which just under 20 were U.S. and Canadian issuers.
The number of new issuers attracted to AIM is only half the story. AIM has now convincingly demonstrated that there is a vibrant market where high risk emerging-growth companies can harness much needed growth capital. However, of equal importance to the market’s overall development has been the extent of liquidity during 2005. Indeed, the value of on-market trades has more than doubled the previous record level, with an average daily volume over 434 million shares traded, and with an average daily value of just under £170 million . With the LSE’s continued efforts to promote AIM as the “market of choice” for small- to mid-cap companies, these trends augur well for 2006.
In addition to the global marketing efforts undertaken by the LSE last year, a number of other factors will also drive AIM’s international reach in 2006. The nature of the AIM market itself, with its more flexible admission criteria, the relative simplicity of the admission process, its more lenient disclosure requirements (both initial and ongoing), and the reduced costs of obtaining (and maintaining) a listing, all combine to deliver a distinct advantage over other junior markets, most notably Nasdaq. The decision by the LSE to take AIM outside the scope of the EU Prospectus Directive has meant that preparation of the admission documents remains less burdensome and more streamlined than for the main market of each of the 25 member states. The reduced regulatory burden has obvious commercial benefits: because AIM’s admission process is less complex, management has more time to develop the underlying business, thus delivering improved shareholder value. By contrast, it is estimated that US companies chasing a public flotation will spend an additional $2.0 million annually on Sarbanes-Oxley compliance costs. Overall admission costs are also significantly less than other competing markets. The LSE calculates that the cost of listing on AIM is between 4.5-5 % of funds raised, compared to the 6-8% in the U.S.
Second, success breeds further momentum. As more U.S., Canadian and other global companies join the AIM market, the more familiar UK corporate finance, accounting and legal advisers become with them, thus further reducing the overall costs of admission. Of even greater significance is the increased familiarity of institutional investors with holding international paper. Whereas, once an overseas company joining AIM may have been viewed with various degrees of scepticism, with executive management often feeling that they have to “tick all the boxes” more than once, the U.K.’s “blue chip” investor base is now far more acclimatised.
Third, increased U.S. investor interest in holding AIM stocks may continue this virtuous circle. If U.S. demand for the market increases, it is reasonable to expect an increase in the number of U.S. companies attracted to the market. The question is whether the price of increased U.S. institutional investor participation will be the adoption of U.S. disclosure standards -- as was the experience of many global markets when Rule 144A portions of global offerings became the norm.
The AIM market developments of 2005 bode well for both issuers and exiting shareholders. However, for U.S. companies a key issue remains, namely the need for physical stock to be issued in order to comply with the strict requirements of the safe harbour from registration offered in respect of offshore offerings pursuant to Regulation S under US securities laws. Although institutional investors in the U.K. are becoming more accustomed to holding shares of U.S. companies in physical form (as opposed to electronic or “dematerialised” form for settlement in CREST), it remains a distraction to be explained to investors during a road show. AIM is in the process of attempting to follow the lead of other exchanges such as Sweden, Australia and EASDAQ by seeking a “no action” letter from the SEC through offering a number of alternative safeguards while permitting U.S. shares to trade electronically. A satisfactory resolution of this issue should be a critical path for the LSE.
___________________________________________
By:Andrew Croxford, John Hession of McDermott Will & Emery LLP