The London AIM: A Capital Opportunity for Some U.S. Companies
August 16, 2006
Anne Hamblin Schiave- Chicago
While the London Stock Exchange (LSE) has been attracting publicity as the exchange of choice for giant international IPOs, London’s Alternative Investment Market (AIM), its junior partner, is attracting many smaller international IPOs, including companies from the United States. In 2005, 19 U.S. companies floated their shares on AIM, raising more than $2 billion in capital.
What Is AIM?
AIM is the LSE market for growing medium and small companies. The LSE main market lists more than 1,600 established companies, while the AIM lists more than 1,500 earlier stage companies. Seeking to be known as a source of capital for medium and small companies, AIM had 335 IPOs raising more than $16 billion in capital in 2005, of which 76 IPOs were for foreign companies that raised $4 billion in capital.
Why Is AIM Attractive?
AIM promotes itself as the world’s most successful growth market, which makes it attractive to medium and small companies and their equity holders for several reasons.
First, AIM has access to a large pool of capital with sophisticated institutional investors focused exclusively on medium and small companies. Within that investor community, there is a strong appetite for international businesses. In addition, a large number of brokers and investment bankers focus on raising capital for medium and small sized businesses, delivering quality advice, support and research during the IPO process as well as post-IPO. This is in sharp contrast to the U.S. market, where small cap companies frequently fall below the investment radar screen due to lack of investor focus on the market class and, correspondingly, garners limited broker support.
Second, AIM’s valuation of companies and transaction costs can be more favorable to medium and small companies than in the U.S. public markets. Good quality companies maintain premium valuations, at least equal if not better than those in the U.S. markets. Underwriting fees typically range from 3 percent to 5 percent rather than 7 percent to 8 perent on a NASDAQ transaction. Considering professional fees, listing charges, printing costs, as well as the underwriting costs and pricing features, the total transaction costs of an IPO on AIM are substantially less than a comparable U.S. offering. Post-IPO, admission and annual fees for a U.S. company that is listed on AIM are significantly less than charged by NYSE or NASDAQ. Without SEC requirements including Section 404 and other Sarbanes-Oxley compliance expenses, the annual cost to maintain a public market company on AIM is also significantly less than on NYSE or NASDAQ.
Third, the more flexible regulatory environment is another attraction of the AIM market to U.S. companies. AIM admission is regulated by the LSE – not the United Kingdom Listing Authority. Easier admission standards also attract potential AIM-listed companies. There is no minimum amount of shares required to be public, and AIM welcomes offerings that are small by U.S. standards: a large number of all AIM floats have been in the $20 million to $100 million range. Admission documents are not reviewed by either the LSE or a governmental agency, but rather by the issuer’s nominated advisor, resulting in a quicker time frame for the offering and listing process. Companies admitted to AIM may raise money from the public or by a private placement. And, of course, unless the issuer elects to do a simultaneous U.S. private placement or public offering, there is no obligation to comply with the Sarbanes-Oxley requirements.
Nomads
A key to the AIM market is its reliance on nominated advisors, or nomads. Nomads are investment banks authorized by AIM to evaluate issuers and assure their compliance with LSE rules. The nomad is the sponsor for a listing company’s entry into AIM and to the pool of institutional investors. In contrast to U.S. practice, the nomad performs both an underwriting function and a pseudo-governmental role, in that the nomad conducts a due diligence investigation of the company and “vouches” for the company and its disclosure documents to both AIM and the investors. An issuer cannot be listed or remain listed on AIM without a nomad sponsor. There are currently 86 authorized nomads, varying in size and geographic and industry sector specializations. Some U.S. investment bankers are joining the game by becoming nomads, including Morgan Stanley, Merrill Lynch and Jeffries.
The AIM Trading Market
The AIM trading market is comprised of almost 100 AIM-authorized brokers, plus institutional investors including many recognized in the U.S. such as Fidelity, Schroder, Merrill Lynch, UBS and Goldman Sachs. This investor base is internationally focused and utilizes comprehensive research coverage for international companies. Given both the investor base and the involvement of the nomads and AIM-brokers, AIM liquidity and analyst coverage for mid-cap companies may be better than those companies can find on NASDAQ. One independent study found that, for the first quarter of 2006, AIM had better liquidity for stocks in the 50 million to 100 million pounds (i.e., $100 to $200 million U.S.) market cap range than NYSE, LSE, NASDAQ, or EURONEXT. The increased liquidity enhances exit potential for large investors at both the primary and secondary offering stages.
Once listed, an AIM company must satisfy continuing obligations, including retaining a nomad; disclosure of price-sensitive information in a timely manner; providing semi-annual and annual (as distinguished from U.S. quarterly) reports; and compliance with UK corporate governance standards, as well as restrictions on insider transactions during select periods. Audited financial reports can be prepared in accordance with UK or U.S. GAAP, or International Accounting Standards. Retaining a London-based AIM investor relations firm is also recommended.
Ideal AIM Companies
Most medium and small U.S. companies are not good candidates for AIM. Wanting to avoid higher costs or Sarbanes-Oxley compliance may be attractive to shareholders of IPO-candidates, but that will not persuade AIM investors to buy a company’s shares. Companies with significant markets (sales) and operations (or plans for markets and operations) outside of the United States are attractive because AIM’s institutional investors are looking for international investments. As in the U.S., interest in industry sectors changes over time, and recently companies in the oil and gas, mining, finance, and software and computer services have been well-received by the AIM investors.
Future Developments
Initially, the AIM market was viewed by U.S. participants as a “Junior NASDAQ” (without the cost of Sarbanes-Oxley compliance), to be used as a stepping stone before listing a company on the U.S. exchanges. Now, private equity firms and venture capital funds look to AIM as a means to exit from their ventures, but do not assume the company will leave AIM. In addition, some privately-held U.S. businesses consider AIM a more attractive alternative to the private equity market as a source of capital to fund their international expansion. AIM would like its listed companies to remain on the AIM market as they grow, or move to the LSE main market. However, AIM recognizes that its established U.S. companies with international operations may also need to list on U.S. exchanges in the future.
Potential Risks
There are risks for a U.S. business listing on AIM: notwithstanding the common language, the London institutional investment and banking businesses, the legal requirements and the business expectations are different than those in the U.S. The advice of knowledgeable advisors including the nomad and counsel, are essential to a U.S. company and its shareholders as they commence the AIM process.
AIM’s rapid growth in the last two years has also created potential problems for companies seeking capital. For example, the quality of nomads and AIM – brokers can vary from firm to firm and over time as people relocate. Intense competition from nomads for companies always increases the risk of under-delivering on promises. Without active involvement by the company, post-IPO interest by nomads, brokers and PR firms can shrink, and given the expanding number of AIM-listed companies, an individual company can get lost.
For more information, e-mail Anne Hamblin Schiave at anne.schiave@hklaw.com or call toll free, 1-888-688-8500.