Joining AIM – a Quote in London - The Lawyer's Perspective

AIM was established by the London Stock Exchange in 1995 as a smaller companies' market, to provide young and growing businesses with a means of raising capital and experiencing a public market in their securities.

At the end of May 2007 there were 1,639 companies trading on AIM with a total market capitalisation of over £107 billion and the average market capitalisation being approximately £66 million. Of these, 311 are overseas companies, which have a combined market capitalisation in excess of £36 billion.

The total number of admissions from the launch of the market in 1995 to the end of May 2007 stood at 2,765, of which 424 were non-UK companies.

WHY AIM?

A company joining AIM gains all the benefits of flotation on a public market in addition to the extra advantages of being quoted in London - for example:

• internationally respected regulatory standards
• the opportunity to raise funds for further growth by creating an external market for its shares
• the ability to make acquisitions in exchange for shares
• exposure to the deepest pool of global capital in the world
• the opportunity to widen the shareholder base through dual listing
• international investment expertise.

WHO CAN JOIN?

AIM membership is available to companies from all sectors and from all over the world. Whatever the country of origin, the application process remains the same, with the main requirement being that a company must be appropriate for the market. The company's Nominated Adviser makes this decision.

There are no restrictions on the size of the company or its specific activities. Furthermore, there are no restrictions on the number of shareholders and no required trading track record.

KEY REQUIREMENTS

1. Nominated Adviser (Nomad)

Each company must appoint and then retain a Nomad at all times. The Nomad is a firm of experienced corporate financiers who are approved by the London Stock Exchange. (At the end of May 2007, there were 79 registered Nomads).

The Nomad will advise initially on suitability to admission to AIM. The Nomad confirms to the London Stock Exchange that all the rules and regulations of admission to AIM have been complied with, and that the company continues its obligations after admission. The Nomad is appointed by the company, but also has a duty to the London Stock Exchange to ensure the company complies with the AIM Rules.

The Nomad is the company's point of contact with the Exchange, and plays an important role in bringing each company to AIM and advising it thereafter.

2. Broker

Each company must appoint and then retain an AIM broker at all times. The broker is a securities house which is a member of the London Stock Exchange, and which may be the same firm as the Nomad. The broker is responsible for dealings in the company's shares.

3. Free transferability of shares

As a general rule, there must be no restrictions on the free transferability of shares; there are limited exceptions to this rule where particular countries' securities laws require restrictions to be imposed.

4. Admission Document

Each company must prepare an Admission Document. This document includes detailed information on the company and its activities, directors and management and historical financial information if appropriate. The Admission Document is made available to all prospective investors. Further details of the contents of the Admission Document are set out below.

5. Lock-ins

"Where an applicant's main activity is a business which has not been independent and earning revenue for at least two years, it must ensure that all related parties and applicable employees as at the date of admission agree not to dispose of any interest in its securities for one year from the admission of its securities". Related parties include directors, shareholders owning 10 per cent or more of the voting shares, and their respective families. Applicable employees are those with 0.5 per cent or more of the voting shares, and employees in possession of price sensitive information because of their employment, regardless of their interest or holding in the shares.

6. London Stock Exchange Admission and annual fee

An initial admission fee of £4,340 is payable by all companies seeking admission to AIM. Each company must then pay an annual fee of £4,340 to the London Stock Exchange.

THE ADMISSION TEAM

The team of advisers and service-providers required to complete the Admission process is as follows:

The Nomad

The Broker

Auditors and reporting accountants

Lawyers to the company (on an admission of a non-UK company, the UK lawyers and the lawyers in the country where the company is incorporated or carries on its principal business will share this role)

Lawyers to the placing/introduction

Registrars and Printers

PR consultants

Independent experts

Very importantly, representatives of the management team of the company will also have a significant role in working with the advisers, providing information in relation to the due diligence process and collaborating in the drafting of the admission document.

TIME & COST

The admission process for AIM usually takes three to four months. The length of time is largely dependent on the type of company, the speed and accuracy of the information provided for inclusion in the Admission Document, the amount of due diligence required and the ease of verification.

Costs will comprise fees for the AIM admission and for the various members of the admission team (see above) for advising on and producing the admission document, and also commissions. These costs are generally around 8 to 10 per cent of the amount raised, including commissions, though this percentage will be higher if a relatively low amount (say, less than US $10 million, GB £6 million), is to be raised.

CONTINUING OBLIGATIONS

Once admitted to AIM, AIM companies are subject to continuing obligations in order to retain their AIM quote. These include:

• Retaining a nominated adviser and broker;
• In order to preserve an orderly market in the company's shares, publishing price-sensitive information without delay;
• Imposing a code on share dealing for directors and applicable employees;
• Obtaining shareholder approval where (i) an acquisition would result in a ‘reverse take-over' or (ii) - a disposal would (when aggregated with other disposals made in the previous twelve months) exceed 75% in any of certain specified tests. These rules are much less demanding than those for companies quoted on the main market of the London Stock Exchange;
• In the case of an "investing company", having an "investing strategy", which must be put to shareholders for approval on an annual basis;
• Ensuring that the securities admitted to trading on AIM are eligible for electronic settlement;
• Producing and filing half-yearly reports (within 3 months of the half-year-end); and
• Producing and filing annual financial statements (within six months of the year-end) prepared in accordance with UK or International Accounting Standards (there is a transitional period during which financial statements prepared in accordance with US GAAP may also be acceptable).

THE AIM ADMISSION DOCUMENT

Many companies joining AIM take the opportunity of raising money by way of a placing, although it is perfectly possible for a company to have its shares admitted to trading on AIM without an associated fund raising. Either way, the company must publish an Admission Document containing information required by the AIM Rules of the London Stock Exchange.

Following the implementation of the EU Prospectus Directive, a company may not make an offer to the public in the United Kingdom without producing a prospectus which is first approved by the United Kingdom Listing Authority, unless such offer is an "exempt" public offer. To be exempt, the offer must satisfy one or more of certain prescribed criteria, which include making the offer to not more than 100 persons, other than "qualified investors" as such term is defined in the relevant legislation. The AIM company's broker will seek, if at all possible, to ensure that such criteria are met so that a prospectus is not required. Accordingly, it is likely that the applicant company will be required to produce only an Admission Document, compliant with the AIM rules. This document will look much like a full prospectus, but will contain less, and somewhat different, information and, importantly, will not need to be approved by the United Kingdom Listing Authority.

An Admission Document provides details about the company and its securities which are to be admitted to AIM, so that investors can assess the value of the securities and make an informed judgment as to their future performance in the market. Typically, the "front end" of an Admission Document will contain the following information:

• Introduction
• History and Background
• Product/Business
• Assets
• Market / Opportunities
• Marketing / Sales
• Competition
• Financial record
• Current trading and prospects
• Financial projections (if necessary) with report
• Directors and senior management
• Share option schemes
• Reasons for the Offer
• Use of Proceeds
• Dividends
• Corporate governance
• Taxation
• Dealing Arrangements

Specific requirements

There are detailed content requirements.

The Admission Document must contain:

• annual audited accounts for the last three years (or less if the company has been trading for less than three years)
• financial information on any business or company which the company intends to acquire
• a statement that the company has sufficient working capital for its present requirements (at least 12 months from the date of the Admission Document)
• the name of any person who has received, within the previous 12 months, any fees, securities or other benefits with a value of £10,000 or more
• details of any lock-ins (see above)
• details of any significant shareholders (3% or more)
• in relation to each director
• interests in shares
• details of his or her employment terms
• remuneration
• age
• all companies and partnerships of which he/she was a director or partner over the previous five years
• unspent convictions in relation to indictable offences
• details of any insolvencies (personal or corporate) in which the director has been involved
• any public criticism by any statutory or regulatory authority a responsibility statement confirming that each of the directors accepts responsibility, individually and collectively, for the information contained in the document, and that "to the best of the knowledge and belief of the directors (who have taken all reasonable care to ensure that such is the case), the information contained in the admission document is in accordance with the facts and does not omit anything likely to affect the import of such information"
• Share rights
• Minimum subscription
• Estimated expenses
• Financial information
• Litigation

General Duty of Disclosure

The applicant company must include in the Admission Document "any other information which it reasonably considers necessary to enable investors to form a full understanding of:

(i) the assets and liabilities, financial position, profits and losses, and prospects of the applicant and its securities for which admission is being sought;

(ii) the rights attaching to those securities; and

(iii) any other matter contained in the admission document."

Who has Responsibility for an Admission Document?

The persons responsible for an Admission Document include (a) the company, (b) each director of the company at the time it is published (this includes shadow directors, i.e. people in accordance with whose instructions the directors of the company are accustomed to act, regardless of their official position), and (c) every person is named in the Admission Document as a proposed director.

The Admission Document must contain the responsibility statement set out under "Specific requirements" above.

What are the Potential Liabilities?

Persons responsible for an Admission Document issued in connection with a fund raising can incur liability to pay compensation to any person who has acquired relevant shares and suffered loss in respect of them as a result of any untrue or misleading statement in the Admission Document or the omission from it of any matter which the Prospectus Regulations require to be included. Initial investors, as well as purchasers of the shares following Admission, can claim compensation.

In addition to liability under the Prospectus Regulations, there are potential civil liabilities under the general law in respect of inaccuracies in and omissions from an Admission Document, giving rise to claims for damages for misrepresentation, possibly involving the subscription of shares being set aside.

Care should be taken to avoid possible claims for defamation, for example by "knocking the opposition" in the Admission Document. The company and the Directors may also become liable under warranties and indemnities given to the Nomad and/or broker under any Placing or Introduction Agreement.

Misstatements in or omissions from an Admission Document can constitute a criminal offence under the Financial Services and Markets Act 2000, as can the creation of a false market in the shares.

Having said this, it is unusual for claims to be made in connection with an Admission Document, provided appropriate steps have been taken to verify the information in the document.

Verification Procedures

To minimise the risk of inaccuracies in the Admission Document, the company's lawyers prepare verification notes, comprising a series of questions and answers which are designed as a way of providing a formal record of the steps taken to check accuracy and a way of making sure that all responsible persons focus on particular statements. Much of the verification procedure takes place informally during the many drafting meetings; statements which cannot be verified will be removed.

It is customary for each director to sign a responsibility letter, which will authorise the issue of the Admission Document containing the responsibility statement referred.

Responsibility letters enlarge upon that responsibility statement in order that directors fully appreciate the nature of the responsibility that they are assuming. However, the directors will be responsible for the Admission Document whether or not a responsibility letter is signed.

Placing/Introduction Agreement

The company and its directors will enter into a Placing or Introduction Agreement with the Nomad and the broker, under which the Nomad and the broker agree to perform their respective functions (including placing the company's shares if relevant), and the company and its directors undertake to fulfil their role in the placing and give warranties and (in the case of the company) indemnities in relation to the company.

Ancillary documents

Other documents will be required – for example, the 10 Day Announcement giving details of the application for admission, placing letters, other press announcements, Nomad and broker agreements.

"FAST TRACK" DESIGNATED MARKETS ROUTE

The London Stock Exchange has introduced a "fast track" procedure for companies already listed on one of the "Designated Markets". Information on this procedure is the subject of a separate article, AIM - The "Fast Track" Designated Markets Route.