The AIM market of the London Stock Exchange (LSE) is for growth-orientated, small to mid-sized businesses and is currently host to more than 50 U.S. corporations. Established in 1995 as the LSE's junior market, it has become the most successful growth market in the world, enabling smaller, growing companies to raise capital in the public markets to finance growth. By 2005, AIM had become the most active IPO market in the world, with 519 admissions in 2005; and, in 2006, more money was being raised on AIM (more than $24 billion that year) than on NASDAQ.

As of October 2015, 1,088 companies were listed on AIM. Although primarily targeted at smaller companies, 12 of the companies currently listed have market capitalizations in excess of U.S. $1 billion (the largest at more than U.S. $4.9 billion). The average market capitalization of an AIM company is around U.S. $100 million, with 84 percent of the companies having market capitalizations of less than U.S. $150 million.

Unlike the world's senior stock markets (e.g., the LSE's Main Market/NYSE/NASDAQ), AIM has no external regulator (e.g., the Financial Conduct Authority or U.S. Securities and Exchange Commission). Day-to-day regulation is delegated by the LSE to approved financial advisors known as nominated advisors or "Nomads." This leads to a "light touch" regulatory regime, which is more appropriate for smaller companies. For U.S. companies listed on AIM, the ongoing regulatory burden and substantial cost of compliance with the Securities Act and Sarbanes-Oxley can be avoided.

Why do small to mid-sized businesses and U.S. corporations choose AIM?

• AIM is designed for growth-orientated, small to mid-sized businesses.
• London has a large professional investor base, internationally focused and targeted at small to mid-sized growth-orientated businesses.
• Low cost of maintaining listing (approximately 15—20 percent of the corresponding NASDAQ annual listing maintenance costs)
• No minimum free-float — negotiated on a case-by-case basis with Nomad
• No minimum market capitalization — agreed on a case-by-case basis with Nomad
• No minimum trading history
• Less onerous admission criteria
• Ease of, and good institutional support for, secondary fundraising
• Straightforward acquisition rules (often no prior shareholder approval required)
• Comprehensive research coverage for more than 80 percent of AIM companies 

What does an ideal U.S. AIM candidate look like?

• Strong management team with positive track record
• Pre-money valuation of U.S. $40 million or more
• Operations or markets and/or opportunities outside the United States, with growth/development potential in Europe
• Sound strategy for developing business and deploying capital
• Looking to raise U.S. $10 million or more
• Management prepared to adopt internal controls and corporate governance regime
• Looking for a "stepping stone" to listing on a senior market (NASDAQ, NYSE, LSE Full list) or dual listing as the business matures

What has historically been the "push-back" against AIM?

Concern over liquidity 

Liquidity on NASDAQ (with which comparisons are often made) is generally better than on AIM. It has been estimated that the average liquidity on AIM is approximately 4 percent per month, compared with approximately 12 percent per month on NASDAQ. This average, however, flatters those NASDAQ-listed companies with market capitalizations below $500 million. 

The reality is that averaging liquidity statistics does not acknowledge the most significant factors in driving liquidity, including:

• quality of the company;
• quality of the management team;
• quality and frequency of news flow;
• delivery on, or (better) exceeding, expectations;
• track record; and
• size of free float.

AIM companies that score well in these areas rarely have concerns over liquidity.

Regulation S

The safe harbor restrictions that apply to the securities issued by U.S. corporations that do not qualify as "foreign private issuers" (Category 3 issuers) when raising equity capital outside the United States (Reg. S securities) are quite onerous. These restrictions require legends to be placed on the securities and for a certification process to be applied to ensure that the securities are not resold to U.S. persons during the applicable distribution compliance period (usually one year from issue). 

Until September 2015, it had not been possible to comply with these U.S. restrictions within CREST (the UK's electronic settlement system for securities). Accordingly, paper stock certificates were issued by these U.S. corporations for Reg. S stock during the compliance period in order to police compliance with the restrictions. Yes, astounding as it may seem in today's high-tech world (and on a stock exchange that has provided capital markets access to many leading-edge technology companies), the sale and transfer of securities in these U.S. corporations has been conducted on the basis of hard-copy certificates and transfers! The "clunky" mechanics of paper share dealing, coupled with the certification and legend endorsement requirements of Reg. S restrictions, meant that during the applicable distribution compliance period, the Reg. S securities were traded as a separate line of securities on "T+10" settlement terms, rather than the market norm of T+2. This impacted not only liquidity but also has led to a discount being applied to market pricing of the Reg. S restricted line.

Effective September 1, 2015, Reg. S shares are now capable of full electronic settlement in CREST and no paper certificate dealings in any shares admitted to AIM are now permitted. The implementation of these systemic changes in CREST will allow for T+2 settlement terms to be applied to restricted Reg. S securities, thereby potentially:

• improving liquidity prospects;
• eliminating the price discounting of the restricted line;
• narrowing the pricing range of the Reg. S securities; and
• increasing institutional/market appetite for U.S. IPOs and follow-on raises on the AIM market.

Conclusion

The potential impact of the recent changes within CREST for growth-orientated, small to mid-sized U.S. IPO candidates is considerable. It is anticipated that U.S. IPO candidates will be more likely to consider AIM as an attractive intermediate alternative to listing on NASDAQ on the one hand, or securing a quote on the Over the Counter Bulletin Board/Pink Sheets on the other—it now very much depends on the AIM!

Ray B. Smyth is a partner in Duane Morris' London office. He practices in the areas of mergers, acquisitions and disposals; flotations (IPOs); fund raisings; corporate restructuring; EU and UK competition law; distribution, agency, licensing and joint-ventures; executive/employee incentive schemes and general business, commercial and contract law.

Disclaimer: This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.