THE European Commission recently issued a consultation document, Review of the Prospectus Directive, which is a part of the Commission’s proposals for a capital markets union (intended to provide an opportunity to create a properly functioning single market in capital across the EU). The objective of the consultation was to seek views on: the scope, form and content of prospectuses; the prospectus approval process by regulatory authorities; liability; and sanctions.
The review is welcome if revisions are made to the prospectus directive (PD), which make it easier for companies to raise capital throughout the EU. However, there is one particular matter in the consultation which could, in our view, have an adverse impact for AIM admissions. Views are being requested by the European Commission on whether a prospectus should be required for admission of securities to trading on multilateral trading facilities (MTFs), of which AIM is one.
At present, a company seeking admission to AIM prepares an admission document, the contents of which are set out in the AIM Rules for Companies, prescribed by the London Stock Exchange. There is currently no requirement for admission documents to be approved before admission. In contrast, however, the contents of a prospectus are determined by the PD and, thereby, EU regulation. All prospectuses have to be approved by the national competent authorities in the member states – the Financial Conduct Authority (FCA) in the case of the UK.
Such a major shake-up would clearly have cost and resource implications for companies considering a listing on AIM, and takes away one of the junior market’s main attractions as an alternative to the main market. As such, the UK advisory community is responding to the consultation to express its concerns and registering its objections.
We have recently undertaken a survey of clients and advisers on the implications of this proposal with the views overwhelmingly in favour of retaining the status quo for both the AIM admission process and how the disclosure requirements of admission documents are determined.
Our view is that AIM’s lighter-touch approach works for the UK capital markets and for investors. Although AIM bases its admission document requirements on the PD requirements, we suspect that – if developed – an MTF prospectus would be considerably closer to a full prospectus than an admission document once the regulators got involved.
A benefit of AIM is also that it can move relatively quickly to amend its AIM rules to meet market and investor requirements – something that could never be said about changes to the PD. AIM currently also has the ability to give derogations to its own AIM rules where, for example, a disclosure in an admission document in a specific situation is particularly onerous (or impossible) but it is judged that there is no detriment to investors in not strictly following the AIM rules. Should the contents of an MTF prospectus be set out in law, the current ability to show discretion would go, and with it the element of flexibility that is so attractive to companies considering a listing on the junior market.
We would be very concerned if the current prospectus regime were extended to cover admission to trading on an MTF. We believe it would be overly restrictive for AIM and the market is capable of distinguishing between PD and non-PD regimes.
However, we fear that the current momentum of opinion in the rest of the EU is towards applying more regulation to MTFs. If this were to occur, FDs would have to recognise that this would inevitably lead to additional costs and hence a reduction in the net proceeds available to the company from the gross funds raised.
Importantly, they would also have to plan for increased demands on the time of the management team, which is generally “lean” in a small company and usually already over-stretched even in the existing admission process. This would be a further factor to take in considering whether additional temporary accounting assistance should be taken on.
Additionally, any pre-approval of an admission document by the FCA would have to be taken account of in the admission timetable. In particular, the first draft of the admission document would have to be at an advanced stage of preparation much earlier in the admission process than currently, in order for it to be submitted for review by the FCA.
It is also more likely that “issues”, which a nominated adviser might be able to work around with the company under the present regime, could prove to be more problematic, or even fatal, for the admission when they are reviewed by the FCA under a strict interpretation of rules and regulations. Close liaison between the company and its advisers, and careful planning and identification of issues at an early stage in the admission process, would be even more important than at present.
The deadline for responding to the EU on the consultation was 13 May 2015 so now we must wait for its conclusions. Companies and their advisers will continue to watch this issue with interest and concern. ?
Charles Romaine is a director at BDO
There are particularly strong opinions that:
• the information on an applicant in the current AIM admission document is sufficient to inform and protect investors
• it is a benefit to the market and investment community that AIM can draft, develop and adapt its own rules and that AIM can give derogations on its own rules in appropriate circumstances
• a company admitting to AIM should not be required to prepare a UKLA-approved prospectus rather than the current admission document
• there would be significant cost implications for a company admitting to AIM if a prospectus had to be prepared