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New regulations target AIM

The wave of revelations in the Langbar affair ­ the former AIM-listed company
which is being probed for fraud after £365m went missing from a Brazilian bank
account ­ raises questions about whether regulation on the London Stock
Exchange’s junior market needs tightening.

AIM had its best year ever in 2005, with 519 new admissions. The market
boasted 1,426 listed companies with a market cap of £65.1bn by the end of
February 2006, compared with 1,065 with a market cap of £37.6bn a year earlier.

But the Langbar imbroglio has reminded AIM that, when it comes to attracting
quality investors, reputation is everything. Bryan Hucker, FD at AIM-listed
Coda, believes the combination of rapid market expansion, plus the addition of
lots of companies from overseas ­ 226 by the end of February ­ could increase
AIM’s risk of reputational damage.

David Blain, FD at AIM-listed eg solutions, says: “If company failures or
scandals ruin the reputation of the market and frighten off potential investors
then AIM will be of no use to companies or their investors.”

Chilton Taylor, head of capital markets at accountants Baker Tilly, adds:
“Maintaining a market’s integrity is crucial, but with so many new entrants
there is always a danger that there might be some of such poor quality that the
market itself could be damaged.”

The question is whether AIM can manage the delicate balancing act of
tightening rules and guidelines without frightening off the smaller companies
for whom the light touch regulatory framework is particularly attractive. There
is a real dilemma, says Michael Owen, financial planning director at Duncan
Lawrie Group, the financial services provider.

“There are competing interests between businesses looking for access to
capital and potential shareholders being reassured that their investment has a
suitably robust framework,” Owen says. “My concern at the moment is that some
novice investors are being lured to the market because of the beneficial
business asset rules that restrict both capital gains and inheritance taxes.”

Tightening rules

The past year suggests AIM understands that it needs to tread a fine line
between tightening rules to avoid abuse and maintaining an investment-friendly
environment for smaller companies. In October 2004, for example, AIM decided to
become an “exchange regulated market”, a term it largely invented itself. The
ploy was a way of side-stepping most of the requirements of the EU’s Prospectus
Directive, which came into effect in July last year and which insisted that any
admissions document should be reviewed and approved by the relevant regulatory
body ­ in the case of Britain, the UK Listing Authority.

As John Cowie, head of AIM at accountants Smith & Williamson, points out,
the Prospective Directive would have fatally undermined AIM’s unique nominated
adviser or “nomad” system of regulation. “The role of the nomad is key to what
happens on AIM. I think the AIM team at the London Stock Exchange felt that the
Prospectus Directive would take away their ability to devolve responsibility for
interpreting the market’s rules to the nomads.”

Even so, the switch to exchange regulated status couldn’t be achieved without
some regulatory creep, notably for companies which are making an offer to the 4
public ­including rights issues, open offers and takeovers using the company’s
shares. Where more than 100 investors are approached and/or the sum being raised
is more than e2.5m, the transaction is subject to the Prospectus Directive
rules. That means the company needs to produce a full prospectus approved by the
UKLA. In practice, the change is unlikely to affect many AIM transactions.

Standards change

The Prospectus Directive also stimulated a change in the information
standards applied to AIM admission documents. But AIM-PD, the name of the new
standards, tailors the Prospectus Directive’s approach to a market designed for
smaller companies. It came into effect in July 2005 and plainly hasn’t slowed
the stampede of new companies towards the market.

What would be more important for companies is if AIM decides to increase the
role of nomads. There aren’t any specific proposals on the table at the moment,
but some market-watchers think that it’s only a matter of time before there are.

One factor that could change it all is the growing number of foreign companies
coming to the market, partly a response to the lacklustre performance of some
AIM-lookalike markets overseas. Because there aren’t many overseas nomads, some
foreign companies use UK ones. But while there is not yet any evidence of
specific problems, it must be more difficult for a UK nomad to develop the kind
of close working relationship with an overseas company that it would expect to
develop with a home-grown one.

Coda’s Hucker sees the nature of the problem. “Our nomad is just an hour down
the road and it’s a very tight relationship. When the company is Russian or
Chinese, I’m not sure how that strong relationship works. If there were a few
cases where nomads didn’t have control, that could put a shock into the system
and we would all suffer,” he says.

Even without formal changes, the Langbar affair may have had a psychological
effect on nomads. They are likely to be more wary and watchful in the future. So
AIM companies could see a subtle shift of emphasis between nomad’s twin roles of
mentor/adviser on the one hand and regulator on the other. Less nurse-maid, more

It’s the way of business life that regulation grows in small increments in
response to specific problems. It looks as though AIM may be no exception.
Robert Coe, founding partner at chartered accountants Wilder Coe, sees a danger
that AIM could become over-regulated and more expensive, which could create a
barrier for smaller companies.

But some AIM FDs seem more concerned about maintaining the integrity of the
market and its attractiveness to investors ­ particularly institutional
investors ­ than handling an extra rule here, or guideline there.

“Regulation is just good business practice if it’s done correctly,” says
Blain. “All companies on AIM have a vested interest in ensuring shareholders’
interests are protected. We should do anything we can to eliminate the risk of
scandals to maintain the integrity of AIM and, therefore, its reputation.”


It looks as though the days of AIM cash shells are numbered. Even before the
Langbar scandal erupted, AIM had evidently decided that it was playing with
financial fire by allowing an unprecedented number of cash shell companies to
float on the market with no apparent purpose in view.

Last April, AIM adopted new rules, which essentially force any cash shell
that has raised less than £3m to complete a transaction within 12 months. The
idea is that if the shell is raising more than £3m, investors are more likely to
demand answers about what’s happening to the money. Time’s up on 31 March for up
to 50 cash shells and, as Financial Director went to press, events were

The likelihood was that those companies which were in the process of making a
transaction, but which hadn’t completed the paperwork, would be given a grace
period. But those that were still sitting on a pile of cash with no activity on
the horizon were expected to be given their marching orders – or at least be

But there are those who think that the deadline might result in some poor
investment decisions. “There is a danger that companies will be rushed into
doing a deal simply to meet the deadline,” says Max Audley, corporate partner at
the law firm Faegre & Benson. “It would be better for shareholders if the
company could sit on its hands and allow its shares to be suspended than to do
the wrong deal simply in order to retain a quote.”

There is no suggestion that AIM’s cash shells are in any way dishonest. But
the Langbar saga has created some suspicion, which will inevitably lead to
tougher regulation.

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