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Aim roundtable – On the open market

Since it was created by the London Stock Exchange in 1995, over 850 companies have listed on the Alternative Investment Market, attracted by easier entry requirements and a less stringent regulatory environment than a full listing. To date, more than £7.2bn has been raised on the market and the companies trading on AIM have a total market cap of £11.1bn, with an average of £20m.

But while AIM is touted by the LSE as a sure-fire vehicle for growth and a stepping-stone to full market listing, AIM companies have been rocked by volatile share prices and lack of market confidence. Without a lengthy trading history investors will just not risk looking to companies listed on fledgling markets to recoup losses incurred on the FTSE.

Moreover, an EC prospectus directive proposed in November 2001 advocates the creation of a standard listing framework across Europe (see box, below) This threatens the existence of fledgling markets because it would remove the distinction between AIM and a full listing.

We asked executives from two companies floated on AIM just before the dotcom collapse, and a partner from nominated legal advisers Nabarro Nathanson about the experience of joining AIM, raising capital and coping with a fluctuating share price.

Describe the experience of preparing for flotation on AIM.
FIONA MORRIS, BSOFTB: BSOFTB was established in 1994 and we began to look at various ways to raise capital in 1999. We chose to float on AIM because the obligations in terms of reporting were less onerous. We raised £13.8m net when we floated in July 2000. Aside from the cash the listing also heightened our profile and gives us a degree of credibility, especially with customers and suppliers.

Unfortunately, flotation is a lengthy and difficult process. We were a small company at the time with only 27 people. We were going through the flotation process during the day and running the company at night and at weekends. There was a huge amount of paperwork and processes, particularly trying to describe in layman’s terms what your product and company does for the benefit of the institutions. Also the whole due diligence and legal process was tortuous.

DAVID TILSTON, OVERNET DATA: We initially went to market to raise £2m and eventually raised £3.5m. But the decision to float was very tricky. We had other options such as venture capital funds, OFEX or a full listing. We plumped for AIM because we essentially thought listing would increase our visibility and profile. But one of the main benefits AIM provided was in terms of the shareholder base. Because of the tax breaks involved, certain classes of investor, such as venture capitalist trusts and wealthy private investors, tend to invest in new shares which they hold for three or four years to get the maximum tax benefits. So there were advantages being on AIM that we wouldn’t get elsewhere.

The legal process is terribly time consuming but there are a relatively clear set of hurdles you have to jump: the key memoranda, drafting a prospectus, doing the due diligence and making sure the selling documentation is in order. One of the most valuable things we had on day one was a very stiff lecture from our lawyers about due diligence and what our personal liabilities were if we got it wrong. That certainly helped to focus the boards’ mind as to what they could and could not say. We went through some difficult periods when we couldn’t read whether the markets would allow the float to get away. In the end we were turning people away because the float was comfortably over subscribed. You don’t know how the dynamics will play out until you have passed a critical point in the fund raising.

What is the advantage of AIM over a full listing?
MORRIS: At flotation we certainly saw AIM as a stepping-stone to a full listing. But the ability to raise further funds from a full listing is dependent upon the market conditions, and at the moment a move to the FTSE would not be very wise as there is little market confidence.

One of the problems of being listed on any market is that regulations are a drain on administration. But to show that you are working in accordance with those regulations is actually quite positive. Another problem is the distraction of the share price. Some of the incredible market caps we saw in 2000 were pipe-dreams without trading histories to support them.

At the moment the markets have moved too far the other way – our share price is not a reflection of profit warnings or information we have given to the City.

TILSTON: An AIM listing works to our advantage. With our short trading history a full listing on FTSE would mean we would have to move to quarterly reporting, which would be a big drain on resources. I have spoken to techMARK companies which are working continually to produce numbers rather than running the business. And if they miss a quarter, which is not difficult, the City can over-react.

There is a difference whether you are trying to impress a financial or a commercial audience. A flotation counts with a commercial audience. But if the share price is bouncing all over the place you know investors will be unhappy. You don’t necessarily get an idea of the volume of shares being traded to drive volatility, however. A share price can move disproportionately to the tiny volumes traded.

RICHARD BREARLEY, NABARRO NATHANSON: If you were talking to a blue-chip broker they would probably not have a particularly high regard for AIM as a vehicle for raising a company’s profile and respectability. But an AIM flotation does mean that a company becomes a public company and its shares are freely tradable. That certainly opens doors with investors.

The appropriateness of a step up to full listing depends on the type of company involved. If you do not have a long trading history then AIM is the best place to start. And the documentation isn’t that heavy in terms of transferring from AIM to a full listing if you aren’t fundraising at the same time.

In the end AIM is not a cheap way of raising capital, even though it is still less expensive than the continuing obligations of a full listing.

And while I am all for taking a practical viewpoint, the prospectus regulations are, unfortunately, very similar to the full listing documentation. The process of listing is no longer quick and dirty back-of-an-envelope stuff.

Companies have to be aware of the obligations and the cost. But the process is quicker because you don’t have to have your prospectus approved by the UKLA. The other option is to look for VC backing to fund expansion, but AIM means that companies can control their own destiny.

How has your relationship with shareholders changed since floating?
MORRIS: The market is very difficult. It can cope with good or bad news but the one think it can’t cope with is uncertainty. We try to keep our investors as close as possible and informed of our position. Even though we have faced difficulties I haven’t experienced any hostility because our performance has been in line with expectations.

Most investors are realistic. It is not just our company having difficulties – the whole marketplace has problems. The main thing is that investors have confidence in the management.

Our staff are also made aware of the trading position as most of them are shareholders themselves. But there is a feeling that sometimes doors are closed to them. Of course, announcements can only be made at the appropriate time. But despite problems most of our staff believe our technology is here to stay and they will benefit in the future from their share options, pensions schemes and other benefits that we have been able to put in place.

TILSTON: We floated at 115p. The share price hit 230p by the end of the first day, then it hit 800p en route and is now languishing at about 25p. We have had an interesting ride.

If you ask investors if they are happy with the current share price of any TMT fund then they will probably answer in the negative. However, shareholders are often investing for the long term and in a portfolio of stocks – they have balance. So communication is key. Everything revolves around trust and confidence in the management team.

You also have to tread a delicate balance between not giving away too much price sensitive information internally versus not saying anything and demotivating your staff. We have an open meeting for all staff on a weekly basis and give them a pretty clear picture of where things are going, of course staying clear of the precise financial details. And one of the things that excites our staff is the opportunity to get into a new company from ground zero and ride that wave.

BREARLEY: There is obviously a legal requirement to inform the market. But, more importantly, companies should go out of their way to communicate their position. Recently we have been crafting a lot of announcements for our clients that contain bad news. If you keep the institutions informed then they can become hacked-off with the companies but at least you can’t be accused of being secretive.

The way the legal regulations are going the FSA are trying to clamp down on companies informing shareholders about performance before informing the market as a whole. From a practical point of view you have to inform everyone at the same time, but realistically you can send news down the wire to the market that may not get the same care and attention as the news you give to your shareholders.

Companies floating on AIM have to work a team of nominated advisers (NomAds). How did you build that team?
MORRIS: Initially other AIM companies we knew put us in touch with their advisers. We went through several and eventually chose the advisers that suited us. However, the legal team we used didn’t have all the skill sets we required. So, through their contacts we selected another adviser in London and our auditor, Ernst & Young. That whole process was very time consuming. It is also based on chemistry. Listing is an arduous process and you have to be able to get on with your advisory team.

TILSTON: We hired legal advisers with whom we already had dealings and chose a heavyweight firm of accountants, KPMG, to show that we meant business. But I can’t stress how important trust is. During the flotation process a lot of the work is cut and dried but there is also a lot of judgement involved. You can’t always have everything your own way and you have to trust that the advice you are getting is in your best interests.

One example of this is the drafting of the prospectus and how you put the investment message and health warnings across. Other areas of tension are directors’ contracts and articles regarding borrowings and issuing of shares. You need reasonable flexibility as a company, but the trade off is that you mustn’t offend the investment community.

BREARLEY: You are entering into a relationship of trust and as a legal advisor you need to have a strong feeling that your clients are not going to hide things from you. Occasionally one turns people down on the basis of the business plan and the management team as people. I would rather they held up their hands and admit to cocking-up rather than brushing problems under the carpet.

Will the proposed EU Prospectus Directive jeopardise fledgling markets such as AIM?MORRIS: With the Prospectus Directive it will be interesting to see how regulations develop. We are already under pressure as a small company.It could jeopardise the position of those companies already in the market as well as the future of the market. The lawyers and the institutions are getting involved and the feedback they are giving us is that it could be very damaging. By listing on AIM you are competing for a certain type of investor. By standardising regulation you eliminate choice for smaller companies as well as choice for investors.

TILSTON: The benefit of AIM is that it provides small companies with a step up to a full regulatory environment. Taking away the stepping stone, which is the effect of the proposed legislation cannot be in the interests of UK business. The size of the step needed from a private company to a quoted company will get bigger at a time when we are trying to encourage small companies to expand and increase flexibility in the capital markets.

If the end result is as we fear it is entirely wrong. I think there should be competition between regulatory environments. We have already looked at the trade-off between OFEX, AIM and full listing and made our choice. At least we had that choice and investors accepted our decision because they bought our shares.

Would you do anything differently if you were floating today?
MORRIS: When you prepare for flotation there are so many variables that are out of you control that if we did the whole process again we could not predict the outcome.

TILSTON: I would give three pieces of advice to companies thinking of AIM. Firstly, make sure you have read the due diligence riot act thoroughly before you start. This is very frightening but extremely valuable – it gets you into the right mindset. Also talk to people who have been through the flotation process before – they are easier to understand and their advice is easier to accept than your professional advisers’. The third thing to realise is that there will be disruption to the business. Make sure you have resources to cater for it.

The prospectus directive was proposed by the EC in May 2001 and aims to establish a common pan-European capital markets structure. It proposes a uniform standard of documentation for all markets and all sizes of companies.

This would require companies to annually publish an equivalent of the 10K shelf registration document used in the US. UK businesses argue that this would cost a minimum £50,000 a year – a drain on financial and operational resources that cannot be borne by many small public companies.

Nabarro Nathanson’s Brearley is opposed to the proposal as it jeopardises the USP of fledgling markets such as AIM. “Currently, the LSE shifts the burden of responsibility for AIM listing onto the shoulders of the NomAds.

Under the new legislation a regulatory authority would have to get involved as they do for full listings. It would be the death of AIM as we know it,” he says.

While the London Stock Exchange has been vocal about the damage that the directive may cause, the Treasury has so far been silent on the subject. Brearley suggests that politics may be clouding the handling of the issue.

“I have heard a rumour that the status of the directive is in some way linked to the status of Gibraltar – a question of who gives way first,” he says.

The EC prospectus directive proposal is available at


Fiona Morris Chief executive.

Listed on AIM in July 2000, BSOFTB provides business process management technology that enables companies to modify their business processes online.

David Tilston, finance director.

Floated on AIM in July 2000, OverNet Data provides wireless mobile data solutions for the business market and network operators.

Richard Brearley, partner responsible for advising on AIM flotation.

Nabarro Nathanson is a commercial law practice providing legal advice for 100 IT, communications and new media businesses.

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