A listing is when a company decides to list its shares on a stock exchange, resulting in anyone being able to buy and then sell its shares.

There are three different stock exchanges in the UK; the Main Market, the Alternative Investment Market (“AIM”) and PLUS. The Main Market is primarily for the largest companies, with AIM and PLUS for smaller, growing companies.

AIM was established in 1995 and 3,262 companies have listed since. At 31 August 2011, 1,158 of these companies remain listed, including 35 Scottish based companies.

The main differences between listing on AIM and the Main Market are as follows:

Main Market	AIM
25% of a company’s shares must be held by the public	No minimum number of shares to be held by the public
Three year trading record required	No trading record required
Application vetted by the London Stock Exchange	Application not vetted by the London Stock Exchange
Minimum market capitalisation of £700k (although £10m is preferred)	No minimum market capitalisation requirement

In what circumstances might a business consider an AIM listing?

A company is likely to consider an AIM listing after it has already raised funds privately, either through business angels or venture capital, and has developed a product or service with a proven market. Listing on AIM should be considered if it could provide significant funds not available elsewhere, thereby enabling a company to grow much faster than it would be able to otherwise.

AIM should not be used to “make a quick buck”

A company deciding to list on AIM needs to appoint a Nominated Adviser (“Nomad”) to guide the directors through the listing process which, typically, takes around three months. A Nomad will act as a friend as well as a policeman - they are required to confirm to the London Stock Exchange that a company is appropriate before it can list on AIM.

A Nomad will challenge the management team on their credentials and track record, challenge the viability of the expected growth and profitability, as well as scrutinising how the growth will be achieved. Lawyers and accountants will also be appointed to undertake legal and financial due diligence.

The process is thorough and a Nomad will not issue their approval until they are satisfied the company is appropriate for the public to invest in, as well as being able to deliver a return on investment sufficient to attract investors.

AIM should not be used to “make a quick buck” - it must be part of a company’s long term strategy to fuel growth and create sustainable profits.
 
What benefits might an AIM listing bring to a business?

The most obvious benefit is access to a wide market of new investors and the opportunity to raise additional capital. A company can issue new shares on listing (called an initial public offering - “IPO”) as well as issuing shares further down the line if cash is required.

Since 1995, companies listing on AIM have raised £35 billion of new funds at IPO (an average of £10m per company), and an additional £41 billion from further share issues.

Other benefits include:

1. Profile. The listing process will generate publicity and raise a company’s profile amongst the public, competitors, suppliers and customers. A company is seen as more credible once it has attained “plc” status.
2. Exit. Listing on AIM means existing shareholders can easily realise part of their investment at a market price.
3. Employees. Share options can be used to incentivise and retain staff. Staff can clearly see the value of any options they’ve been granted and also decide when they cash them in.
4. Acquisitions. A listed company can fund future acquisitions by issuing its own shares rather than using cash resources or debt.
5. Efficiencies. A listed company is required to have proper procedures, controls and systems in place, resulting in increased efficiencies.

What potential pitfalls are there with an AIM listing?

There is no doubt that the two biggest drawbacks of the AIM listing process are the cost and the time involved.

A company should expect to incur costs of at least £150k to complete an AIM listing. If a company is not raising significant levels of cash these costs could be viewed as excessive.

The listing process is intense, and requires management to spend considerable time preparing information and fielding questions from advisers. Management can get easily distracted to the detriment of running the business.

Other issues to be considered include:

1. Control. A large proportion of shares, and votes, may be held by institutional investors with different objectives to management.
2. Ongoing costs. A company is likely to incur annual costs to satisfy regulatory requirements.
3. Liquidity and share price. Trading volume can be lower than expected as many institutional investors will take a long term view on their investments. External factors will also affect share prices e.g. Greek debt, ash clouds etc.
4. Disclosure. Information needs to be regularly disclosed to the public.
5. Restrictions. Management may be restricted in its dealings in company shares, and, typically, existing shareholders will not be able to sell their shares in the first year after listing.

How much regulation is associated with being listed on AIM and can this prove off-putting to businesses?

There are a number of obligations in the AIM Rules with which a company has to comply. For example, all companies must ensure that the market is properly informed of all developments, transactions, financial results and other information that could affect its financial prospects. This includes disclosing interim and full year results on its website.

Investors will expect AIM listed companies to follow corporate governance best practice such as having separate audit and remuneration committees, appointing independent non-executive directors and publishing an annual corporate governance report.

It is clear AIM listed companies are subject to more regulatory burden than private companies, but in comparison to their Main Market counterparts, they get off lightly.  The AIM market has an emphasis on growth rather than reporting and governance, and it should not be an issue for any well run company to want, or be able, to comply with these regulations. It is key to appoint a good finance director to keep on top of everything, as well having the support of experienced advisers.

Are there particular types of business – and sector – where an AIM listing is more appropriate?

AIM is open to companies from all sectors and from all over the world. Companies who list on AIM range from new, venture capital-backed companies to well-established, mature organisations looking to expand into the wider market.

Over the last three years, it has only been the very strong candidates that have been able to attract investor interest at IPO at an acceptable price. Investors are now looking for companies with larger market capitalisations - a trend that is likely to continue – and are less likely to take risks on management teams with no track record.

At Scott-Moncrieff we recently acted for In-Deed Online plc, a company with no track record, but because of the strength of the management team and the market opportunity, the directors successfully raised the funds at the price it was looking for.

What if a company decides it no longer wants to be on AIM? What are the options and how difficult is the process of becoming de-listed?

Should directors decide they no longer want the company to be on AIM, the de-listing process needs to be carefully structured to ensure the company and shareholders obtain the most satisfactory outcome. They will also need the consent of 75% of the shareholders present at a general meeting.

The simplest form of de-listing is when the company continues as an unquoted company with the same shareholder register. Some shareholders may be against this; large institutional investors may be restricted from holding unquoted shares and minority investors would struggle to realise their investment in an unquoted company. In such cases, the directors may consider an offer to buy out the minority shareholders.

Another option would be a “public to private” acquisition when existing or new investors would set up a private company and acquire all of the listed shares.

The process of de-listing is relatively straightforward and the costs are significantly less than what one might think. Before making the final decision, directors may want to remind themselves why they listed in the first place and whether the long term strategy of the company can be achieved by going private.

 

Contact

Stewart MacDonald, Partner, Corporate and Consulting Services.