WHY SHOULD WE JOIN AIM?

The AIM admission process requires commitment from the company and its management. Points to consider at the outset include:

Key benefits

• Creates access to a broad range of investors to raise finance for further growth
• Places a value on the business
• Enhances the company's public profile
• Gives shareholders the opportunity to realise all or part of the value of their shareholdings
• Simple admission process
• Less regulatory requirements, suited to smaller companies
• Tax incentives available for investments in AIM companies attractive to both individual and institutional investors

Other considerations

• Increased disclosure and reporting requirements for the company
• Impact on management time during the float process itself and afterwards in fulfilling the continuing obligations and managing investor relations
• Increased pressure on management decisions given the company's public company status and greater accountability to shareholders
• Additional responsibilities and restrictions placed on directors. For example, they will only be permitted to buy and sell shares in the company at specific times
• Control of business: significant acquisitions and other such decisions may require the prior approval of shareholders after admission

WHO'S ELIGIBLE?

The entry requirements for AIM are less onerous than those for the Main Market and AIM companies are not subject to the Listing Rules of the UK Listing Authority. Instead, they must comply with the requirements of the AIM Rules for Companies ("AIM Rules"), which have been designed to suit smaller companies. AIM has an unusual, and perhaps unique, model in that regulatory emphasis is placed on the Nomad, rather than on the company itself.

Eligibility

There are no specific suitability criteria for companies to qualify for AIM. Companies can be established trading businesses or at their start-up stage. However, before admission to AIM a company must comply with the following:-

• The company must be a public company (or equivalent)
• Shareholders must be able to transfer their shares without any restriction and the shares must be eligible for electronic settlement
• It must appoint a Nomad and broker (which are required for as long as the company is listed on AIM)
• Published accounts must conform with International Accounting Standards, or, for certain countries of incorporation, their Generally Accepted Accounting Principles

Under the AIM Rules all companies must produce an admission document (or prospectus, if applicable), which contains the information necessary to enable an investor to assess the company's prospects and the rights attaching to the shares to be admitted. The admission document includes factual information about the company and its trading history as well as details of the directors' backgrounds, the shareholders and financial information. Any investors investing in the company at the time of the flotation will base their investment decisions on the information contained in the admission document. 

An application for admission of securities to trading on AIM will usually involve an offer of securities to the public. This requires the publication of a prospectus unless one of a number of exemptions applies (such as if the issue amounts to less than 2.5 million euros (US$3.7 million) or to fewer than 100 people). Typically, many AIM listings, even for large amounts, do not require a prospectus to be published since the listing falls within one of these exemptions. As a result, the admission document (unlike a prospectus) does not need to be pre-approved by the London Stock Exchange nor by the UK Listing Authority.

Market Requirements

To be suitable for listing, the company will need to satisfy its Nomad that it is suitable.

Track record

There is no requirement for the company to have a trading history. In some sectors such as IT and biotechnology companies come to market at the pre-profit stage to enable them to fund the necessary research and development.

However in reviewing a company's suitability the Nomad will look at, among other things:

Prospects

If the company has been trading for some time, the Nomad will look for sustainable revenues and profits. In the case of a younger company, it will focus on future revenues. The "story" is an important element of the admission document.

Management quality and continuity

The Nomad, like potential investors, will review the range, skills and experience of the company's management. They will want to check that the board and senior management include people who have had relatively long experience - preferably several years - in the business. The company should look to identify and plug any gaps in the full breadth of expertise needed to fulfil its business plan. This is where non-executive directors can be very useful. Investors will also look for a management team which shows it is united behind the company's plans, personally committed to its future, and fully agreed on its objectives. They will also want to ensure that suitably qualified non-executive directors are appointed.

Employee participation and incentivisation

Investors may also look for signs of long-term commitment to the business from key staff at and below board level, through contractual arrangements or share option schemes. Share option schemes are often put in place upon a listing in order to enable employees to participate in the ownership of the company, improving the recruitment and retention of key staff.

HOW IS THE 'CREDIT CRUNCH' AFFECTING AIM?

The majority of companies coming to AIM have been attracted by its reputation as an international growth market, its growing and increasingly sophisticated investor base and its regulatory framework. In 2007, 284 companies joined AIM, raising a total of £16.1 billion. An increasing number have been from overseas and there are now over 500 companies on AIM who operate outside the UK.

However, in the last 12 months the FTSE AIM All Share Index has dropped from over 1,100 to below 700 by mid- September 2008. The uncertainties in the markets are clearly impacting on companies contemplating coming to AIM and those already quoted.

So what does it all mean? In the short term there will be few IPOs and only those companies who are very strong candidates will be able to come to the market. Despite this we are currently advising on a number of IPOs or reverse takeover transactions and are confident that these transactions will come to fruition, though valuations may be impacted. We are also currently advising on significant secondary fundraising transactions and have recently seen an increase in consolidation through M&A activity.

In all probability companies coming to AIM in the future will have a larger market capitalisation than has historically been the case and be more likely to have operations overseas particularly in Asia and Latin America. We also anticipate that a number of smaller AIM companies may decide to go private if the transaction can be financed and/or to de-list.

However, in the longer term AIM will continue to be the international growth market of choice for those companies with a good story and good management.

WHAT HAPPENS IF WE'RE A NON-UK COMPANY?

There is a fast track admission route to AIM for companies already having their securities traded upon an AIM designated market (UKLA Official List, NASDAQ, Deutsche Börse, Australian Stock Exchange, Euronext, Johannesburg Stock Exchange, NYSE, Stockholmsbörsen, Swiss Exchange, Toronto Stock Exchange) for at least 18 months prior to the date of admission to AIM. They can apply for a quotation on AIM without having to publish a full admission document, which provides a cost-effective method for joining AIM. For overseas companies not already quoted on these markets, the admission process is broadly the same as that for a UK company. However, the following specific issues may be relevant:

Structure

It may be necessary to impose a UK or offshore holding company structure above the foreign company prior to the flotation. This will largely be determined by the compatibility of the foreign company's local regulatory requirements with the UK regulatory regime, tax structuring issues and the nomad and broker's view on whether such a holding company structure is likely to make it easier to market the IPO to investors.

If the holding company is incorporated outside the UK, Channel Islands or the Isle of Man, it will need to make arrangements for depositary interests in its shares to be traded in CREST (only UK, Channel Islands and Isle of Man securities and depositary interests representing the underlying foreign securities can be electronically settled in CREST).

Constitutional Documents

Although international AIM companies are subject to the law of their incorporation, their articles of association are usually tailored so that they contain certain important provisions of English law. This provides the necessary comfort to investors in relation to, for example, free transferability of shares (which is an AIM Rule requirement), pre-emption rights and voting rights. Since the City Code will not apply to a company which is not incorporated or managed in the UK it is common to include provisions to incorporate elements of the City Code which would apply in the event of a takeover offer being made for the company. 

Financial Reporting

An AIM company incorporated in an EEA country is required under Rule 19 of the AIM Rules to prepare accounts in accordance with International Accounting Standards (IAS). An AIM company incorporated in a non-EEA country is required under Rule 19 of the AIM Rules to prepare accounts in accordance with either International Accounting Standards, US, Canadian or Japanese GAAP or Australian International Financial Standards. Although this rule only applies once a company has been admitted, in practice overseas companies generally choose one of these accounting standards for the admission document in order to achieve consistency in later reporting.

Composition of Board

UK and European investors will normally expect an international company to have at least one UK/Channel Islands based non-executive director on the board. Such a director will usually have extensive public company experience and will provide support and guidance to the foreign directors on the UK legal and regulatory regime.

WHAT FINANCIAL RECORDS DO WE NEED TO SHOW?

Accounts

The company must normally have published or filed audited accounts for a period ending no more than six months before the planned flotation. However, there is no requirement for a minimum trading record, as is the case for a listing on the Main Market.

Independent track record

Where the company's main activity is a business which has not been independent and earning revenue for at least two years, it must ensure that all related parties and applicable employees as at the date of admission agree not to dispose of any interest in its securities for one year from admission. This is a minimum period and the Nomad may require a longer lock-in period.

Investing companies

If the company is an investing company, a condition of its admission is that it raises a minimum of £3 million in cash via an equity fundraising on, or immediately before, admission.

Resource companies

There are specific guidance notes relating to resource companies that are seeking to join AIM. A report must be prepared by an industry specialist on the company's material assets and liabilities, which is included in the admission document.

Working capital

The company must be able to show it has enough working capital for its current needs and for at least the 12 months following flotation. The company's reporting accountants will prepare a report assessing whether this is the case.

DO WE HAVE TO ABIDE BY CERTAIN RULES?

Corporate governance

Although there is no formal corporate governance regime that AIM companies must comply with, the Quoted Companies Alliance (QCA) has published a set of voluntary corporate governance guidelines for AIM companies. The QCA is an organisation that seeks to promote the interests of smaller quoted companies. (For more information, see their website). Investors will expect certain minimum standards to be met and to see the development of appropriate corporate and management structures. These will help to reduce the company's reliance on individuals, which gives greater security to investors. While some changes might be inappropriate for a very small business, potentially relevant steps may include splitting the roles of chairman and chief executive, the appointment of non-executive directors to the board, and appointing a qualified finance director. A further point to remember is that it may be worth considering going beyond the minimum requirements in areas such as accounting controls and corporate governance, and instead to aim for "best practice" as standard. Again, this policy can be instituted well before the flotation takes place, and may help convince advisers and investors of the value and solidity of the business.

HOW DO WE CHOOSE OUR ADVISERS AND WHAT ARE THEIR DIFFERENT ROLES?

If careful consideration of all the pros and cons shows that a listing on AIM will benefit the company, next, the company will need to think about the following issues:

Appointment of advisers

Identifying and appointing the Nomad will co-ordinate the company's entry to the market. In addition to a Nomad, a broker will be needed, which may or may not be the same firm as the Nomad. Further advisers needed for the flotation include lawyers (one firm to advise the company and its existing shareholders and another firm to advise the Nomad) and reporting accountants. The company will also need to appoint public/investor relations advisers.

Choosing good quality corporate advisers is one of the first and most important things that you must do in preparation for a flotation - and is also one of the most difficult.

During the flotation process, you will inevitably rely heavily on your advisers for guidance as to what is happening at each stage.

1) The Nomad

The role of the Nomad is essential to the listing of a company on AIM. The company must appoint a Nomad (an organisation approved by the London Stock Exchange) to guide it through the AIM application procedure and to act as Nomad at all times to advise it on the AIM Rules on a continuing basis after flotation. If an AIM company ceases to have a Nomad for any reason, the London Stock Exchange will suspend trading in the company's shares.

A Nomad is responsible for ensuring and confirming to the London Stock Exchange that an applicant to the market meets the requirements set out in the AIM Rules. The Nomad will usually be responsible for maintaining the admission document (or prospectus) and will arrange for the scheduling of the date of admission of the company to the market. Nomads must comply with a specific set of rules published by the London Stock Exchange.

2) The Broker

An AIM quoted company must also retain a broker at all times. The broker acts as the company's main interface with the market and potential investors. This may be the same firm as the Nomad and must be a member of the London Stock Exchange.

As well as advising on market conditions and the likely level of demand from investors for the company's shares, the broker also actively markets the shares to potential investors and can advise on the best method of flotation, size of offer, timing and price. It will continue to work with the company after flotation to look to maintain liquidity and profile in the after-market.

3) The Company's lawyers

The responsibilities of the company's lawyers include conducting the legal due diligence process (fact gathering on the company to identify any legal issues which may need to be addressed before the flotation), advising on the legal aspects of the issue and producing the key legal documents. The company's lawyers assist the directors in the verification exercise, which is vital to confirm the accuracy of the statements made in the admission document and to ensure that the document is not misleading to investors. The company's lawyers also provide guidance for the directors as to the nature of their responsibilities and obligations as directors of AIM quoted companies.

4) The Nomad's lawyers

The Nomad's lawyers' primary role is to advise the Nomad/broker on the admission process and any placing and to produce the placing agreement.

5) The Reporting accountant

The role of the reporting accountant in a flotation is separate from that of the company's existing auditors but can be (and often is) fulfilled by a separate team in the same firm. The Nomad may prefer to appoint a different firm to ensure the highest possible level of detachment and independence in this key role. Essentially, the reporting accountant is responsible for reviewing the business, the company's financial records and internal systems and will comment on the company's working capital statements.

The reporting accountant prepares two separate reports. First, a detailed report on the financial and management history of the business, which although not published, provides the management and the Nomad with the information needed to draft the admission document. It also serves as the basis for the reporting accountants' second and shorter report, which is published as part of the admission document itself. The reporting accountants will also prepare a report for the Nomad on the company's projected working capital position following admission (normally for the 12 to 18 month period following flotation). They may also advise on the tax implications of the issue.

6) Other advisers

Depending on the method of flotation and the specific circumstances, a company might also decide to use a number of other advisers in particular areas. The most likely is a firm of financial PR consultants, to maximise awareness of the company and its products or services amongst the general public and the professional investment community in the run up to the flotation. Companies coming to market often underestimate the importance of public profile and press contacts. The financial PR consultants should also help ensure that any public statements and press releases are permissible under the relevant disclosure regulations. A company will also find that by helping to generate press interest and publicity, the financial PR consultants can play a key role in sustaining awareness and liquidity after the flotation. An applicant company may consider media training for those key directors who will be under the spotlight.

A natural resources company will generally require a competent persons' report to be included in the admission document. The AIM Rules contain specific requirements in this regard.

Other advisers you may need include: registrars to manage the company's share register; printers for accurate and speedy production of documentation; chartered surveyors/valuers to assess property values; actuaries to assess the position of company pension schemes; receiving bankers to handle share applications (only in a public offer); trademark or patent agents where a report on intellectual property is regarded as important and insurance brokers to check that all risks are adequately covered.

Beginning the valuation process

The market value of the company is clearly central to the flotation. If funds are to be raised, it will affect the proportion of the company's capital which needs to be sold or issued. Also, the value of the business might be affected by any corporate restructuring and board appointments made in the run up to the float. The final valuation achieved on flotation will depend on market conditions at the time.

Method of flotation

Depending on the nature of the business and its capital requirements, the company may come to the market in any of the following ways:

1) Public offer

In a public offer, the broker will offer shares to private and/or institutional investors. A public offer is generally the most expensive route to the market, and is often used by larger companies. However, it may also bring in private investors who are important in increasing the liquidity of a company's shares.

2) Placing

A placing usually involves offering the shares to a selected base of institutional investors. This allows the company to raise capital but with lower costs and greater freedom in terms of how it is done. It also potentially gives a company more discretion to choose its investors. However, the downside is that it can result in a narrower shareholder base than a public offer which can give rise to less liquidity in the shares. The shares being offered will generally be new shares although existing shareholders may be invited to sell some of their shares in the process.

3) Introduction

An introduction is where a company joins the market without raising capital and is therefore often the least expensive and most straight-forward way of joining the market. Generally, a company can use this method if there is already a fair spread of shareholders. It keeps costs to a minimum. However, the downside of an introduction is that the opportunities for boosting the company's profile and visibility are more limited than with other methods of flotation.

4) Reverse

A reverse is where the business is acquired by a company which is already listed on AIM but the number of shares being issued by way of consideration is greater than the number already in issue so that the selling shareholders (or some of them) acquire control of the AIM quoted company. The company already on AIM might only be a "shell", possibly with cash already in it.

WHAT DOCUMENTS DO WE NEED TO PREPARE?

Admission document

Whatever method of listing, the admission document (or prospectus, if required) will have to be prepared and is central to the flotation. The quality of the document can have a fundamental impact on the success of the flotation and the company and its advisers should pay close attention to both its style and content.

If the company is coming to market via a placing or public offer, then it may decide to issue a "pathfinder" document, which contains almost everything that a final admission document (or prospectus) would except for the issue price of the company's securities. The pathfinder can be used to market the issue to selected potential investors, on a restricted basis. For bigger issues, a book building process may be conducted by the broker to identify potential institutional investors and the price at which they are prepared to buy the company's securities. The full admission document (or prospectus) is then issued, complete with the price and a notice of any changes from the contents of the pathfinder document.

Placing agreement

The placing agreement sets out the mechanics under which the broker will place shares with investors to raise money for the company (and sometimes selling shareholders). Typically it includes the broker's corporate finance fee and commission arrangements, which will be a percentage of the total money raised. The agreement also includes statements about the company and its business, which are given by the company and its directors to protect the Nomad/broker's position.

The admission document and the placing agreement are the most important documents involved in an AIM flotation. However, the flotation process involves the production of many other documents which are set out
in the "Key Documents" section of this guide

HOW LONG DOES IT ALL TAKE?

The length of time which it takes to bring the company to come to market is influenced by many variables. The size, sector and structure of the company, the method of flotation being used, the degree and complexity of due diligence which has to be conducted by professional advisers and market conditions at the relevant time, all can impact on the timetable.

The run up to the flotation is generally described in terms of a timetable counting down to admission and "impact day" (when the full admission document (or prospectus) will be issued to investors, and the flotation officially announced). The admission process is generally regarded as starting 12 weeks before admission, depending on the size, complexity and method of flotation. The period up to 24 weeks before impact day is regarded as pre float preparation, during which time the company should prepare itself for life as a public company and discuss the planned float with potential advisers.

Our indicative timetable for the AIM admission process outlines the key stages of any application.

HOW MUCH DOES IT ALL COST?

The costs involved in a successful AIM flotation can vary significantly. Factors such as the route that is chosen (for example, an introduction as opposed to a placing), the amount of money that is raised, (commissions charged by the brokers will range from 3% to 5% of the money raised), whether any material issues arise during the due diligence process that need to be addressed and whether the publication of a prospectus is required, all affect the overall cost of the admission process.

If the flotation is successful, generally all the advisers’ fees will be paid from the funds raised. As a general rule, the total costs of coming to market as a percentage of the funds raised tend to fall as the actual size of the offer increases.

Summary of principal costs on an AIM Flotation (assuming a prospectus is not required)

Item	Cost (excluding VAT and disbursements)
Admission fee (one-off)	This depends on the market capitalisation of the company on the day of admission
AIM annual fee	£4,750
Nomad/Broker's corporate finance fee	This will vary Plus ongoing retainer of Nomad
Nomad/Broker's commission	3% - 5% on all placing shares at the issue price Plus possible option/warrant
Company's solicitors' legal fees	This will vary depending on complexity and scope of work
Nomad's solicitors' legal fees	This will vary depending on complexity and scope of work
Reporting accountants' fees	This will vary depending on complexity and scope of work
PR agents fees	£20,000 – £25,000

Other costs include Registrars fees and printing costs.

WHAT HAPPENS AFTER WE'VE FLOATED?

Once a company has floated on AIM, there are a number of obligations set out in the AIM Rules which the company must comply with on an on-going basis and for which the directors are ultimately responsible. For example, a company admitted to AIM must ensure that the market is properly informed of all developments, transactions, financial results and other information that could affect its financial prospects. The Nomad will continue to advise the directors on their responsibilities and obligations whilst the company's shares are traded on AIM to ensure that the company complies with the requirements of AIM.

WHO DO I CONTACT AT PINSENT MASONS TO START THE BALL ROLLING?

Gareth Edwards