In AIM Notice 46, issued on 11 July 2017, the London Stock Exchange announced the issue of a discussion paper inviting feedback on proposed changes to the AIM Rules for Companies and AIM Rules for Nominated Advisers. The proposals relate to: admission criteria; early clarity for applicants and nominated advisers in the admission process; consistency of approach by nominated advisers in respect of appropriateness considerations; and appropriate levels of corporate governance. The Discussion Paper also considers enforcement and further supervisory powers and sanctions.
Companies on AIM
AIM primarily caters for equity securities of small and medium-sized growth companies and enables such companies to join a public market. A higher investment risk can often attach to investment in an AIM company compared to larger or more established companies. However, as AIM has matured, there has been an evolution in the size of companies on AIM, with 53% of companies now having a market capitalisation above £25 million, compared to 33% in 2000.
The role of the nominated adviser
Nominated advisers are responsible to the Exchange for advising and guiding AIM companies on their responsibilities under the AIM Rules and for assessing the appropriateness of companies to be admitted to AIM. Currently, nominated advisers are required to approach the Exchange at an early stage of a new application for admission to discuss a company, where there are any atypical features or potential issues that may be of concern to the Exchange. The discussion paper includes proposals to extend and formalise the current process of early discussions. Where an issue is either not raised in a timely fashion or is identified towards the end of the application process, there can be delay in, postponement or withdrawal of a proposed admission.
A number of market participants have suggested that the process of holding early discussions about forthcoming admissions be formalised. Earlier visibility on applicants could reduce the risks of delay or postponement and provide greater clarity for the nominated adviser and the applicant as they prepare for admission.
Formalising the early notification process
At an earlier stage in the process of providing the Exchange with the information required by Schedule One to the AIM Rules (as required by Rule 2), the nominated adviser would be required to enter into confidential discussions with the Exchange setting out key information regarding the company and its proposed admission to AIM. The main types of information that would be essential to those discussions would be similar to the information specified in the Schedule One form, including:
- details of the proposed board of directors and any persons discharging managerial responsibilities (who are not directors)
- details of any proposed fundraising
- significant shareholders pre-admission and expected post-admission, including details of any concentrated or connected shareholdings
- names of the broker, reporting accountant and solicitors for the AIM company and nominated adviser being used for admission
- details of the shares not in public hands and how the nominated adviser is satisfied that there will be adequate free float
- details of other markets upon which the company has admitted securities
- details of any issue that has arisen as part of the nominated adviser's due diligence process that may give the Exchange cause to question whether the admission of the applicant may be detrimental to the reputation or integrity of AIM and how the nominated adviser has reached a view that this issue does not affect the applicant's appropriateness for AIM.
This proposal would extend the practice of early discussions to all proposed admissions and codify this into the rules. It would not diminish a nominated adviser's overall obligations to the Exchange to be satisfied about a company's appropriateness or the nominated adviser's ongoing obligation to update the Exchange about any new information or any change of circumstances during the admission process, which in the view of the Exchange remains key to ensuring the long term success of AIM.
This discussion paper seeks views on these proposals, including at what point in the process early discussions should take place to make it feasible for the nominated adviser to have identified the information required and for the discussions to have a benefit to the parties.
Guidance on when the Exchange may delay or refuse admission
If there are issues identified prior to admission which the Exchange considers the nominated adviser has not properly addressed, the Exchange has discretion under Rule 9 of the AIM Rules to delay or impose conditions on an admission should the issues identified remain unaddressed. The Exchange may refuse an admission if it considers that the admission may be detrimental to the orderly operation or reputation of AIM or if it considers that the applicant will not comply with a special condition which the Exchange considers appropriate. In practice, issues are usually either addressed satisfactorily or the application is withdrawn and so this power is rarely used.
In order to provide consistency of approach from nominated advisers and to provide certainty as to the Exchange's expectations, the Exchange proposes to include in the AIM Rules for Nominated Advisers, a non-exhaustive list of factors as guidance about the types of issues that may give rise to concerns. These include concerns as to the good character, skills, experience or previous history of a director, key manager, senior executive, consultant or shareholder; where the rationale for seeking admission to AIM is not clear; where there has been formal criticism of the applicant and/or any of its directors by other regulators, governments, courts, law enforcement or exchange bodies; where the applicant has been denied admission to trading on another platform or exchange; and where the corporate structure and business model gives rise to concerns regarding the appropriateness for a public market. A nominated adviser would be expected to consider the interaction of the different factors when making an overall assessment of appropriateness.
The Exchange seeks views on whether a non-exhaustive lack of factors to be taken into account by nominated advisers when assessing appropriateness for AIM would be helpful.
As AIM has matured, the Exchange has amended the AIM Rulebooks. For example, the requirement for mining and oil and gas companies to publish an expert report was introduced in March 2006 and minimum fundraising rules for investing companies were introduced in April 2005. Notwithstanding these changes, there are no specific eligibility criteria regarding minimum size, trading history or percentage free float for companies seeking admission to AIM.
Free float and an orderly market
Sufficient free float is fundamental to the orderly trading and liquidity of shares and therefore a key consideration as to whether an applicant is appropriate to be admitted to AIM. The AIM Rules for Companies do not include a specific threshold for free float and the Exchange does not currently consider that a prescribed threshold is appropriate. The Exchange considers that current guidance (see Inside AIM – 1 June 2015) together with early discussions with nominated advisers strikes an appropriate balance between supporting liquidity in the secondary market and supporting innovation and emerging growth companies.
On an application for admission the Exchange wants to understand the nominated adviser's consideration relating to free float, taking into account factors such as the range and spread of shareholders on admission, including the participation of recognised institutional shareholders and the influence and visibility of any major shareholder.
This approach takes into consideration the nature and spread of the investor base, recognising that a company which may appear to have a high free float at admission may not automatically have higher levels of trading if specific investors buy and hold shares for the long term.
The discussion paper seeks views as to whether the introduction of a minimum shares in public hands requirement should be considered or whether the current approach strikes the right balance.
Minimum fundraising requirement for new applicants to AIM
The Exchange does not currently believe that it would be appropriate to apply minimum overall size of applicant criteria at admission or on an ongoing basis.
However, having introduced a minimum fundraising requirement for investing companies of £6 million in cash via an equity fundraising on, or immediately before, admission (Rule 8 of the AIM Rules), it would, in the view of the Exchange, be beneficial to introduce a minimum capital raising threshold to a wider set of new applicants. The threshold could be similar to Rule 8. A minimum fundraising requirement set at an appropriate level would necessitate external, often institutional, participation ensuring an extra level of scrutiny over the business, the applicant's directors and the company's valuation on admission. The discussion paper seeks responses on an appropriate minimum fundraising threshold. The thresholds suggested range between £2m and £6m. The intention of the proposed threshold would not be to exclude companies where the purpose of the criteria can be met by other evidence, such as where a company is admitted to another market (and already has track record as a public company). Accordingly, if such a threshold were introduced, some limited exceptions would be included. Therefore, the Exchange seeks views as to whether the proposal should apply to all applicants or just non-revenue generating businesses at admission.
Based on previous admissions, the vast majority of applicants would exceed the required minimum fundraising, based on a range of £2m - £6m. The Exchange believes that the benefits of being admitted to AIM are maximised where companies raise capital to support their future growth. If this requirement was introduced, the Exchange would expect it to be satisfied by an independent fundraising and not by funds from related parties, unless the related party is a substantial shareholder only and an authorised person.
Corporate governance requirements for AIM companies
Under the AIM Rules for Companies, an AIM company must consider corporate governance with its nominated adviser, which forms part of the nominated adviser's wider considerations about the appropriateness of the company. This allows a company to focus on what is meaningful and appropriate to its particular circumstances. This approach recognises that a 'one size fits all' regime is not appropriate for small and medium-sized growth companies. Over the past 10 years the Exchange has amended the AIM Rules requiring companies to consider their governance arrangements and to provide specific disclosures to investors. The Exchange has also issued guidance in Inside AIM (Issue 2) setting out its views on the importance of corporate governance and published a guide to Corporate Governance for Main Market and AIM Companies.
Composition of Boards
The AIM Rules require nominated advisers to assess the efficacy of boards. There are no specific composition requirements.
Whilst acknowledging that the roles of chairperson, finance Director and non-executive directors are integral to a well composed board and that only in exceptional circumstances should the board of an AIM company not contain these roles, the Exchange recognises that good board composition is no guarantee against corporate failure. Meaningful consideration of relevant corporate governance issues, with the support of the nominated adviser, is more important, in the view of the Exchange, than standardised disclosure.
The current corporate governance disclosure requirements for AIM companies are set out in AIM Rule 26. It requires disclosure by an AIM company of the "details of the corporate governance code that the AIM company has decided to apply, how the AIM company complies with that code, or if no code has been adopted this should be stated together with its current corporate governance arrangements". This allows the board to consider and balance the needs and resources of the business at its particular stage of growth, with the need to have an effective governance system.
The Exchange welcomes feedback on whether the corporate governance arrangements currently applicable to AIM companies are appropriate or should be revised. An option includes making it mandatory for AIM companies to comply and explain against one of the industry codes of their choosing, such as the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies and the UK Corporate Governance Code. The Exchange expresses the view that it remains preferable for AIM companies to have a range of options to suit their specific stage of development and size.
London Stock Exchange's remit
The Exchange's remit is often perceived to be wider than it is, extending to matters which are subject to legal and often criminal sanctions. However, the Exchange's remit is limited to a company's conduct in relation only to its AIM Rules obligations, or in the case of a nominated adviser, the duties it owes to the Exchange.
The AIM Rules for Companies are focused on disclosure to ensure investors have the relevant information to make informed investment decisions. They do not duplicate statutory obligations, for example, in areas such as market abuse, short selling, fraud, directors' duties, takeover code obligations and financial reporting standards. The nominated adviser cannot guarantee an AIM company's compliance either with the AIM Rules or its wider statutory responsibilities.
The Exchange seeks views on any further ways it can educate market participants as to what if can and cannot do in respect of its remit beyond the information already on its website.
Breaches of the AIM rules and investigations
The Exchange has a variety of private and public sanctions it can use in respect of the enforcement of its various rulebooks. This range of sanctions enables the Exchange to take the most appropriate action taking into account the circumstances of each case. Through the use of these sanctions, the Exchange seeks to bring to account those who do not comply and provide education to the market to ensure changes in future behaviour and to deter future breaches.
The Exchange intends to undertake a further review of the AIM Disciplinary Procedures and Appeals Handbook with a view to considering proposals to enhance greater understanding of the number and type of its investigations. The Exchange also intends to review its supervisory powers and sanctions policy to ensure consistency of standards across the market and will also consider whether there is merit in introducing automatic fines for non-compliance with rules such as late filing of accounts and disclosure of regulatory information on an AIM company's website. The Exchange anticipates a further consultation on proposed changes to the Disciplinary Handbook.
The Exchange asks for views on automatic fines for explicit breaches of the AIM Rules and the types of breaches which should be subject to automatic fines and the level of fine. Also, views on any other changes to the Disciplinary Handbook which the Exchange should consider.
The Exchange invites responses by 8 September 2017. Having considered the feedback, the Exchange will then evaluate whether any changes to the AIM Rulebooks should be drafted for consultation.