AIM - London Stock Exchange Group · 2013-06-14 · AIM companies since the market’s launch is...

AIM

A guide to AIMPublished by White Page Ltd in association with London Stock Exchange, with contributions from:

Publishing editor: Nigel Page

Design: London Stock Exchange plc

Printing and binding: Argent Litho Ltd

A guide to AIMis published by:

White Page Ltd, 17 Bolton Street,London W1J 8BH,United KingdomPhone: + 44 20 7408 0268Fax: + 44 20 7408 0168Email: [email protected]: www.whitepage.co.uk

First published 2005ISBN: 978-0-9565842-0-5

A guide to AIM© 2010 London Stock Exchange plcand White Page Ltd

Copyright in individual chapters rests with theauthors. No photocopying: copyright licencesdo not apply.

This guide is written as a general guide only. Itshould not be relied upon as a substitute forspecific legal or financial advice. Professionaladvice should always be sought before takingany action based on the information provided.Every effort has been made to ensure that theinformation in this guide is correct at the time ofpublication. The views expressed in the articlescontained in this guide are those of the authors.

AIM is a registered trademark of London StockExchange plc. The publishers and authorsstress that this publication does not purport toprovide investment advice, nor do they bear theresponsibility for any errors or omissionscontained herein.

Contents

3 ForewordLondon Stock Exchange

4 AIM – the most successful growth marketLondon Stock Exchange

10 AIM advisersLondon Stock Exchange

14 IPO groundworkGrant Thornton UK LLP

26 Financial considerationsGrant Thornton UK LLP

38 Legal work and due diligenceOlswang LLP

46 Raising finance Numis Securities Limited

54 Communicating with investors – it mattersBrunswick Group LLP

60 Being on AIMSeymour Pierce Limited

70 Useful contacts

A guide to AIM

Today AIM is firmly established as one of the world’s leading growth markets with a universe ofcompanies from a wide range of sectors around the world. Companies, intermediaries and investorsrecognise AIM as the market of choice for smaller, growing companies as it continues to help them raisecapital at admission and throughout their time on market.

Since its launch in 1995, more than 3,100 companies have joined AIM, raising over £67 billion to fundtheir growth. A number of factors have contributed to this success including:

l a balanced approach to regulation which facilitates a smooth transition to becoming a public company and allows companies to focus on growing their business once on market

l a network of advisers that is experienced in supporting companies from the time they first consider a flotation, through to helping them raise capital to fulfil their growth potential

l an international investor base that has the knowledge and understanding to effectively provide capital to companies as they progress and has confidence in the regulatory environment.

To build on these foundations, the London Stock Exchange continues to support the expansion of theunique community that makes AIM a success. Looking to the future, we remain committed to providing ahighly regarded and efficient market for small and medium-sized companies to raise the capital they needto realise their ambitions and potential.

The decision to take your company public is one of the most significant steps you may take. With this inmind, this publication brings together in-depth knowledge and insight from some of the key advisersexperienced in bringing companies to AIM. Their perspectives will inform readers about the principalissues that can arise during the process of joining AIM, as well as the ongoing responsibilities andopportunities that arise once on market.

I hope you find this publication useful, and wish you every success in the future development of your business.

ForewordBy Marcus Stuttard, Head of AIM, London Stock Exchange

A guide to AIM

Page 3 A guide to AIM

AIM is London Stock Exchange’s (the ‘Exchange’s’)market for smaller and growing companies. Launchedin 1995, it is now firmly established as a leadinggrowth market with the critical mass to provide firmsfrom a wide range of countries and sectors withaccess to a diverse set of investors, who genuinelyunderstand the needs of entrepreneurial businesses.

AIM serves as a mechanism for companies seekingaccess to capital to realise their growth andinnovation potential and since launch has helped over3,100 companies raise over £67 billion through newand further capital raisings. AIM plays a vital role inthe funding environment for small and medium-sizedenterprises as they develop their businesses.

Unique global community

Dynamic, growing companies from across the worldcontinue to be attracted to the benefits of being onAIM. AIM is home to 1,253 companies with a totalmarket value of almost £65 billion, 20 per cent ofwhich are incorporated overseas. Together, these

companies comprise a unique global community ofinnovative businesses representing the future of theworld economy. As well as being geographicallydiverse, AIM is able to support the financing needs ofcompanies from over 40 different sectors.

AIM is the only major growth market that has livedthrough two complete economic cycles. The fact thatAIM companies raised £4.7 billion through furtherissues during 2009, a year of uncertainty andupheaval in capital markets worldwide, demonstrateshow interest in small and mid-cap companies remainsstrong amongst the internationally focused investorcommunity in London.

Why join a public market…?

Joining a public market – be it AIM or the MainMarket – is a way to grow and enhance yourbusiness. When considering the available financingoptions the following factors will often be viewed asthe key benefits of admission to a public market:


AIM – the most successful growth marketBy London Stock Exchange

0.10.8 0.7 0.6 0.9

3.1

1.1 1.02.1

4.7

8.9

15.7

4.35.5

16.2

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Further

New

Money raised at admission and through further issues: 1995 – 2009

Page 5AIM - the most successful growth market

l to provide access to capital for growth, enablingcompanies to raise finance for further development,both at the time of admission and through furthercapital raisings

l to create a market for the company’s shares,broadening the shareholder base

l to place an objective market value on thecompany’s business

l to encourage employees’ commitment andincentivise their long-term motivation andperformance, by making share schemes moreattractive

l to increase the company’s ability to makeacquisitions, using quoted shares as currency

l to create a heightened public profile, stemmingfrom increased press coverage and analysts’reports, helping to maintain liquidity in thecompany’s shares

l to enhance the company’s status with customersand suppliers.

...and why AIM?

Before joining AIM, businesses may have been venturecapital-backed or be more established companies thathave decided that AIM is the best way to take theirbusiness to the next stage of growth.

Whatever their background, there are many reasonswhy ambitious, growing companies continue tochoose to join AIM. These are summarised in theinformation panel below.

Companies that choose to join a public market inLondon have a choice depending on their size, stageof development and capital raising requirements andshould discuss the options available to them withtheir advisers. The Main Market is for larger moreestablished companies and companies have thefurther option of two types of listing – a PremiumListing or a Standard Listing. Companies with aPremium Listing are required to meet the UK’ssuper-equivalent rules which are higher than the EU directive minimum requirements for a StandardListing, and as a result benefit from access to awider range of investors.

The table on page 6 highlights the key differencesbetween the admission criteria for AIM and the Main Market.

Balanced regulation

AIM’s success is underpinned by its regulatoryenvironment, which has been specifically designedto meet the needs of smaller and growingcompanies while offering appropriate investorprotection. AIM also benefits from being an integralpart of the portfolio of markets offered by the Exchange.

The entry criteria for AIM are tailored for growingcompanies with no trading record required, nominimum size criteria and there is no prescribedlevel of shares to be in public hands.

l Balanced regulationAIM’s balanced regulatory environment, specifically tailored to support the needs of smaller companies

l International investor baseAccess to a wide and diverse range of institutional and retail investors

l Geographical reach and wide sector coverageThe diversity of sectors and regional coverage on AIM, with companies from 40 different industries from over 28 countries

l Expert adviser networkA large and experienced community of expert advisers to help companies join AIM and support them once they aretrading on the market

l Visibility and profileWith customers, suppliers, investors and other key stakeholders

Key reasons why small and growing companies choose to join AIM

particular sectors, such as oil & gas companies andinvesting companies.

International investor base

AIM provides a robust and proven platform forcompanies seeking to raise growth capital, boththrough an IPO at the time of admission, and throughfurther fundraisings. The total of £67 billion raised byAIM companies since the market’s launch is evenlysplit between new capital raised by companies joiningthe market, and further capital-raisings by existingAIM companies.

This track record reflects AIM companies’ ability toaccess London’s large and highly receptive investorbase. As a result, AIM, along with private equity, hascome to represent a vital link in the global risk capital‘funding ladder’, supporting innovation, enterprise andjob creation.

Institutional and retail investors invest in AIMcompanies. Given the variance of marketcapitalisations on AIM the market appeals to a widerange of investors. For example, larger internationalinvestment firms can be found on the shareholderregisters of the larger AIM companies and specialist

Once admitted to AIM, the ongoing responsibilitiescontinue to remain straightforward and are aimed atencouraging growth. For example, there is norequirement to seek shareholder approval or preparecirculars except in circumstances where a transactionis classed as a reverse takeover or a disposalresulting in a fundamental change in business.Integral to both the admission process and life onAIM is that the company must work closely with theirNominated Adviser (‘Nomad’) to ensure that theiractions are fair and reasonable for shareholders.

As AIM has grown, the Exchange has ensured thatthe market’s regulatory framework has continued toevolve and develop to meet the changing needs ofinvestors and companies. These changes havealways balanced strong investor protection principleswith the needs of smaller companies, allowing themto grow.

There are two sets of rulebooks, one for companies,and one for Nomads. The AIM Rules for Companies(the ‘AIM Rules’) are tailored to the needs ofbusinesses joining AIM, and are designed to be easilyunderstood. The development of the AIM rules hasincluded the creation of specific guidance notes for

Page 6 AIM - the most successful growth market

Differences between admission criteria and continuing obligationsfor AIM and the Main Market

AIM Main Market

l No minimum market capitalisation l Minimum market capitalisation

l No trading record requirement l Normally three-year trading record required

l No prescribed level of shares to be in public hands l Minimum 25 per cent shares in public hands

l No prior shareholder approval for most transactions* l Prior shareholder approval required for substantialacquisitions and disposals (Premium Listing only)

l Nominated Adviser required at all times l Sponsors needed for certain transactions (PremiumListing only)

l Admission documents not pre-vetted by the Exchange orby the UKLA in most circumstances. The UKLA will onlyvet an AIM admission document where it is also aProspectus under the Prospectus Directive

l Pre-vetting of prospectus by the UKLA

*unless the transaction is a reverse takeover or disposal resulting in a fundamental change of business

Page 7AIM - the most successful growth market

investors, such as Venture Capital Trusts, invest inmany of the smaller companies.

Geographical reach and sector diversity

In terms of industries, the 40 sectors represented onAIM reflect the full spectrum of business activityacross the world (see sectoral chart above). A featureof AIM that is increasingly evident is the growingdiversity of companies ranging from software tomining and computer services to real estate andsupport services. AIM also provides an opportunityfor an increasingly important global theme, renewableenergy, and is ideally positioned to support thefinancing of exciting growth stories within thecleantech sector. This diversity underlines AIM’scontinuing appeal to growing companies in all industries.

The increasing scope, profile, size and maturity of AIMhave confirmed the validity of the underlying premiseupon which AIM is built – that ambitious smaller andgrowing companies require markets that arespecifically designed for their needs. While AIM wasinitially launched to meet these needs among UKbusinesses, the market has become increasingly

international, underlining the similarities betweengrowing companies all over the world.

As a result, some 520 international companiesincorporated outside the UK have joined AIM since itwas founded, and 241 of these remain on the markettoday. In recent years, AIM’s international momentumhas been maintained by strong interest fromcompanies in emerging markets in Asia Pacific, Indiaand Central/Eastern Europe, alongside the market’slongstanding and continuing success amongcompanies in territories such as Australia and Canada.

Adviser network

AIM is supported by a large and highly experiencedcommunity of expert advisers, ranging from Nomadsand brokers to accountants, lawyers and publicrelations and investor relations firms. The outstandingsuccess of AIM is largely due to the dedication andprofessionalism of these advisers.

Each company applying to AIM must appointand retain a Nomad to guide it through the admissionprocess and to advise it during its time as a public

Other 29%

Pharma 3% Travel & Leisure 4%

Equity Investments 5%

Media 6%

Support Services 9%

IT 8%

Real Estate 7%

Mining 11%

Oil & Gas 7%

Other 24%

Oil & Gas 17%

Mining 16%

Real Estate 9%

General Finance 8%

IT 6%

Support Services 5%

Equity Investments 6%

Food 3%

Travel & Leisure 3% Pharma 3%

General Finance 8%

AIM sectors and relative market value

Sectors represented by allAIM companies

Sectors by market value

London Stock Exchange statistics April 2010

company. The Exchange sets strict criteria forbecoming an approved Nomad, in order to safeguardthe integrity of the market, and to ensure that existingand prospective AIM companies have access to thehigh-quality advice they deserve. More details on thevarious advisers to AIM companies are provided inthe next chapter.

Visibility and profile

Admission to AIM provides international visibility andcredibility for companies not only with their customersand suppliers but with a wider set of stakeholdersincluding investors, advisers and analysts. Proactivecommunication with investors and focused investorrelations activities can have a positive impact on thevisibility and liquidity of a company’s stock.

Other market developments

AIM Designated Markets

The Exchange has made it possiblefor some companies whose securities have beentraded upon an ‘AIM Designated Market’ for at least18 months prior to the date of admission to AIM toapply to be admitted to AIM without having to publishan admission document. These companies are knownas ’quoted applicants‘.

Instead of publishing an admission document, acompany qualifying as a quoted applicant is required tomake a detailed pre-admission announcement at least20 business days prior to its expected admission date.The supplement to the pre-admission announcementrequires additional disclosures, which include aconfirmation that the company has adhered to any legaland regulatory requirements of the AIM DesignatedMarket; a description of any significant changes in thecompany’s financial or trading position; and a statementby its directors that they have no reason to believe thatthe working capital available to it will be insufficient forat least 12 months from the date of admission.

Although a full AIM admission document is notrequired, other material information needs to beincluded in the announcement, and therefore a similarlevel of due diligence and preparation for admission

needs to be undertaken as for a standard admission. Itis advisable for a quoted applicant’s proposed Nomadto speak to the AIM regulation team at the earliestopportunity to discuss whether a company is able totake advantage of this route to AIM.

AIM indices to support companies

Today, trading in AIM securities is encouraged andsupported through a number of indices that havebeen developed to improve investors’ ability tobenchmark and trade AIM securities in a variety ofways. The FTSE AIM Index Series includes the FTSEAIM UK 50 Index, FTSE AIM 100 Index, FTSE AIMAll-Share Index and FTSE AIM All-Share Supersector Indices.

The Supersector indices provide investors with 18industry-based benchmark tools, helping them toidentify macroeconomic opportunities for investmentand trading, and to differentiate between theperformance of Main Market and AIM companies in agiven Supersector. These help to boost institutionalinterest and investment in AIM. A further innovationcame in 2009, with the launch of the FTSEEnvironmental Opportunities UK AIM Index, designedto help investors identify and gain exposure tocompanies in six environment-related sectors.

The outlook for AIM

The Exchange is committed to maintaining andextending AIM’s attractiveness to issuers and investorsin the UK and worldwide. With this in mind, theExchange is continuing to work closely withpolicymakers and regulators at a national and Europeanlevel. Our objective is to ensure AIM continues todeliver its distinctive offering to the growingbusinesses that will be the global multinationals of tomorrow.

If you are an ambitious and growing company –whatever your business, wherever you are based andwhatever your sphere of activity – then AIM is anattractive route to a public quote on one of theworld’s most prestigious markets.

Page 8 AIM - the most successful growth market

AIM is the London Stock Exchange’s market forinnovative growing companies from the UK andaround the world. Firmly established as the world’sleading growth market, over 3,100 companieshave raised more than £6 billion since its launch15 years ago.

AIM continues to help smaller and growingcompanies from a wide range of sectors raisecapital at admission through further issues tofund their expansion.

For further information on joining AIM, pleasecontact one of our business development managers:

UK companies +44 (0)20 7797 3429

International companies +44 (0)20 7797 4208

or visit www.londonstockexchange.com/aim

Where ideas take off

Copyright © June 2010 London Stock Exchange plc.

London Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc.

Once you have decided that a quotation on AIM isright for the next stage of your company’sdevelopment, your first step should be to identifyand appoint a Nominated Adviser (‘Nomad’). TheNomad will be your key adviser during the admissionprocess and throughout your life on AIM.

A range of other advisers will also play integral rolesin supporting you throughout the admission processand thereafter. These will usually include a broker, areporting accountant, and legal, public relations andinvestor relations firms. Depending on your business,you may also need other specialist advisers in areassuch as real estate, intellectual property andtechnology to conduct due diligence relevant to your business.

After selecting and appointing your advisers, you willwork in close consultation with them and yourNomad to prepare an admission document whichdetails your investment proposition. The admissiondocument is critical for investors as it includesdetails of your company’s directors, financialposition, business activities and strategy, togetherwith any other relevant information.

The Nomad

The Nomad might be an investment bank, acorporate finance firm or an accountancy firm andmust be approved to act in such capacity by theExchange. To obtain approval as a Nomad, a firmmust first meet the relevant criteria set out in theAIM Rules for Nominated Advisers. This approvalprocess ensures that all Nomads have a deepunderstanding of AIM itself, they recognise theneeds and aspirations of companies seekingadmission to the market, and are experienced inguiding them through the flotation process.

It is the Nomad’s role to assess the company, eachof its directors and its potential advisers forsuitability and reputation issues. It must be able todemonstrate to the Exchange that it has carried outthese responsibilities.

A company admitted to AIM must appoint and retain aNomad throughout its time on market. Among otherthings, the Nomad will:

l undertake due diligence to ensure your company is suitable for AIM

l ensure the directors are appropriate and capable of acting as a board for a company trading on a UK public market

l provide guidance to the company throughout the flotation process

l co-ordinate and oversee the preparation of the AIM admission document

l confirm to the Exchange that the company isappropriate for AIM

l prepare the company for life on a public marketl act as the primary regulator throughout a

company’s time on AIM by keeping abreast of developments at the company, and ensuring the company continues to understand its obligations under the AIM Rules.

A full list of approved Nomads and their contactdetails is available on the Exchange’s website at www.londonstockexchange.com/aim

Selecting the right Nomad is a significant decision foryour company. It is important that your chosen Nomadhas relevant sector experience and understands yourcompany’s business as you are likely to have a longand close relationship with the firm.

The broker

Under the AIM Rules, every AIM company mustretain a broker at all times. Your broker will be asecurities house that is a member of the Exchangeand will have the following key roles in relation toyour AIM flotation:

l support the financing needs of the company by assessing the level of investor interest in your company’s shares at the time of admission to AIM, and in any further fundraisings

l provide ongoing advice on market and tradingrelated matters

l advise on the pricing of shares and investment opportunities.


AIM advisersBy London Stock Exchange

Page 11AIM advisers

The firm you choose to be your Nomad may also havea broker function, and your company may decide toappoint the same firm as Nomad and broker.Alternatively, you can choose to appoint separatefirms to act as Nomad and broker, and you shouldexplore the options most suitable for your company.

When selecting your broker, the firm shoulddemonstrate that it is capable of raising finance in thesector in which you operate and has good relationshipswith investors suitable for investing in your company.

The broker will often have its own institutional researchdepartment which is responsible for producing researchon companies to provide investors with analysis of thecompany and its assets. Alternatively, analyst researchcan be written by a firm independent of the companybut paid for by the company. Analyst research is avaluable tool in raising investor awareness and can bepublished at admission and on an ongoing basis.Improving the information flow about your business toinvestors is key to ensuring a greater understanding ofyour company’s activities, strategy and futureprospects and can have a positive impact on liquidityand share price performance.

A full list of AIM brokers and their contact details isavailable on the Exchange’s website atwww.londonstockexchange.com/aim

Market makers

‘Market makers’ are responsible for ensuring that thereis always a two-way price in the securities in which theyare registered as market maker. They play an importantrole in the secondary market as providers of liquidity,ensuring investors have an efficient means for buyingand selling a company’s security.

A broker can take on the additional role of marketmaker in a company’s securities, and must beregistered with the Exchange to act in this capacity.

Maximising liquidity will be a key focus for yourcompany once on market but planning can take placeduring the admission process to positively influencethe level of trading from the outset. While a marketmaker’s role is to improve liquidity, there are a numberof factors that influence liquidity. A company which

actively engages with investors, considers the level ofshares in public hands and implements acomprehensive communications strategy can improvethe level of knowledge about its business amongstboth existing and potential investors, and have apositive impact on the liquidity of its securities.

The reporting accountant

Your reporting accountant’s role will include reviewingand reporting on several key aspects, includingfinancial position, financial reporting procedures,working capital, tax and share incentive schemes andthe disclosure of historical financial information. Infulfilling these roles, the reporting accountant isresponsible for raising potential problems early on inthe process so that they can be addressed as soon aspossible. The reporting accountant brings a valuableindependent perspective to the flotation process, andprovides additional assurance to investors that theappropriate financial due diligence has taken place onthe company.

The law firm

During the flotation process, your law firm will adviseon a wide range of issues, including the structuring ofthe company and its subsidiaries, the requireddocumentation, and the directors’ responsibilities inrelation to the AIM flotation and any associatedfundraising. More specifically, your lawyers’ role will include:

l conducting legal due diligence on the business, including verifying ownership of assets

l advising on the drafting of the admission document

l negotiating the terms of the placing agreementbetween the company, the directors and the Nomadand broker

l preparing employment agreements for directors and other key staff

l advising your company’s directors on their responsibilities and corporate governance in conjunction with the Nomad who has these responsibilities in accordance with the AIM Rules

l advising generally on the legal aspects of theflotation process and the continuing obligations onAIM.

Also, other lawyers may be instructed separately byyour Nomad and broker to assist in the review of youradmission document and any other investmentcommunications that may be issued, in order toprovide advice that is independent from the company.

The public relations (PR) firm

Clear and effective communication with the mediaabout your company’s growth story, strategy andmanagement team will be critical both for achieving asuccessful admission to AIM and for maintaining yourprofile and reputation once you are on the market. Toachieve these goals, your financial PR firm will designand implement a communications strategy aroundyour admission to the market, while also acting asyour ‘eyes and ears’ in the media, providing usefulfeedback on how your company is perceived and onhow these perceptions can be improved. The PR firmwill work closely with your other advisers in producingthe institutional roadshow presentation which willform the basis for the face-to-face meetings withinvestors during the roadshow. While it will notcontain information that is not in the admissiondocument, it should be structured in a format tomaximise its effectiveness as a sales tool. Once yourcompany is on AIM, the PR firm will continue to workon an ongoing basis to build and maintain mediainterest, going beyond the regulatory disclosurerequirements and communicating regularly andproactively with selected media organisations.

Investor relations (IR) firm

Many leading financial PR firms are also strong in IR,and there is significant overlap between the two roles.Both focus on communication and while the targetaudiences differ, the IR programme should be run in

close coordination with financial PR. As a result,many companies coming to AIM choose a single firmto handle both PR and IR. The IR firm’s core role is tocommunicate effectively with the investmentcommunity and – post-admission – with thecompany’s shareholders in particular, to ensure thatcompany’s share price on AIM truly reflects its value.The IR firm’s role will include managing expectationsin the investment community, and researching marketsentiment to help fine-tune the company’s messaging.The IR programme may also involve a detailed reviewof the company’s share register to enable targeting ofkey shareholders and roadshows to promote thecompany to fund managers and retail investors.

Registrar

Although it is not a specific requirement in the AIMRules, a company will normally appoint a registrar inorder to maintain and keep the register ofshareholders up to date. The registrar will also provideinformation to the Nomad and your other adviserswhen appropriate, such as in instances where thecompany may need to distribute a circular or similarshareholder publication.

The team of advisers that a company chooses toappoint will be integral in supporting it throughout theflotation process and once admitted to AIM. It isimperative that you select firms that have appropriatesector and market experience and are committed toworking with you after admission. One of the keypieces of advice that existing AIM companies feedback to the Exchange is that it is vital to havepersonal chemistry with your advisers, since you willbe working very closely together.

Page 12 AIM advisers

AIM is the London Stock Exchange’s market forinnovative growing companies from the UK andaround the world. Firmly established as the world’sleading growth market, over 3,100 companieshave raised more than £6 billion since its launch15 years ago.

AIM continues to help smaller and growingcompanies from a wide range of sectors raisecapital at admission through further issues tofund their expansion.

For further information on joining AIM, pleasecontact one of our business development managers:

UK companies +44 (0)20 7797 3429

International companies +44 (0)20 7797 4208

or visit www.londonstockexchange.com/aim

Where ideas take off

Copyright © June 2010 London Stock Exchange plc.

London Stock Exchange, the coat of arms device and AIM are registered trademarks of the London Stock Exchange plc.

As you will have seen from the ‘AIM advisers’ chapter,one of the Nomad’s principal tasks is to assess, onbehalf of the London Stock Exchange (the ‘Exchange’),whether a company is appropriate for admission to AIM.In this chapter, we will look at the factors that a Nomadwill consider when determining suitability.

While a company may be suitable for AIM, there maybe other options better suited to the company and itsshareholders. In this chapter we will also consider thefactors that the prospective AIM company should takeinto account when deciding whether to seekadmission to AIM.

Finally, while a prospective AIM company may be ideallysuited to the market, and AIM may be its best option,the company may not yet be ready for admission. In thischapter we will look at the different matters theprospective AIM company should consider in order toprepare itself for life on a public market.

Determining suitability for admission

The Nomad’s primary responsibility and duty of care isowed to the Exchange and it must ensure that theadmission of a company to AIM and its conductfollowing admission do not impact adversely on thereputation or integrity of the Exchange. For a Nomad,the reputation and integrity of the market are ofparamount importance.

A Nomad should only proceed with the admission of acompany if it is confident that the company willenhance the market’s reputation and has a realisticchance of delivering real value to shareholders. Inassessing a company’s suitability, a Nomad must askif it really wants to be associated with that company.Central to this decision will be strong managementthat will strive for best practice in corporategovernance and communicate effectively with themarket, a sound strategy and a realistic possibility ofcreating value for shareholders.

Sector

There are over 40 business sectors represented byAIM companies, so there are very few types ofbusiness that would not in principle be able to find ahome on AIM. It is preferable, however, that thebusiness is operating in a market with good visible

growth over the medium term, although a companythat is operating in a static or declining market may beattractive, if it has strong management and is growingits market share or consolidating the sector.

For certain types of company – for example, miningand natural resources or biotechnology companies –its assets and the track record of management inexploiting such assets are most important. Forinvestment funds, many of which have chosen to joinAIM, the track record of the investment manager isthe critical factor in deciding whether to invest in thebusiness. A Nomad considering advising a start-upbusiness – a rarer event in risk-averse marketconditions – will largely base its decision onmanagement, strategy and preparatory workundertaken.

However, irrespective of sector, in determiningwhether a trading business is likely to generate valuefor shareholders, the Nomad will carefully consider thecompany’s past performance.

Historic track record

As AIM is designed for smaller, growing companies,there are no requirements in the AIM Rules for aprospective company to be of a certain size, or tohave an established trading record.

However, a Nomad would expect that a strong AIMcandidate (other than a pre-revenue business orperhaps a natural resources business) has thefollowing characteristics:

l a record of sustained growth over at least three years

l forecasts that show sales continuing to growl a record that compares favourably with its peer group.

Where sales growth appears to have slowed or evenreached a plateau, this presents a warning light toadvisers and investors. Raising funds at initial publicoffering (‘IPO’) to provide the company with theresources to fulfill orders it is unable to complete, or toensure quality control before continuing to expand, is amuch more compelling reason to support the companythan purely to expand its sales and marketing.


IPO groundworkBy Colin Aaronson, Director, Grant Thornton UK LLP

Page 15IPO groundwork

For a trading business, margins should be steady orincreasing and gross profit should be growing in linewith or better than sales. If it is not, it could implysupply constraints or difficulty generating marginalsales. Even if gross profit is growing in line with sales,care needs to be taken to ensure that direct costs arecorrectly attributed at the cost of sales level and notincluded in indirect costs. For that reason, gross profitcannot be read in isolation and must be looked atalongside EBITDA (earnings before interest, taxation,depreciation and amortisation) and net profit (or loss)before taxation.

EBITDA can be helpful in that it shows the operatingperformance of the business, although the trueoperating performance must take account of the costof using fixed assets. Taken alone, it can bemisleading as costs can be eliminated at this level bycapitalising them. Accordingly, EBITDA must bereviewed in line with sales, gross profit and net profit(or loss) before taxation.

The Nomad will also review the balance sheet toensure that it supports the reported historic tradingresults. Particular emphasis will be placed on debtors– increasing debtor days could indicate quality issuesor lack of financial control, or even call into questionthe validity of the sales numbers.

When analysing the financial track record of abusiness, the Nomad will also look at:

l whether the company has a history of meeting its forecasts

l whether the company has a record of clean audit reports by an appropriate firm of auditors

l whether the accounting policies adopted are in line with best practice for the industry

l the extent to which the company has managed to raise finance from external investors and whether each round has been at a higher valuation than the previous round.

The Nomad’s review of the historic financialinformation about a company forms a vital part of itsassessment of a business and its prospects. It will,however, be reviewed in greater depth by reportingaccountants as part of their financial due diligence.

Other aspects of a company’s track record

Whilst the financial record provides the most objectiveand testable record of a business, the Nomad will lookat other aspects of a company’s history in assessingits ability to manage future growth. These includefactors such as:

l does the company have a record of successfully acquiring and integrating other businesses (this is particularly relevant for a company that is seeking to use quoted paper to grow through acquisition)

l level of staff turnoverl compliance with health and safety and other statutory regulations

l compliance with quality management and other non-statutory standards

l publicity about the business (both good and bad)l litigation.

Management

A company will be judged by investors, above all, onthe quality of its management. To a large extent, thefinancial performance of the company will give a clearindication of the way a business has been run and, byextension, the quality of the management team.Although a company’s commercial success wouldsuggest that its managers are capable, the realitycould be that they are running an underperformingcompany in a successful sector. It is thereforeimportant to benchmark the company against its peergroup. Management may also be reacting to eventsrather than driving the business forward. The Nomadwill therefore need to analyse and assess thestructure and composition of the management team.

A strong management team typically has the followingcharacteristics:

l a clearly defined structure, with a clearly identifiable leader

l a full set of skills encompassing finance, operations, marketing and sales. Operations include procurement, human resources, production and distribution. In most cases, an experienced and capable finance director is essential to the success of a quoted company

l there is strength in depth. A company must have a sufficiently strong management team such that the loss of one particular individual will not cause

irreparable damage to the business (although this can be mitigated to some extent by keyman insurance). More subjectively, a business whose leaders are too ‘hands-on’ will not be able to think strategically. From a more practical point of view, the IPO process can be extremely time-consuming for management and the company must be able to continue its business without suffering from the absence of key directors

l its team members can demonstrate relevant experience in business generally and specifically in the sector in which the company operates

l its members work well together. A strong managing director should have colleagues who are able to stand up to and not be dominated by him or her

l it is able to provide accurate, reliable andcomprehensive management information in atimely manner – otherwise, this impacts thecompany’s ability to have the appropriate systemsnecessary to run the business. Indeed, the Nomadhas an ongoing obligation to the Exchange to besatisfied that the company has sufficientprocedures and controls

l the accounting policies selected by the management team should reflect industry best practice and should be consistently applied

l it should have strong non-executive directors who are experienced in City practices and are able to impose proper public company practices on their colleagues.

As part of its procedures for determining whether acompany has suitable management, the Nomad willconduct due diligence on the directors andsometimes on key managers. Directors will be askedto complete a questionnaire that gives informationsuch as past and present directorships and details ofany personal bankruptcies or business insolvencies.This information must be disclosed in the AIMadmission document.

The Nomad will review each director’s curriculumvitae, from which information will also be taken andincluded in the AIM admission document. Referenceswill be taken and detailed background searches will bemade using either publicly available information orspecialist agencies where appropriate.

Non-executive directors

In the UK, the board of directors has responsibility forrunning the company. It is made up of executivedirectors, managers of the business and non-executive directors serving as representatives of allshareholders. At board meetings, the financial andoperating performance of the company are consideredand major decisions about the business are taken. It isalso the forum where the non-executives can questionand challenge their executive colleagues.

In order to fulfil that role, the non-executives need tobe experienced, financially literate and independent ofthe company. The ideal candidate has a successfultrack record in business, a reputation to protect andsufficient resources such that he or she is notdependent on the income received from the companyand is uninterested in short-term share pricemovements. The ideal candidate will also offerindustry-relevant expertise and contacts.

Finally, a Nomad will want to ensure that the directorsof a company are fully aware of (and are prepared toaccept) the costs and obligations of being an AIMcompany, that they have considered and have rejectedthe alternatives and that they are seeking admission toAIM for the right reasons.

Strategy

The fundamental question that a Nomad should ask iswhether the prospective AIM company has asustainable competitive advantage that can be furtherexploited to create shareholder value. Competitiveadvantage can take many forms including patent,copyright or other form of intellectual propertyprotection. It could reside in the company’s brand, itspeople or the time and resources taken to build itssystems, processes and facilities or a combination ofall of these.

To a large extent, a company’s ability to exploitprofitably its competitive advantage will depend on itsability to control its destiny. In this regard, a Nomadwill look at:

l whether it is a significant player in a large market or whether it operates in a niche that it can control

l whether the company is subject to market forces that are beyond its control and will affect its future

Page 16 IPO groundwork


growth; these include both limits on demand and supply-side resource constraints

l whether it is dependent on a limited number of staff, customers or suppliers

l the extent to which the market is characterised by barriers to entry.

Market considerations

Fundraising and management of the after-market in theshares is the responsibility of the company’s brokerand is discussed in greater detail in the ‘Raisingfinance’ chapter. However, in determining whether toact for a company seeking admission to AIM, theNomad will need to consider, in consultation with thebroker, whether there is likely to be sufficient investorappetite for the company’s shares to ensure asuccessful IPO, support for secondary fundraisingsand an effective market in the stock.

Why float on AIM?

Part of preparing to join AIM involves considering thealternatives and deciding that for all of the costs andadditional work that being public entails, AIM is the rightoption for the company. Anyone thinking of floating theircompany should have considered and have ruled outthe alternatives such as private equity, trade sale, debtfinance or even an alternative equity market. Althoughthe Nomad’s formal role is regulatory, in practice itwould be expected to give corporate finance advice andwould be remiss if it did not challenge the ownermanager and ensure that he or she was taking theircompany to market for the right reasons.

Is it right for the company?

Traditionally, joining a public market was seen as thelast stage of a company’s evolution and a means ofthe owner-manager securing an exit. AIM is different,in that it is a source of development capital, designedoriginally as a solution to the equity gap faced bysmaller companies. In this regard it has beenremarkably successful, raising sums of less than £5mfor many businesses. It should not, however, be seenpurely as an exit.

Raising funds to provide an exit to existing investors isa reason to float on AIM that most investors will find

unappealing. Indeed, large shareholders may be askedto agree to lock-ins as a condition of the broker raising funds.

The primary reason for most businesses consideringa flotation is to raise capital for expansion. Forshareholders seeking to realise their investment, atrade sale or sale to an institutional buyer or amanagement buy-out team may well be a bettersolution.

Whilst AIM is an effective source of capital for smallercompanies, finance may also be available from privateequity providers, possibly on better terms than would

Becoming a quoted company entails substantialchanges in the way that a company is run. It involvestaking in outside shareholders who enjoy theprotections, inter alia, of the Companies Act and theTakeover Code, thereby imposing obligations onmanagement and larger shareholders. Depending onthe company’s shareholding structure, it also makespossible an uninvited takeover offer for the whole ofthe company.

The company must be prepared to accept these risksand responsibilities as well as the increasedtransparency and reporting obligations, together withwith the associated time and cost. In particular, thecompany must be prepared to accept the higher levelof information that it must provide about its businessthan is required of an unquoted company, and to run itsbusiness and enter into transactions in compliance withthe AIM Rules.

The AIM company’s obligation to update the market ofits financial condition, performance or prospects doesnot always sit comfortably with a desire to maintaincommercial confidentiality. In practice, most companiesfind a way to reconcile the needs of the business withtheir regulatory responsibilities but this is an aspect ofbeing a public company that must be considered.

Beyond complying with its regulatory responsibilities,the company must also be willing to devote time andresources necessary to communicate effectively withthe market. The work that this entails is discussed inmore detail in the chapter ‘Communicating withinvestors – it matters’.

The attitude of the owner-manager

be available through an IPO on AIM. A private equity-funded company will have outside shareholdersusually with board representation and possiblyadditional reporting requirements; going public alsobrings public accountability and scrutiny and the risk ofa loss of control to parties not yet known tomanagement. In addition to weighing up the differentsources of equity capital, a company should alsoconsider whether debt finance may be either a partialalternative or even a complete alternative to equityfinance. What is important is that the prospective AIMcompany has examined and rejected the alternatives.

While for most companies, their admission to AIMforms part of a fundraising exercise, there are othergood reasons for a company to join AIM.

The ideal AIM company is looking to come to AIM forone or ideally several of the following reasons:

l to raise funds to expand the businessl to raise funds at future dates to continue growing the business

l to enhance the value of employee and management share option schemes

l to allow the company to acquire other businesses using quoted shares as partial or even total consideration

l to enhance credibility with key customers and suppliers.

The ideal AIM company also has management that iswilling to embrace the opportunities that being aquoted company offers, is comfortable dealing withoutside investors and the market and welcomes the

disciplines that being quoted brings. The idealcompany will also have the additional resources tocover the costs of being public and has concluded thatthe benefits of being on AIM outweigh those costs.

Whatever the reasons to float, the reasons for joiningAIM and the use of funds must be clearly articulated.

The next step

A company that is considering AIM as one of itsexpansion options should approach one or twoNomads for an initial discussion. Ideally, these shouldbe firms positioned to give a broad range of corporatefinance advice. When approaching such advisers, thecompany should have a business plan or at the veryleast an executive summary along with summarisedhistoric financial information and forecasts. Throughthese discussions, the company should learn at anearly stage both whether a flotation is a viable optionand whether it is in the best interests of the companyand its stakeholders.

A company can choose to appoint a firm that has bothNomad and broker functions or an independent Nomadwhich uses its knowledge of the broking communitywhen advising on the right broker to approach.

For many business owners considering flotation, thedecision they take may well be determined bysuccession issues and a Nomad that has experience ofadvising on these matters may be particularly helpful.

Once the decision in principle to float has been takenand a Nomad and a broker have been appointed, thebroker together with the company should undertakesome test marketing to confirm their belief that afundraising is achievable.

The final decision to be taken is how to raise the funds.The company may be in the position of having to decidewhether to float the company directly, or whether toreverse into a cash shell, if one is available. Reversinginto a shell involves slightly more documentation than astraight IPO, and takes around four weeks longer as thetransaction requires both a full AIM admissiondocument and approval of the shareholders of the cashshell and, usually, additional wording to satisfy therequirements of the Panel on Takeovers and Mergers,


Overseas companies may wish to have their sharesquoted on AIM to benefit from London’s capitalmarkets and the raised profile that a quotation inLondon brings. For an overseas company to be quotedon AIM, the Nomad will normally require that thecompany’s business be international and not limited toits local market. Certain types of business such asnatural resources and technology are by their natureinternational. For other types of companies, theyshould at least have international markets or seek toexpand internationally.

Considerations for overseas companies


who must approve the document prior to publication.However, reversing into a cash shell provides anexpanded shareholder base and obviates the need for afundraising roadshow, production of a presentation toinvestors and possibly brokers’ notes. It also removesthe risk of a fundraising failure. In this situation, thecompany should fully evaluate the alternatives inconjunction with its Nomad.

Preparing for admission

As far in advance of admission as possible, acompany considering AIM should ensure that anumber of key issues are dealt with prior tocommencing the admission process. Good planningwill save time, money and possibly aggravation.

The admission process itself typically takes three tosix months from the time an initial all-parties meetingtakes place until publication of a pathfinder AIMadmission document. This will be delayed if there aremajor structural issues that have to be dealt with. Itis important, therefore, that any potential issues areraised at an early stage to avoid any negative impacton timing.

Funding

The company should ensure that there are sufficientfunds to pay the costs of flotation, irrespective of theresult of the IPO fundraising. A significant portion ofthe professional fees will be payable regardless ofwhether the company secures admission to AIM.Whereas the fees of the Nomad and broker aremainly or wholly contingent on success, lawyers willusually require staged payments and reportingaccountants cannot work on a contingent basis so asto ensure their independence. If necessary, a pre-IPOfundraising at a discount to the proposed IPOvaluation should be arranged.

Board composition

The board that will run the company followingadmission to AIM should be in place by the time theflotation process begins, if only because they will betaking responsibility for the AIM admission documentand should therefore have time to get to know thebusiness. Key operational management should havebeen in place for considerably longer, but non-executives may be appointed closer to the IPO.

A strong finance director is extremely valuable and willusually be involved in presenting to potential investors.The finance director will often be the main point ofcontact between the company and the advisers,ensuring that information and documents are madeavailable on a timely basis. It may be necessary tobring in temporary staff to provide support.

The same applies to the rest of the board and thecompany’s senior management; the flotation processis intensive and time consuming and management ofthe business must continue during the IPO.

Non-executive directors

Most private companies do not have non-executivedirectors, other than to provide industry contacts,although venture capital or private equity providers willusually require board representation. However, it isvery good practice for all prospective AIM companiesto appoint non-executive directors well in advance ofadmission to AIM. During the pre-IPO period, non-executive directors should:

l impose good practice in corporate governancel ensure industry standard accounting policies are adopted

l get to know the company sufficiently well so as to accept responsibility for the AIM admission document

l by their presence, give comfort to potential investors.

Corporate governance

Main Market companies, being admitted to the OfficialList, are required to adhere to the Principles of GoodGovernance set out in the The UK CorporateGovernance Code (formerly the Combined Code), aset of guidelines designed to ensure that each listedcompany is headed by an effective board acting in theinterests of all stakeholders in the company.

The UK Corporate Governance Code separates therole of chairman, whose job is to run the board fromthat of the chief executive, whose job is to managethe business, to ensure that there is a balance ofpower within the company. For the same reason, theThe UK Corporate Governance Code requires thatthere is a balance between executive and non-

executive directors including independent non-executive directors, so that no one group dominatesdecision making.

An AIM company should aspire to this level ofcorporate governance. It is advisable that at the veryleast, an AIM company should adhere to the QCA(Quoted Companies Alliance) Guidelines, which aresimilar to, but not as prescriptive, as the The UKCorporate Governance Code. The QCA Guidelinesrequire at least two independent non-executivedirectors whom the prospective AIM company shouldappoint prior to admission.

As far in advance of the IPO as possible, companiesshould establish the necessary board committees –audit, remuneration and nominations. It is also advisableto start holding formal, minuted board meetings as far inadvance as possible of the IPO. For further detail, seethe ‘Legal work and due diligence’ chapter.

Corporate structure

The simpler the better. Complex corporate structuresthat are difficult to understand or which have differentclasses of shares giving preferential rights are anexcuse not to invest. Ideally, there will be one class ofshares and a simple share option scheme or schemes.

Where there are minority shareholders in subsidiarycompanies, consideration should be given to buyingout their interests or exchanging shares in thesubsidiary for shares in the AIM (holding) company.

Where a private company has undertaken transactionswith related parties, these may need to be formalisedor terminated.

Statutory

The company’s shares need to be capable of beingtraded under the laws of the country where the AIMcompany is incorporated. For a UK incorporatedcompany, this may mean re-registering as a publiclimited company.The company should adopt articles of associationappropriate to an AIM company.Taxation

It may be advisable to re-organise the structure of thegroup to optimise the company’s taxation position.

Accordingly, it may be necessary to get tax clearancesand confirmation as well as to the position of thecompany with regard to EIS and VCT investment.Together with clarifying the corporate structure, thisshould be done as far in advance of the IPO aspossible.

VAT and PAYE should be up to date.

Accounting

Accounts should be brought up to date. Where achange in accounting policy is required, accountsshould be re-stated as early as possible to give thereporting accountant historic financial information onwhich to report.

Assets

Where a company is dependent on assets, forexample intellectual property or mining explorationrights, the company should ensure that ownership ofthe assets and its ability to use them is unfettered.Ownership or leases of land and buildings should besecured. The insurance policies should be reviewed toensure there is adequate coverage.Where a company is being valued on earnings, it maybe of benefit to the owners to transfer certain assetsout of the business before admission.

Staff

Employment contracts should, where possible, be


An AIM company needs to have managementinformation and financial reporting systems that enableit to produce monthly management accounts on atimely basis – within no more than three weeks of themonth end – and to comply with its reportingobligations under the AIM Rules, particularly wherethere is a need to notify the market on a timely basis ofa change in the performance of the business comparedwith market expectation.

The reporting accountants will review and report on theadequacy of financial reporting so the company willreduce their work (and cost) by ironing out anyproblems before due diligence begins, taking onadditional staff if necessary.

Financial and management systems


standardised and changed to ensure they areappropriate for an AIM company. Key members of themanagement team should have notice periods ofsufficient length and should have the benefit andincentive of shares and/or suitably structured shareoptions. Where necessary, the company should takeout keyman insurance.

Other matters

Other matters that a company would benefit fromdealing with at an early stage include:

l establishing a website that is compliant with AIM Rule 26

l ensuring all litigation is resolved or, at least quantified

l terms and conditions of sales should be reviewed l where major contracts have change of control clauses, these are reviewed and the position regarding the IPO agreed with the counterparty

l certification of compliance with quality management and other standards are obtained.

Project managing the admission process

Once a Nomad has agreed that a company is suitablefor admission to AIM and a broker has agreed to raisethe necessary funds, the Nomad’s task is to bringtogether a full team of advisers, set a timetable,allocate responsibilities and ensure that all partiesadhere to the programme that has been agreed.

The two key tasks in any AIM admission are preparingan AIM admission document (which can sometimes bereferred to as a prospectus if there is to be an offer ofshares to the public) and arranging the fundraising itself.

Starting the admission process

Once the company and its advisers have agreed toproceed with a flotation and after the key professionalshave been appointed and their terms of engagementagreed, the Nomad will call all parties to attend ameeting to agree a timetable. Apart from preparing adetailed timetable, with responsibilities clearly identified,the Nomad will also circulate a detailed list of partieswith contact details and a list of documents to beproduced. The Nomad will take as its starting point theend of the flotation process. The key date is known as

‘Impact Day’. It is on this day that the AIM admissiondocument is finalised and posted to shareholders andpotential investors. Admission to AIM and receipt offunds usually takes place shortly afterwards.

The company will often need or want to secure funds bya particular date, in which case that date will determinethe Impact Day. The broker will advise on a good timeto introduce the company to the market, having regardto holiday periods, market sentiment and the broker’sown workload. From this point, the Nomad will workbackwards setting dates for the completion of the finalAIM admission document, the placing proof and thepathfinder (if applicable) and the detailed due diligencethat is discussed in the ‘Legal work and due diligence’and ‘Financial considerations’ chapters.

The Nomad will set the scope of work for both thesolicitors and reporting accountants. Where it considersit appropriate to have additional due diligence – forexample, specialist reports on mineral resources,technology or intellectual property – it will also set thescope of work for the professionals undertaking suchdue diligence, in consultation with the company.

Starting work

The order in which work starts will depend on whatinformation is available. Typically, the first task will fallon the reporting accountants to begin work on thelong form (financial due diligence) report. While theirwork is underway, the lawyers will commencedrafting the statutory and general information sectionof the AIM admission document. The Nomad and thecompany will begin work on the front part of the AIMadmission document and the directors will draft thehistorical financial information. Information about thestructure and contents of an AIM admissiondocument are discussed in the ‘Legal work and duediligence’ chapter.

If any commercial due diligence has to be undertakenor any experts’ reports prepared, this work willcommence at a very early stage. Meanwhile, thecompany will be required to prepare working capitalforecasts in support of the statement on the adequacyof working capital (which the directors have to make inthe AIM admission document).

Illustrative timetable of the admission process (which typically lasts from three to six months)

Week 1 2 3 4

Test marketing

Negotiation of agreements for the engagement of the Nomad and broker, reporting accountant and registrars

Review corporate structure with key advisers

Long form report produced

Accountants’ report produced

Working capital review

Drafting of AIM admission document

Senior executive employment arrangements and terms of appointment of non-executive directors

Negotiation of placing agreement

Legal due diligence report produced

Verification

Pathfinder completion meeting

Marketing

Placing list finalised

Placing proof prepared

Placing proceeds received by broker

Completion meeting

Admission to AIM and dealings commence

Proceeds of the placing paid to company

5 6 7 8 9 10 11 12 13 14

Project2:Layout 1 15/6/10 13:22 Page 1

On completion of the draft long form report, a full firstdraft of the AIM admission document will be compiledunder the Nomad’s supervision. The reportingaccountants will then typically begin work on reviewingthe working capital forecasts. During this part of theprocess, the AIM admission document will go througha number of drafts. As the document takes shape, thelawyers will begin the verification process and thebroker will start to sound out the market informally asto who might be interested in taking the shares to beissued. In any event, the broker would normally haveundertaken some market testing before it agreed toact as the company’s AIM broker. The public relationsadvisers will work on the press coverage to be soughtfor the issue.

If a pathfinder is to be produced, it is likely to berequired some ten to 14 days before Impact Day. Thisis an essentially complete document (save foragreement as to the price at which the shares are tobe placed) which can be taken to potential institutionalinvestors to gauge the level of interest and todetermine the placing price. During this period thecompany is often required to make presentations topotential investors.

Sometimes, the company issues a ‘placing proof’,sometimes described as a ‘p-proof’. This is in allmaterial respects a finished document, except it ismarked as a proof. Having generated interest usingpresentations or a pathfinder, the broker gives theplacing proof to potential investors to secure theircommitment to invest prior to completing andregistering the AIM admission document itself. Aplacing proof will be used if there is some doubt as tothe success of the fundraising, or where the Nomadand broker want to know the amount that may beraised prior to finalising the AIM admission document.

To Impact Day

Once the brokers are confident that the funds will beraised and know the price at which the shares will beplaced, the company is ready to complete its AIMadmission document and a completion meeting will bearranged for the day before Impact Day. At thismeeting all documents will be signed and the directors

will formally approve and take responsibility for theAIM admission document. Many other documents,including the verification notes which record theunderlying evidence for statements contained in theAIM admission document, will be completed andsigned and the order will be given for the bulk printingof the AIM admission document. This is then printedovernight and on Impact Day it is filed with therelevant authorities and distributed to shareholders,potential investors or anyone interested in receiving acopy. The AIM admission document must be madeavailable on a website that the company is obliged tomaintain under the AIM Rules.

With an institutional placing, admission usually takesplace within a fortnight of Impact Day. The admissionprocess may continue for up to about a month afterImpact Day, either if there is an offer for subscriptionto the general public or if the company’s shareholdersneed to approve any aspect of the transaction in ageneral meeting.

Apart from project managing the admission processand coordinating the work of the various parties, theNomad will need to liaise with the AIM Regulationteam at the Exchange. An AIM company will need toissue to the market a statement of its intention toseek admission to AIM ten business days before theproposed admission date (other than a companytransferring from the Main Market or one of severalother ‘AIM Designated Markets’, for which 20business days’ notice is required). The Nomad willdraft and issue that statement. It will also arrange theformal application for admission to AIM, which mustarrive at least three business days before admission.


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The financial considerations relevant to a companyseeking admission to AIM can be split into two broadcategories:

l private financial reports typically required as part ofthe IPO process; and

l public financial disclosures required within the admission document itself.

Private reports are typically commissioned toundertake historical financial due diligence, reviews ofsystems and controls and to assess the company’sworking capital position.

Public financial disclosures primarily revolve arounddisclosure of audited historical financial informationand, where relevant, interim financial information,although pro forma financial information is often alsoincluded. Very occasionally, forecast financialinformation may also be included.

This chapter summarises the principal obligations andmarket expectations with respect to financial matters.Unless the context indicates otherwise, references toa company within this chapter also refer to its group ifit has subsidiaries.

Financial due diligence

Long form report

As part of the IPO process, the company’s reportingaccountants are typically commissioned to prepare afinancial due diligence report on the company. Thisreport is referred to as a ‘long form’ report and itsprimary purpose is to assist the Nomad in itsassessment of the suitability of the company to beadmitted to AIM.

The long form report is a detailed report on thecompany’s business, focusing mainly on thecompany’s financials and business operations.Sometimes a separate commercial due diligencereport is commissioned, focusing on the company’sbusiness and market. The long form report excludesforecasts (which are covered in a separate report).The long form report is a private document, usuallyaddressed only to the Nomad and the company itself.It is not made available to the wider public, or topotential investors.

The due diligence work undertaken for this exercisecan be quite onerous for a company and can take asignificant length of time. The company will need tosupply significant amounts of data and explanationsconcerning its business and financial history andmanagement should not underestimate the time andeffort that it, and its finance department, will need todedicate to this exercise. This will often occurconcurrently alongside numerous other IPO-relatedwork streams, all of which will be competing formanagement’s attention alongside its need to run andmonitor the company’s day-to-day business. Prior tobeginning the IPO process, management shouldconsider whether the company has adequate internalresources to meet these competing needs or whetherit should bring in additional temporary resource tohelp project manage the process.

It may be beneficial for the company to populate adata room with its financial information in advance ofthe work commencing. The company should requestits reporting accountants to send them a preliminaryinformation request list to assist them in this exercise.

Scope of the long form report

The long form report is usually expected to providedetailed commentary on the company and itsbusiness. The actual scope of a long form report isagreed between the Nomad, the company and thereporting accountants. Although the report is normallycomprehensive, in some circumstances the scopemay be restricted; for example, where the companyhas not traded (as in a ‘cash shell’ or investingcompany) or where the Nomad is obtaininginformation from other sources, such as commercialor technical due diligence.

Although the scope in each instance will be bespoke,as illustrated in the box ‘Typical contents of a longform report’, a long form report will typically coverthe company’s:

l financial performancel taxation positionl business operationsl financial reporting systemsl accounting policies; andl management and employees.


Financial considerationsBy Mo Merali, Partner, and Sunil Patel, Director,

Grant Thornton UK LLP

Page 27Financial considerations

The long form report will set out key financial orcommercial risks and exposures identified during thedue diligence exercise, highlighting any issues thatneed to be resolved before IPO. Whilst no twocompanies are alike, issues that often arise include:

l inadequate financial reporting systems and controlsl potential tax exposuresl concerns over items in the balance sheet (eg

potentially irrecoverable receivables, obsolete inventories)

l trading risks (eg customer or supplier concentration); and

l over-reliance on key management.

Any significant issues identified during this exercisewill usually be communicated to the company and theNomad as they arise, rather than waiting until theformal written report is produced. Doing so maximisesthe time available to the company to rectify anymatters. Also, if critical issues are incapable ofresolution and it becomes necessary to delay or even

Financial performance l analysis of historical trading performance over last three yearsl analysis of historical cash flows in last three yearsl analysis of balance sheet itemsl analysis of financial trends, key performance indicators and risksl financing arrangementsl capital expendituresl contingent liabilities and off-balance sheet arrangements

Taxation l tax compliance statusl corporate taxes, sales taxes and employment taxesl international tax structure and withholding taxesl transfer pricing

Business operations l operational structurel products and servicesl markets and competitionl customers and suppliersl trading termsl production facilitiesl research and developmentl business premisesl insurance

Financial reporting systems l management information systemsl accounting proceduresl controls environmentl corporate governance

Accounting policies l assessment of accounting policiesl recent and planned changes in accounting policies

Management and employees l key management personnell remuneration arrangementsl succession arrangementsl headcount metricsl pension and other benefit obligations

Typical contents of a long form report

abort the IPO, it is important that such issues areidentified early before excessive time and costs havebeen incurred. Although, if the company has gonethrough a comprehensive grooming process, mostcritical issues should have been identified and rectifiedprior to the long form work commencing. In caseswhere the long form work is expected to take anumber of weeks, it is often beneficial to scheduleregular meetings with the reporting accountant toupdate on progress.

Prior to a draft of the long form report being sent tothe Nomad, a copy is made available to the companyfor review. This allows management both to check thefactual accuracy of the report and also to consider anykey points raised and challenge any they disagreewith, prior to its distribution to the Nomad.

Financial reporting procedures

Assessment

It is important for public companies to have robust andreliable financial reporting procedures so that accurateinformation is readily available on a timely basis.

As part of their initial due diligence responsibilities andcontinuing obligations, Nomads are required to besatisfied that the directors have established procedureswhich provide them with a reasonable basis on which tomake proper judgements on an ongoing basis as to thefinancial position and prospects of the company.Nomads are also required to be satisfied that thecompany has sufficient systems and procedures toenable its compliance with the AIM Rules. In turn,Nomads seek such confirmation from both the directorsof the company and the reporting accountants. Toprovide comfort in this area, the reporting accountantwill assess and comment on the company’s financialreporting procedures, including its managementinformation systems and its control environment. Thiswork often forms part of the overall long form report,but may form part of a separate report to the companyand the Nomad.

Typically, companies undertaking an IPO on AIM willnot previously have been on a public market. Instead,they will have been managed, controlled and operatedas private companies, sometimes with a dominantowner-manager. Life as a public company is very

different in most cases, not just because of thepresence of external stakeholders but also as a resultof the need for compliance with rules and regulationsgoverning public entities. Accordingly, whilst acompany’s systems and controls may have beenappropriate for life as a private company, they mayneed to be strengthened prior to joining AIM.

Assessing the company’s financial reportingprocedures is considered one of the most importantelements of due diligence for an IPO. A thorough pre-IPO grooming process should result in significantweaknesses being identified and addressed prior tothe IPO process formally commencing.

Scope of a financial reporting procedures review

A typical review of financial reporting procedures mayinclude consideration of the following:

l high-level financial controls and extent of documentation

l risk identification and assessments undertaken bythe company

l corporate governance frameworkl forecasting and budgeting proceduresl treasury operations and managementl assessment of key accounting procedures and

controlsl organisation of the finance function and sufficiency

of resourcesl reporting framework and frequency, timeliness and

reliability of key information.

Working capital

Working capital statementIn accordance with the AIM Rules, the admissiondocument is required to contain a statement from thecompany’s directors as to the adequacy of workingcapital. This statement, which must be clear andunambiguous, requires the directors to confirm thatthe company has sufficient working capital to last atleast 12 months from the date that it is admitted toAIM. The wording of the statement can vary but istypically phrased along the following lines:

‘The directors are of the opinion, having made dueand careful enquiry, that the company and its grouphas sufficient working capital for its present

Page 28 Financial considerations


requirements, that is for at least 12 months from thedate of admission.’

This working capital statement is considered one of themost important statements made within the admissiondocument. Furthermore, the requirement for thisstatement to be made after ‘due and careful enquiry’places a relatively onerous burden on the directors.

Working capital forecasts

In order to substantiate the working capital statement,the company is expected to prepare a set of tradingand cash flow forecasts. Although the technicalrequirement as per the AIM Rules is to give astatement covering 12 months from the date ofadmission to AIM, the forecasts prepared by thecompany should extend further than this – a period ofat least 18 months is typical. Given the importance ofthe working capital statement, assessing thesufficiency of working capital over a longer period thantechnically required under the AIM Rules providesgreater protection to the directors of the companywhen making the statement.

It is important for the company to build a robustforecast model. In most cases, this should be amonthly forecast with integrated monthly incomestatements, balance sheets and cash flows. As far aspossible, the model should be formula driven, withclearly identified input cells to allow sensitivities to berun easily. Some companies will need to construct anew model; other companies will already have or beable to adapt an existing model, such as one used forbudgeting purposes. Management should not

underestimate the importance of ensuring the forecastmodel is robust, built on reasonable assumptions andeasily sensitised. The model should reflect the keybusiness and financial drivers for the company andalso be consistent with the business plan as set out inthe admission document. Investing time on the modelup front will save time and cost during the latterstages of the IPO process, when pressures are attheir highest.

A selection of things to consider when preparing arobust working capital model are set out in the box ‘Tipsfor preparing a robust working capital model’ above.

The directors of the company should also prepare aworking capital memorandum summarising all relevantinformation available to them to support the workingcapital statement in the admission document. It shouldinclude a summary of the key assumptions used in theforecasts and an analysis of the headroom betweenforecast cash flows and the cash facilities available tothe company.

Bank and other lending facilities can be taken intoaccount, but only to the extent they are committed.For instance, it is not normally appropriate to includean overdraft repayable on demand within any forecastfacilities; nor is it appropriate to assume anycommitted bank debt expiring in the forecast periodwill be rolled over. Therefore, if the forecasts rely onbank facilities, the company will need to ensurecommitted facilities are available for the entire workingcapital period under review.

l Are the monthly income statements, balance sheets and cash flows integrated?l Is it formula driven and easy to sensitise?l Are the input cells easily identifiable?l Does it include test cells/check cells as appropriate?l Does the starting balance sheet position tie in to management or audited accounts?l Does the management team buy in to the key underlying assumptions?l Does it correctly calculate any covenant tests on debt facilities?l Does it correctly account for varying tax rates, payment dates, withholding taxes and utilisation of tax losses in

different jurisdictions?l Does it take into account any restrictions on use or transferability of cash (eg between different security pools

or jurisdictions)?

Tips for preparing a robust working capital model

Working capital report

The reporting accountants will prepare a report on thecompany’s forecasts. This report is referred to as a‘working capital report’ and its primary purpose is toprovide comfort to the Nomad and the directors of thecompany as to the adequacy of working capital. Theworking capital report is a private report, usuallyaddressed to the Nomad and the company itself. It isnot made available to the wider public, or to potential investors.

In carrying out this work, the reporting accountant willundertake a series of detailed checks and reviewprocedures on the company’s forecasts. These willinclude checking the model for errors orinappropriately applied assumptions and consideringthe reasonableness of key assumptions, taking intoaccount historical trends and known changes in thebusiness. The report will highlight key risks andvulnerabilities within the forecasts and the impact ofapplying appropriate sensitivities on working capitalheadroom and covenant tests.

A draft of the working capital report is made availableto the company’s management for review prior to itbeing sent to the Nomad, giving management anopportunity to challenge any findings they disagreewith. However, significant issues identified during thework are usually communicated to the company asthey arise, allowing the company to amend its modelor, should working capital be inadequate, seekadditional sources such as bank finance or increasedfundraising at IPO.

Financial information in the admission document

Types of financial information

An issuer is required to include audited historicalfinancial information on itself in an admissiondocument. In addition, it may also include pro formafinancial information and forecast financial informationin its admission document, although the latter is rare in practice.

Most admission documents prepared by companiesseeking an IPO on AIM fall outside the scope of theProspectus Rules published by the Financial ServicesAuthority. However, under certain circumstances theycan be caught within its scope (these circumstancesare discussed in the chapter ‘Legal work and duediligence’). An admission document caught by theProspectus Rules must be approved by the UK ListingAuthority at the Financial Services Authority and mustinclude certain information which is not required in anadmission document that falls outside that regime; forexample, the potential need for pro forma information.

Audited historical financial information

The basic requirementsThe AIM Rules require audited historical financialinformation to be included in an admission documentcovering three consecutive financial years prior toIPO. If a company has not existed for three years, thenthe requirement is limited to those years it has been in


Type of issuer Choice of accounting standards

Incorporated in European Economic Area IFRS as adopted by the European Union(or national GAAP if not a parent company)1

Incorporated outside European Economic Area IFRS as adopted by the European UnionUS GAAPCanadian GAAPAustralian IFRSJapanese GAAP

1 An issuer incorporated in the EEA which does not have any subsidiary undertakings is allowed to use the national GAAP applicable to its country

Allowable GAAP


existence. The directors of the issuer are responsiblefor preparing this financial information.

At least the last two years of this audited financialtrack record need to be presented and prepared in aform consistent with the accounting standards andpolicies to be adopted in, and legislation applicable to,the issuer’s next set of annual financial statements tobe published after the admission document. The AIMRules restrict the choice of accounting standards thatmay be adopted once a company is admitted to AIM,depending on its country of incorporation and whetherit is a standalone company or the parent of a group.Except in rare circumstances, the last two years ofaudited financial information published in theadmission document will need to be presented inaccordance with one of the suites of GenerallyAccepted Accounting Principles (‘GAAP’) shown inthe box ‘Allowable GAAP’.

When a company is determining which accountingstandard to use, it should be mindful of what currentand future investors may demand as well as marketpractice. It is common practice for AIM companies togenerally report in International Financial ReportingStandards (‘IFRS’).

Alternative methods of including audited financialinformationA company essentially has two choices when includingaudited financial information in its admissiondocument:

l it can reproduce its last three sets of audited financial statements and the audit reports thereon; or

l it can publish specially prepared historical financial information covering the three years and instruct itsreporting accountant to issue a report thereon (effectively a special purpose audit report).

Reproducing the last three sets of audited financialstatements is only an option if no adjustments to thepreviously published financial statements are requiredto comply with the regulations (such as therequirement that the last two years are presented in aform consistent with the accounting standards andpolicies that will be adopted in the next publishedannual financial statements). Therefore, this option

would not normally be acceptable in cases where theissuer needs to adopt a new suite of accountingstandards post-IPO (such as a requirement totransition to IFRS). It also assumes that there were noaudit qualifications. Moreover, Nomads and brokersoften prefer the alternative route of including speciallyprepared historical financial information with a newaudit opinion by the reporting accountants. This isbecause doing so effectively ‘refreshes’ the old auditopinions, which may not have been given incontemplation of an IPO, and also allows the three-year financial track record to be presented as one setof financial statements, making it easier for potentialinvestors to compare the different periods. As aresult, it is more usual practice to see speciallyprepared historical financial information in anadmission document than it is to see the reproductionof existing financial statements.

A simplified decision tree for determining whetherexisting financial statements or specially preparedhistorical financial information should be included in theadmission document is set out in the box ‘Presentationof audited financial information’ on page 33.

The reporting accountant, which will issue an opinionon the specially prepared historical financialinformation for inclusion in the admission document,does not have to be the company’s auditor. However,when carrying out its work, a reporting accountant willtypically review the audit working papers of theauditors for the past periods. In order to do this, thepast auditors will need to grant the reportingaccountant access to their audit working papers. Thisis usually done on a ‘hold harmless’ basis (ie a noliability basis), with the company indemnifying theauditor as a condition of granting access.

If access to existing audit files is not granted, thereporting accountant would be obliged to re-audit thefinancial statements of the company from scratch,which would likely have significant time and costimplications for the IPO process. As a result, where acompany is intending to use a reporting accountantthat is different to its firm of auditors (or where it hashad a change of auditor during the three-year trackrecord period), it is important for the company toestablish as early as possible in the process whetherthe auditor or auditors concerned are willing to grant

access to their audit working papers. It would beunusual for a UK audit firm to not grant such access,as they understand the reporting accountant processand, through appropriate hold harmless arrangements,that they would not be exposing themselves toadditional risk. However, such concepts are notalways as well understood by foreign firms of auditors.The granting of access may also depend on the stateof relations between the company and its auditor orex-auditor.

Age of the informationThe permitted time gap between the date of the latestannual audited financial information and the date thatthe admission document is published depends onwhether any interim financial information for theintervening period which is included in the admissiondocument has itself been audited. The last annualaudited financial information may not be older than:

l 18 months from the date of the admission document if audited interim financial statements areincluded in the admission document; or

l 15 months from the date of the admission document if unaudited interim financial statements are included in the admission document.

Notwithstanding these regulatory limits, Nomads andbrokers often wish to include more recent auditedinformation than this. This is particularly the casewhere the company is looking to raise new funds atthe time of admission, as investor expectations wouldneed to be taken into account.

For instance, if a company included audited annualfinancial statements for the three years ended 31 December 2009 and audited interim financialstatements for the six months ended 30 June 2010 inits admission document, then the latest date thatadmission document could be published would be 30 June 2011. However, in practice, many investorswould expect to see audited annual financialstatements for the year ended 31 December 2010 insuch a document.

Companies should also bear in mind that slippage inIPO timetables is not uncommon. Therefore, at theoutset of the process, it is sensible to ensure that theage of the financial information planned to be included in

the admission document, when compared to theexpected date of publication of the admissiondocument, allows for potential slippage in the timetable.Otherwise, the company may find itself having toundergo an additional audit late on in the IPO process.

Potential complicationsWhilst the basic requirements concerning the inclusionof audited historical financial information appearsimple, in practice the financial disclosurerequirements can be more complicated.

This is especially the case where a company has made(or will make) substantial acquisitions or disposals pre-IPO. For instance, depending on the size of anacquisition, there may be a requirement to includeaudited historical financial information on the acquiredentity for all of, or part of, the same three-year trackrecord period as needed for the issuer. Alternatively, itmay be necessary to restate past audited financialinformation to take account of subsidiaries or divisionsnot forming part of the group on IPO.

In cases where one or more businesses are beingcombined for the IPO, multiple sets of financialstatements may be required. An issuer is required topresent the financial information for all of thesebusinesses under common accounting standards andpolicies so that the historical financial information iscomparable; this may require past audited informationto be restated or translated into a different GAAP.

The issuer’s own financial information may also needtranslating from its previous GAAP to its future GAAP.For instance, a company that previously reportedunder German GAAP may need to restate its financialstatements into IFRS. Such GAAP translations cancause complications where the new GAAP requiresdisclosures of information that was not required underthe old GAAP and, thus, for which data may not havebeen captured at the time.

Some companies may not have been subject to audithistorically, in which case a full audit will need to beconducted on each of the periods covered by thehistorical financial information. This may beproblematic for the earlier years, as supportingdocumentation may not be readily available. This issuemay be particularly relevant where there is a need to


show financial information for a subsidiary for periodsprior to its acquisition. If the company (or a materialacquired subsidiary) has not been subject to audithistorically then it is worthwhile commissioning anaudit before the IPO process formally begins, in orderto reduce delays once the process starts.

Any audit opinions on the historical financialinformation included in the admission document(whether via reproduction of past audited accounts orvia a special purpose opinion) must be unqualified. Ifpast audited accounts were qualified, the cause of thequalification will need to be resolved pre-IPO and anew unqualified opinion obtained.

There are a number of acceptedconventions that have beendeveloped for the preparation andpresentation of historical financialinformation in an admissiondocument and guidance has beenpublished to assist companieswhen preparing such information.A company should seek advicefrom its reporting accountant onhow to regard and interpret theseconventions and how to deal withdifficult areas. The reportingaccountant will recommendoptions on how to deal with suchsituations based on its previousexperience and market practiceand will discuss, as necessary,particular issues with the Nomad.

Management should ensure thatthey allow sufficient time toprepare financial information forthe admission document,especially if it involves translatingpast sets of accounts to adifferent GAAP such as IFRS.Time to audit any speciallyprepared information also needsto be built into the IPO timetable.The earlier this work commences,the better.

The box, ‘Matters which maycomplicate financial disclosure’sets out a non-exhaustive list offactors to consider whenincluding historical financialinformation in the admissiondocument. If any of the factorsare applicable, management


Presentation of audited financial information

Specially prepared

Historical Financial Information

Existing financial statements for the last three years

Were they audited?

Reproduce existing audited financial statements

Were the audits qualified?

Are the last two years in same GAAP as the

next accounts?

Are adjustments needed to the existing

track record?

Does the Nomad/broker require an updated

audit opinion?

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

should discuss the matter with the reportingaccountant and Nomad.

Interim financial information

There are two circumstances when interim financialinformation is required to be included in an admissiondocument:

l where the company has already published interim financial information (eg quarterly or half-yearly results) since the date of the last audited annual financial information; or

l where the admission document is dated more thannine months after the end of the last audited annual financial information included in it.

If the admission document is dated more than ninemonths after the end of the last audited annualfinancial information, the required interim financialinformation must cover at least the first six months ofthe following financial year and must includecomparative information for the same period in theprior financial year.

Although interim financial information included in anadmission document does not necessarily need to beaudited, the Nomad or broker may request that it beaudited in order to meet market expectations andassist marketing efforts with respect to any fundraising.

Pro forma financial information

Admission documents often include pro forma financialinformation on the issuer. The purpose of this proforma financial information is to show the impact oftransactions (such as an acquisition or a fundraising)on the company.

If the admission document has to comply with theProspectus Rules then the inclusion of pro formainformation is mandatory if the transaction is over acertain size. In all other cases, there is no requirementto include pro forma information; instead, the Nomadwould typically determine whether or not suchinformation should be included, taking into accountmarket practice and the interests of investors.

The most common type of pro forma informationincluded in an admission document is a pro forma netasset statement, which illustrates the impact oftransactions on a company’s balance sheet. A proforma income statement may also be included,although this is less common.

The directors of the issuer are responsible forpreparing any pro forma financial information.Guidance has been published to assist companieswhen preparing pro forma information and a companyshould also seek advice from its reporting accountant.Where pro forma information is included and theadmission document has to comply with theProspectus Rules, the reporting accountant is requiredto report publicly on the pro forma information. If the


l Have consolidated accounts been prepared historically for the issuer?l Have the past financial statements been audited?l Were any of the past audit opinions qualified?l Have there been any material acquisitions in, or subsequent to, the three-year track record period?l Have there been any material disposals in, or subsequent to, the three-year track record period?l Is there a need to translate the exisiting financial statements into a different GAAP?l Will there be, or has there been, any group restructuring pre-IPO (eg divisions carved out of larger groups)?l Have there been any changes in accounting policies during the three-year track record period?l Are the financial statements of any acquisition targets prepared under standards and policies consistent with

those of the issuer?

Matters which may complicate financial disclosure


admission document does not need to comply withthe Prospectus Rules, a public report is not requiredon any pro forma information included in it. However,the pro forma information itself must still comply withAnnex II of the Prospectus Rules.

Forecasts

It is rare for forecast financial information to beincluded in an admission document. Doing so givesinvestors an obvious target to attack should thecompany not meet its expectations and increases riskfor the directors of the company, who are responsiblefor all information in the admission document.

There are times when a Nomad may advise thecompany to include forecast financial information.Such a recommendation may be made where thehistorical track record does not convey atransformation in the profitability of a business.However, Nomads and companies generally resistincluding such information unless deemed essential tothe success of a fundraising.

In the rare cases that forecast financial information isincluded, it would typically take the form of a profitforecast (the forecast profit for a period not yetcompleted) or a profit estimate (the estimated profitfor a completed period not yet audited). Guidance hasbeen published to assist companies when preparingsuch forecasts and the company should also seekadvice from its reporting accountant.

If a profit forecast or profit estimate is included in anadmission document, the reporting accountant istypically asked to report on the information, as thecompany’s Nomad is required to confirm to thecompany that the forecast has been made after dueand careful enquiry by the company’s directors. Astatement must also be included in the admissiondocument that the forecast has been made after dueand careful enquiry. In cases where the admissiondocument has to comply with the Prospectus Rules,such a report by the reporting accountant iscompulsory and has to be published in the admissiondocument alongside the forecast.

Given the risks associated with publishing a profitforecast or estimate, the work undertaken by areporting accountant to substantiate the disclosures

may be substantial and would need to be reflected inthe IPO timetable.

Significant change statementThere is a requirement for the company to disclose inits admission document whether there have been anysignificant changes in its financial or trading positionbetween the balance sheet date of its latest publishedfinancial information and the date of the admissiondocument.

Management will need to carry out a review in the latterstages of the IPO process to identify any such changes.This review should include consideration of the latestavailable management accounts and flash tradingfigures, together with consideration of such matters aschanges in banking facilities, crystallisation ofcontingent liabilities, new post balance sheet eventsand other relevant developments. A final review shouldbe carried out as close as possible to the date of theadmission document to identify any late changes.

The reporting accountant will also perform specificprocedures in order to identify any undisclosedsignificant changes in the company’s financial ortrading position.

Should there be any material changes to theinformation in the admission document (or any newmaterial factors which come to light) a supplementaryadmission document may be required between thepublication of the initial admission document and theadmission date. This may delay the admission date.

Summary

To summarise, a company seeking admission to AIMwill typically need to undergo due diligence on itshistorical financials and business operations, itssystems and controls, and its trading and cash flowforecasts. The exact scope of this due diligence issubject to agreement between the company, itsNomad and the reporting accountants.

In addition it will also need to publish an auditedfinancial track record, and possibly other financialinformation about itself or recently acquired subsidiaryundertakings, in its admission document. The specificrequirements for this published financial information

are set out in the AIM Rules (primarily driven bySchedule 2 to those rules, together with thecontinuing obligation to publish financials inaccordance with Rule 18 and Rule 19). Although they

appear relatively straightforward, they cansometimes be complicated to apply in practice anda company should seek advice early on in theprocess as to the exact requirements.


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The legal and regulatory basis of AIM

AIM is a market regulated by the Exchange.Companies wishing to join AIM must comply with theAIM Rules published by the Exchange and, followingadmission to AIM, they must comply with thecontinuing obligations of the AIM Rules.

In recognition of AIM’s role as a market for growingcompanies, the Exchange has made the AIM Rulesrelatively simple and clear, with entry requirements andcontinuing obligations which are less prescriptive thanthose of many other markets. For example, the UKListing Authority’s Listing Rules, which apply tocompanies seeking to list on the Main Market of theLondon Stock Exchange, are significantly longer andmore prescriptive.

It is the Nomad system which makes the balance ofthe AIM regulatory regime possible – the AIM Rulesfor Nominated Advisers (the ‘Nomad Rules’) ensurethe Nomad is responsible to the Exchange forassessing the appropriateness of an applicant for AIM.The Exchange imposes detailed requirements on theNomad to ensure that the directors of a companyapplying to join AIM are aware of their responsibilitiesand obligations under the AIM Rules, and that eachAIM company complies with the Rules.

The Nomad is required to make a declaration to theExchange that it considers an applicant company andits shares to be appropriate for admission to tradingon AIM. Following admission, the directorsthemselves are required to seek advice from theNomad and to take that advice into account. Where aNomad believes that an AIM company for which it actsas Nomad is no longer appropriate for AIM, it mustcontact the Exchange.

The Exchange can impose sanctions on the companyfor failure to comply with the AIM Rules (which mayinclude the company being issued a warning notice,fined, censured, or the cancellation of its AIMsecurities) and on the Nomad in the event that theNomad has breached its obligations pursuant to theNomad Rules.

Any company applying to join AIM must, in addition tocomplying with the AIM Rules, also comply with:

l the UK legal requirements for offers of securitiesl the restrictions on financial promotions imposed bythe Financial Services and Markets Act 2000(‘FSMA’)

l any legal requirements in other countries where itsshares are being offered, and

l in the case of a company incorporated outside theUK, the corporate and securities laws of thecountry in which it is incorporated.


Legal work and due diligenceBy Max Audley, Partner, Olswang LLP

l an AIM company must appoint and retain a Nomad at all timesl with certain limited exceptions, securities admitted to trading on AIM must be free from restrictions on transferabilityThis does not prevent certain shares being subject to contractually imposed restrictions on dealing such as ‘lock-ins’

l all securities of the same class must be admitted to trading on AIM l an AIM company must retain a broker at all timesl an AIM company must ensure that appropriate settlement arrangements for its securities are in place, and inparticular, AIM securities must be eligible for electronic settlement (except in very limited circumstances agreed bythe Exchange, for example in relation to a ‘Reg S’ offering by a US company)

l an AIM company must pay AIM fees in accordance with the Exchange’s tariffl an applicant which is an ‘investing company’ (ie a company which has as its primary business the investing of itsfunds in the securities of other companies or the acquisition of a particular business) must comply with the ‘Note forInvesting Companies’ and make it a condition of its admission that it raises a minimum of £3 million in cash via anequity fundraising at the time of admission to AIM. It must also state and follow an investing policy

l an applicant which is a mining or oil and gas company must comply with the ‘Note for Mining Oil and GasCompanies’, including the preparation of a Competent Person’s Report and specific content requirements.

AIM Rules – basic requirements for eligibility

Page 39Legal work and due diligence

The UK law on public offers of securities is governedby the Prospectus Rules published by the FinancialServices Authority. The Prospectus Rules are relevantfor AIM companies for two reasons:

l the AIM Rules stipulate that an applicant to AIMmust produce an admission document whichcontains information equivalent to that which wouldbe required by the Prospectus Rules (an ‘AIM-PD’document), with certain specified categories havingbeen carved out

l they will determine whether a proposed fundraisingon AIM will constitute an ‘offer to the public’; if itwill, then the admission document must comply withthe Prospectus Rules, requiring prior approval bythe UK Listing Authority. In addition, the directorswill be assuming certain additional legal liabilities.These rules will also apply to subsequentfundraisings by a company already on AIM.

The company’s lawyers will advise on whether anadmission document constitutes a prospectus –broadly speaking, an offer directed at no more than100 persons or to ‘qualified investors’ will not be anoffer to the public under the Prospectus Rules. In order to avoid the complications, delays and costinvolved in producing a prospectus, most IPOs on AIMare structured as placings to institutions and possiblya small number of non-qualified investors, so that thefundraising is not an offer to the public and the

invitation to subscribe for shares falls withinexemptions to the FSMA restrictions on financialpromotions.

Eligibility for joining AIM

AIM’s admission requirements permit young andgrowing companies from around the world with limitedor no trading records to join the market. The Exchangedoes not impose any minimum requirements formarket capitalisation, trading record, share price orshares in public hands (‘free float’), and the Exchangedoes not make the decision as to whether a companyis suitable for admission to AIM – this responsibility isplaced on the Nomad.

The AIM admission document

The general rule is that all new applicants to AIM mustpublish an admission document. There are fewrequirements as to the form in which the informationrequired by an AIM admission document must be setout. In practice, however, the document is usuallydivided into the sections as shown in the box ‘AIMadmission document’.

General duty of disclosure

In addition to specific content requirements, the AIMRules impose a general duty of disclosure, requiring

The Nomad must make a declaration to the Exchange that:

l to the best of its knowledge and belief, having made due and careful enquiry and considered all relevant mattersunder the AIM Rules and the Nomad Rules in relation to the application for admission, all applicable requirements ofthe AIM Rules and the Nomad Rules have been complied with and, in particular, the admission document complieswith schedule two of the current AIM Rules

l it is satisfied that the applicant and its securities are appropriate to be admitted to AIM, having made due and carefulenquiry and considered all relevant matters set out in the AIM Rules and the Nomad Rules

l the directors of the applicant have received advice and guidance (from the nominated adviser and other appropriateprofessional advisers) as to the applicant’s responsibilities and obligations under the AIM Rules in order to facilitatedue compliance by the applicant on an ongoing basis

l it will comply with the AIM Rules and the Nomad Rules as applicable to it in its role as Nomad to the applicant.

Nominated adviser declaration

Page 40 Legal work and due diligence

AIM admission document

The very front l cover page, including certain ‘health warnings’ and important information for non-UK investorsl summarised key information in relation to the companyl indexl list of directors and advisersl list of definitions and glossary of technical termsl timetablel placing statistics

The front end:detailed description of the business and the investmentproposition

l history of the businessl information about the present-day business, current trading and investmentsl key business and market trends and prospectsl in the case of an investment company, details of its investment strategyl summarised information about directors and key personnell intellectual propertyl information about the placing or offer for subscriptionl use of fundsl corporate governance policiesl share option arrangements and dividend policyl City Code information (if applicable)

Risk factors l risk factors relevant to the business

Historical financial information

l historical financial information relating to the company and its subsidiaries – usually auditedaccounts for the last three years, or a shorter period of time if the company has been inexistence for less than three years. If more than nine months have elapsed since the company’sfinancial year end, interim financial information must also be included, which may or may not beaudited.

l an auditors’ or reporting accountants’ opinion as to whether the financial information shows atrue and fair view for the purposes of the AIM admission document

l if appropriate, pro forma financial information

Other reports l experts’ reports – necessary for mining and oil and gas companies and may be desirable for acompany with a specialist business (eg technology, life sciences, intellectual property)

Statutory and generalinformation: the back end

l a responsibility statement confirming that each of the directors and proposed directorsaccepts general information: responsibility, individually and collectively, for the informationcontained in the document, and that to the best of their knowledge and belief (havingtaken all reasonable care to ensure that such is the case), the information contained in theadmission document is in accordance with the facts and does not omit anything likely toaffect the import of such information

l details of the incorporation and legal status of the company, its registered office and itsobjects

l information about share capital, including rights attaching to the shares and authorities toissue

l further sharesl information about the company’s articles of association and constitution documentsl directors’ interests in the company, directorships of other companies and involvement inprevious personal or company insolvencies

l the name of any person who, so far as the directors are aware, holds an interest of 3 per cent or more in the company’s issued share capital, and the level of that interest

l share option plansl material contracts, including the placing or introduction agreementl related party transactionsl terms of engagement of the directors and senior personnell summarised tax positionl statement by the company’s directors that, in their opinion, having made due and carefulenquiry,

l the working capital available to the company and its group will be sufficient for its presentrequirements, ie for at least 12 months from the date of admission of its securities to AIM

l material litigationl any ‘lock-in’ statement required by the AIM Rules or the Nomadl level of dilution resulting from any offerl expenses of the issuel terms and conditions of any offer for the sale of sharesl sundry information


the company to ensure that the document contains‘any other information which it reasonably considersnecessary to enable investors to form a fullunderstanding of:

l the assets and liabilities, financial position, profitsand losses, and prospects of the applicant and itssecurities for which admission is being sought;

l the rights attaching to those securities; andl any other matter contained in the admissiondocument.’

Pathfinder and placing proof

The AIM admission document will usually be publishedin final form shortly before admission to AIM.Marketing of the fundraising will have been done usinga draft admission document, known as a ‘Pathfinder’,which will be almost complete, with the possibleexception of the placing price. Shortly beforeadmission to AIM, placing letters will be signed byinvestors, attaching a later draft of the admissiondocument (the ‘placing proof’). Any significantdifferences between the Pathfinder, the placing proofand the admission document must be drawn to theattention of investors prior to admission, to give themthe opportunity to withdraw.

Verification

The company’s lawyers produce verification notes,which test each statement in the admission document,any Pathfinder and any investor presentations. Theverification exercise is designed to protect thedirectors and the company from legal liability byensuring that:

l each statement in the offer documentation isaccurate and not misleading in the context in whichit appears

l the directors have reasonable grounds for anyopinions which they express in the documentation

l there is evidence to substantiate factual statementsl statements are not selectively presented so as tobe misleading.

Verification is an interactive process that assists in thedrafting of the admission documentation.

Due diligence

The Nomad, the lawyers and the accountants willundertake a comprehensive review of the company’sbusiness, prospects and commercial risks. Thepurpose of the due diligence is:

l to identify information to be disclosed under thegeneral duty of disclosure

l to establish the corporate structure and standing ofthe company and its subsidiaries and assesswhether any corporate reorganisation should beundertaken to facilitate the AIM admission

l to verify title to assets, including intellectualproperty, and establish what needs to be done toensure the company owns what it should do

l to examine the historical financial information andworking capital requirements of the applicant

l to examine material contracts and employmentagreements and recommend remedial action

l to review any current or prospective litigationl to ensure the Nomad has complied with itsadmission responsibilities under the Nomad Rules(see the box ‘Admission responsibilities under theAIM Rules for Nomads (a summary)’) and is able to provide the Nomad declaration on the applicant.

A legal due diligence report and a long form report willbe produced by the lawyers and the reportingaccountants respectively.

The placing or introduction agreement

Whether or not a company is raising fundscontemporaneously with its admission to AIM, theNomad and broker will require comfort from thecompany and its directors that the contents of theadmission document are accurate and not misleading.The solicitors to the Nomad and broker will thereforeprepare a draft placing agreement or, where no fundsare being raised, an introduction agreement. In eithercase, the agreement will contain:

l warranties by the company and its directors (andpossibly also significant non-director shareholders)on the accuracy of the admission document

l an indemnity from the company (and often from itsdirectors) to the Nomad and broker in relation toliabilities arising out of the admission

l any lock-ins and orderly market undertakings to be given by the directors

l in the case of a placing agreement, an undertakingby the broker that it will use all reasonableendeavours to find placees for the shares whichare the subject of the fundraising and, if the issueis underwritten, that it will subscribe for any sharesfor which placees have not been found

l the fees, commissions and expenses to be paid bythe company to the Nomad and broker

l the obligations imposed on the company to consultthe Nomad before engaging in transactions whichare material in the context of the placing or theadmission to trading on AIM

l the events which will entitle the Nomad and/orbroker to terminate the agreement and thereforenot proceed with the company’s admission totrading on AIM.

Lock-in agreement

The AIM Rules require that ‘where an applicant’s…main activity is a business which has not been

independent and earning revenue for at least twoyears… all related parties and applicable employees asat the date of admission agree not to dispose of anyinterest in its securities for one year from the admissionof its securities’ (it is likely that the Nomad and/orbroker will require further lock-ins in order to protectprospective investors and maintain an orderly market).‘Related parties’ include directors, shareholders owning10 per cent or more of the voting shares (an ‘authorisedperson’ and certain other entities are carved out fromthis rule), and their respective families. An ‘applicableemployee’ is one who, together with his or her family,owns 0.5 per cent or more of any class of thecompany’s securities quoted on AIM.

Other legal documentation

The company’s lawyers will prepare and/or advise onand negotiate:

l agreements for the engagement of the Nomad andbroker, reporting accountants, public relationsadvisers and registrars


In assessing the appropriateness of an applicant and its securities for AIM, a Nomad must satisfy the admissionresponsibilities, which include:

l achieve a sound understanding of the applicant and its business, using in-house specialists or external experts wherenecessary to achieve this

l investigate and consider the suitability of each director and proposed director of the applicant and key managers andconsultants

l consider the efficacy of the board as a wholel consider making investigations in relation to substantial shareholdersl oversee and assess the due diligence process, satisfying itself that it is appropriate and that any material issues arising from it are dealt with or do not affect the appropriateness of the applicant for AIM

l consider whether commercial, specialist (eg intellectual property) and/or technical due diligence is requiredl oversee and be actively involved in the preparation of the admission document, satisfying itself that it has been prepared in compliance with the AIM Rules with due verification having been undertaken

l consider whether any specialist third-party reports are required (eg for companies in particular sectors such as property or biotechnology)

l satisfy itself that the applicant has in place sufficient systems, procedures and controls in order to comply with the AIM Rules and understands its obligations under those Rules (eg release of unpublished price-sensitive information, significant shareholding notifications, regulation of close periods)

l be satisfied that the directors have been advised of their and the company’s continuing responsibilities and obligations under the AIM Rules and that the directors are aware of when they should be consulting with or seeking the advice of the Nomad.

Admission responsibilities under the AIM Rules for Nomads (a summary)


l articles of association and constitution documentsl documentation for any necessary corporaterestructuring and share re-organisations, including(if appropriate) the creation of a new holdingcompany as the vehicle for the flotation

l the statutory and general section which usuallyappears at the back of the admission document

l employment agreements for executive directorsand other key staff

l appointment letters for non-executive directorsl share option and incentive plans for directorsand employees

l memoranda and letters of advice to the company’sdirectors on their responsibilities under theadmission document/prospectus, on theircontinuing obligations under the AIM Rules, oncorporate governance and on the liability of thecompany and its directors under the warrantiesand indemnities in the placing or introductionagreement

l agreements which will govern the relationshipbetween the company and the Nomad and thebroker in relation to their respective roles andresponsibilities following the admission

l any ‘relationship agreement’ that may be advisableto ensure that transactions between the companyand its substantial shareholders are conducted atarm’s length

l detailed board minutes recording that the directorshave reviewed, considered and approved thePathfinder and supporting documentation and,subsequently, the placing proof and the finaladmission document

l terms of reference for board committees (eg auditcommittee, remuneration committee, investmentcommittee and nomination committee)

l powers of attorney and responsibility statementsto be signed by each of the directors, confirmingthat they have understood the responsibilities theyare accepting by approving the issue of the offer documents

l placing lettersl comfort lettersl a contents list for the financial, constitutional andcorporate information which the company isobliged, under AIM Rule 26, to publish on itswebsite.

Considerations for non-UK issuers

No stipulation as to jurisdiction

The AIM Rules do not require AIM companies to beincorporated in the UK or in any other specifiedjurisdiction. Non-UK issuers are subject to the sameeligibility requirements as UK-incorporated companies.

Free transferability requirement

In cases where the AIM Rules requiring electronicsettlement of shares are difficult to comply with, itmay be appropriate to set up a UK holding company,whose shares would be traded on AIM instead. Thedecision to use a UK holding company may also beaffected by tax considerations and, in certaincircumstances, the desire of institutional investors toinvest in a UK entity.

Continuing obligations

A non-UK company is subject to the same continuingobligations under the AIM Rules as apply to UKcompanies. In particular:

l if it is dual listed, it must ensure thatannouncements required under the AIM Rules areannounced simultaneously on all markets

l it must publish annual audited accounts prepared inaccordance with International Accounting Standardsor (in the case of non-EEA AIM companies)equivalent standards – which include US GAAP,Canadian GAAP, Australian IFRS or JapaneseGAAP)

l all documents required by the AIM Rules must be inEnglish and, where the original document is not inEnglish, an English translation must be provided.

Overseas selling restrictions

A company incorporated outside the UK must alsocomply with the corporate and securities laws of thecountry in which it is incorporated and in thoseterritories where its shares are being offered.

Local lawyers

Lawyers will be needed in the jurisdictions in which thecompany is incorporated and operates, to work withthe UK lawyers to advise on due diligence, verification,supporting documentation and corporate andsecurities laws.

The City Code on Takeovers and Mergers

The City Code is a set of rules and principles thatgovern the way takeovers and mergers of publiccompanies are carried out in the UK. It applies to allAIM companies resident in the UK, the ChannelIslands and the Isle of Man. Its purpose is to ensurethe protection and equal treatment of shareholdersin certain takeover and merger situations, includingwhere there are changes in the individuals andgroups that control a company. In simple terms,‘control’ is defined as a 30 per cent (or greater)shareholding in a company.

In circumstances where the City Code does not applyto a non-UK applicant, the Nomad may advise that, tomake the applicant attractive to prospectiveinvestors, or generally suitable for admission to AIM,the applicant’s constitutional documents shouldinclude provisions which are similar to therequirements of the City Code. However, the CityCode cannot be imported in its entirety, ascompanies within its scope are regulated by the Panelon Takeovers and Mergers, which is unable to acceptjurisdiction over companies to which the City Codedoes not apply.

Disclosure and transparency rules

These rules (‘DTR’), issued by the UK FinancialServices Authority, stipulate requirements for thenotification of significant shareholdings. In relation to

AIM, they only apply to UK-incorporated companies.However, companies to which the DTR do not applyare still subject to the obligation in the AIM Rules todisclose shareholdings of 3 per cent or more and anyrelevant changes to those shareholdings. The AIMRules advise such a non UK-incorporated company toinclude provisions in its constitution requiringsignificant shareholders to notify it of any relevantchanges in their shareholdings in similar terms to theDTR. The Exchange also advises such a company tomake appropriate disclosure (eg in the admissiondocument) that the legal requirements for disclosureare different and may not always comply with the AIMRules’ disclosure obligations.

After admission

Once a company has been admitted to AIM, it issubject to the continuing obligations in the AIMRules. These are summarised in the ‘Being on AIMChapter’. A transaction which involves a reversetakeover will require legal work and due diligence inrelation to the shareholder circular and admissiondocument to the same standard as that required forthe initial admission.


A detailed ‘Illustrative admission timetable’ can beseen in the ‘IPO groundwork’ chapter.

Olswang is a leading business law firm with a distinctive approach. We act for

companies, nominated advisers, sponsors and brokers on flotations and fundraisings

on AIM and the Main Market of the London Stock Exchange. We work on projects that

stand us apart from others.

We have advised on some of the largest IPOs and secondary fundraisings in the history

of AIM, with expertise that ensures that we are the law firm of choice to a broad range of

domestic and international issuers and advisers in relation to the full range of AIM-related

transactions. Our AIM IPO and secondary fundraising work alone has seen us working on

transactions with an aggregate value in excess of £1.8 billion since 2006.

At Olswang the passion of our lawyers, the confidence of our approach and the

commercial edge to our advice provide a unique and compelling service.

To find out more please visit www.olswang.com. Or contact Max Audley at

[email protected] or Paul Blackmore at [email protected]

AIM to be the best?Talk to a business law firm with a distinctive approach.

Olswang is a leading business law firm with a distinctive approach. We act for

companies, nominated advisers, sponsors and brokers on flotations and fundraisings

on AIM and the Main Market of the London Stock Exchange. We work on projects that

stand us apart from others.

We have advised on some of the largest IPOs and secondary fundraisings in the history

of AIM, with expertise that ensures that we are the law firm of choice to a broad range of

domestic and international issuers and advisers in relation to the full range of AIM-related

transactions. Our AIM IPO and secondary fundraising work alone has seen us working on

transactions with an aggregate value in excess of £1.8 billion since 2006.

At Olswang the passion of our lawyers, the confidence of our approach and the

commercial edge to our advice provide a unique and compelling service.

To find out more please visit www.olswang.com. Or contact Max Audley at

[email protected] or Paul Blackmore at [email protected]

An IPO is a transforming event for a company. Themain benefits can include:

l access to a deep pool of equity capital to fund corporate growth and development

l providing a new form of acquisition currency– ie paper as opposed to cash

l partial or full exit from the company for private shareholders

l potentially cheaper financing instrument than debtl raised profile for the company and its board of directors

l attracting and retaining the best management and employees through equity incentivisation.

AIM has proved to be remarkably successful for IPOsas over 3,000 companies have raised a total of over£33 billion since the market was created in 1995. Thisis largely the result of the regulatory framework andthe large community of equity fund managers located

in London who are willing to invest in the high-growthcompanies which typically characterise AIMcompanies. The role of a broker in this process is tosource the potential demand for new stock at avaluation acceptable to the company.

The role of your broker

The nature of the broker’s work is multi-faceted and it ismore accurate to view the broker as an intermediarywith the fund management community, acting as aconduit of information from the company to the marketand vice-versa, rather than simply as a fundraisingfunction. Generating interest from supportiveinstitutions is crucial to the success of any IPO but therelationship between the company and the market mustbe built over the long term. Support in the aftermarketis therefore essential to the ongoing success of thecompany as a publicly quoted entity. For example, thecompany may wish to raise further equity capital from


Raising finance By Oliver Cardigan, Director of Operations, and Simon Blank,

Associate Director, Corporate Finance, Numis Securities Ltd

Typical structure of a broker

Price-sensitive

information

Corporate finance/

Corporate broking

Publicly available

information

Corporate broking

Fund management community

Research Sales and trading

CHINESE WALL AIM quoted company

Page 47Raising finance

the market in the future (known as a secondaryfundraise) and the company’s financial results and shareprice performance following admission will be crucial toits success. An IPO must, therefore, be viewed as onlythe first step in the relationship between a company, themarket and its broker.

The typical structure of a broker is illustrated on thepage opposite.

Research

Teams of analysts cover a number of London publiccompanies, generally on a sector basis. Theyproduce research notes and any updates tosignificant news flow which include their ownforecasts of the company’s financial performance andoften include their view of what should be the targetshare price. They will also offer a recommendationwhether the stock should be a ‘buy’, ‘hold’ or a ‘sell’at the current trading price. These notes aredistributed to in-house sales teams and traders andto external fund managers.

Sales and trading

Equity salesmen speak directly to fund managers andprovide research and trading ideas in order togenerate demand for client and other traded stocks.The traders will deal on behalf of fund managers in themarket at the most competitive prices.

Corporate broking

The corporate broking team is responsible for the dailymanagement of the relationship with the company andis its first point of contact. As it sits on the other sideof the Chinese wall, it can receive price-sensitiveinformation and discuss with the company thepotential impact of an item of news flow (includingfinancial results) or a transaction on the market’sopinion and rating of the stock. The Nomad remainsthe company’s first contact for all regulatory matters.

Raising finance on an AIM IPO

Valuation and structure

Raising finance essentially involves balancing theforces of supply and demand using the lever of

Valuation pressures

Supply pressure to maximise valuationHighest price for exit

Minimise dilution from new equity

Demand pressure to lower valuationEntry at lowest possible price

Maximise ownership

Valuation

Valuation range

valuation. The most important initial considerations willtherefore concentrate on the valuation of the companyand potential structure of the equity raise. There arealways competing interests – such as those of existingshareholders retaining ownership, existingshareholders selling their shares and newshareholders investing in the company for the firsttime. For example, those existing shareholders aimingto achieve full exit at admission will want to achievethe highest valuation possible, whilst those investingfor the first time will have the converse desire asillustrated in the diagram ‘Valuation pressures’.

The broker’s pivotal role is performing this balancingact, providing initial advice on its perception of themost attractive valuation and structure to the market,followed by final advice subsequent to an assessmentof the demand generated from meetings with potentialinstitutional investors. In order to crystallise its initialviews, the broker may choose to perform a limitedamount of pre-marketing, presenting the story to asmall group of investors with the potential to provide‘cornerstone’ support for the fund raise.

It should be appreciated that there must be generalconsensus from the company’s owners on its future,approximate valuation and funding requirementsbefore embarking on any public marketing exercise.

Marketing by the broker – research

Once the requirements of the existing shareholdershave been ascertained and the approach to the marketagreed, the broker’s next task is one of marketeducation through the provision of research. Typically,AIM fundraisings at IPO are institutional offeringsrather than offers to the wider public (which are morecommon for large IPOs of companies with highlyrecognised brand names). The broker will thereforeseek to access funds from institutional fund managerswho typically invest money on behalf of insurancecompanies, pension funds, banks, mutual funds,hedge funds and private clients.

In many cases, institutional investors will not befamiliar with the company and the broker will educatethem through the publication of a note by their sectorspecialist research analyst. This will set out thecompany’s investment case in significant detail,positioning the company within its sector and

providing financial forecasts and valuation guidance.This note is composed by the analyst followingdiscussion between the company and the researchanalyst, but is typically produced independently fromthe company in order to preserve the divide of theChinese wall and thereby have credibility in themarket. In essence, to have any value to a potentialinvestor the research must promote the views of theanalyst rather than act as a marketing documentproduced by the company. The reputation of theanalyst is therefore absolutely critical as he providesan independent endorsement of the investment case.

Marketing by the company – roadshow

The research note will be distributed to potentialinvestors by the broker’s sales team who will drawattention to the salient points to promote the story. Onthe back of these conversations, they will arrange aroadshow of meetings between the company’smanagement and potential institutional investors.These meetings typically last for approximately onehour, the first half of which involves the managementteam (usually CEO and finance director) taking thefund manager through a presentation compiled by thecompany with the assistance of the corporate broker.This sets out the investment case but will not usuallyhave forecasts or valuation materials. The companywill also provide the investor with a Pathfinderadmission document, the regulatory documentcompiled by all advisers (discussed further in the‘Legal work and due diligence’ chapter) which containsdetail on the company’s development, operations,financials and outlook. This roadshow is the mainmarketing effort; it puts investors and managementface to face and is in most cases the point at whichinvestment decisions crystallise.

The dissemination of research and construction of theroadshow by the sales team is a delicate process as itis essential that the meetings are only held withappropriate investors. The roadshow can last up to amonth and requires commitment from managementwho give the same presentation up to six times perday. This takes them away from running the businessand the broker must ensure that the company ismarketed to an appropriate audience in order for thisto be fruitful and drive demand for the offering.

Page 48 Raising finance


Pricing – ‘both an art and a science’

Pricing is a continuous, dynamic process comprising fullparticipation from the company. The sales team willhave a constant dialogue with potential investors duringthe marketing period and feedback will be collated andcommunicated throughout the roadshow. Havingderived feedback on demand and valuation from theroadshow, the corporate broker will recommend a finalprice and structure of the issued shares for the approvalof the company. The aspiration is always to provide asound base for long-term share price performance andthis involves balancing the immediate benefit inmaximising the issue price with the implications forlonger-term share price performance.

Following a successful roadshow, there may bedemand for more investment in the company’sshares than was originally envisaged. Although this is

a good problem to face, the company must exerciserestraint and not accept more money than it cansuccessfully deploy in a reasonable time period,which is usually taken to be 12 to 18 months. Thecompany’s intentions will have already beencommunicated to investors and to change these atthe last minute could harm management’s credibility.Furthermore, investors do not appreciate investedcash remaining untouched on a company’s balancesheet as this affects their potential overall return.Equally, the temptation to inflate the issue price andtherefore the company’s valuation should be resistedas, in the future, the market will compare thevaluation of the company to that of similar quotedcompanies in the sector and may well correct mis-pricing in the longer term. Management would thenbe left in the unenviable position of a portion of thecompany being owned by investors who have

Publish research

Identify suitable investors

Market the research

Intensive marketing to key

institutions by

management and broker

Pathfinder prospectus

Daily flow of demand and

market feedback

Establish level of demand

and price sensitivity

Ascertain quality of book

Fix price at sustainable

level and allocate shares

Planning

Market education

Pricing

Roadshow Building momentum

Feedback to company

Agree process with

owners

Consider structure

Pre-marketing with

targeted investors

Refine structure

Driving demand and valuation

experienced share price underperformance sinceadmission.

It is rare that demand results in the exact amountbeing raised at the precise valuation level initiallyenvisaged. The role of the corporate broker is torecommend a price that will adequately balance theforces stressing the price whilst leaving sufficientdemand ‘on the table’ to ensure healthy trading in theaftermarket: this is illustrated in the box ‘Drivingdemand and valuation’.

The broker’s role in the secondary market

Introduction

As admission should be viewed as only the first stepin the relationship between the company, the brokerand the market; the broker’s real work commencesonce the company is on AIM. It is essential for acompany to maintain good relations with existing and

potential investors to ensure support for long-termgrowth. As management time is considered bestspent running the business, it is the broker’s role topromote these relations through ensuring effectivecommunication between the company and the market.The aim of the broker now is to strengthen andbroaden the share register with investors who aresupportive of the management’s strategy through adisciplined sales and investor relations process.

Corporate broking

Once a company is quoted on AIM, the corporatebroking department manages the day-to-dayrelationship with the company, monitoring trading andproviding feedback from the market, reviewingannouncements and presentations and co-ordinatingcommunication with the investor base. The corporatebroker will also provide advice on market reaction toplanned corporate actions, such as acquisitions,disposals, further fundraises and returns of capital.


Typical investor relations year-planner

Year end Half year end

Dec Sept Jul Jun May Aug Apr

Fina

ncia

l cal

enda

r

Pre-close period statement

Interim results announced

Pre-close statement for half year

Jan Feb Mar

Update on trading

Co-ordinate marketing approach

Identify potential new holders

Full investor road-show to holders and non-holders

Followed by debrief and feedback

Inve

stor

inte

ract

ion Two-day road-show to

holders and targeted non-holders

Followed by debrief and feedback

Final results announced

Review marketing materials

Review announcements

Update sales team

Update meeting with broker

Bro

ker a

ctio

ns


The disciplines learned during the IPO process inrelation to the lines of communication within thebroker remain essential once the company is tradingon AIM. The corporate broking team remains insidethe Chinese wall and is therefore able to receiveinside information in the same way as the Nomad. However, communication from the company to thesales, research and trading departments must becontrolled by the corporate broker as thesedepartments must only have access to publiclyavailable information (ie that released via regulatoryannouncements). Should a salesman or researchanalyst receive inside information, they will become‘offside’ and will be precluded by the broking housefrom acting on the company’s behalf until suchinformation is made public.

Research

Fundamental to ongoing communication with themarket will be the research provided by the company’sbroker. The research analyst will publish notes inreaction to company news (such as results, tradingupdates and acquisitions) and events within thesector, explaining their implications on the company.The investment case elucidated at flotation has beenaccepted, but the market will want to track progressand the company’s success in meeting and exceedingthe milestones set out. This will underpin and indeeddrive the market valuation.

Regular news flow allows the analyst to adjustforecasts and recommendations accordingly, whichpermits both existing and new investors to assess thecompany and perform their own analysis ahead ofmaking any investment decision. As the company is apublic entity, analysts from other brokers may wellinitiate coverage on the company which is always awelcome development as it is usually in response toincreasing investor interest and results in an elevationof the company’s profile. Indeed, a recentdevelopment is that some companies now payindependent research houses to produce notes on topof those already provided by their own broker.

Sales

The broker’s sales team circulates the house researchnotes and ensures continued dialogue with existinginvestors. It will also have meetings with thecompany’s management team on a regular basis to

ensure it keeps up to date with corporatedevelopments.

As the company’s story matures and milestones areachieved, the sales team will also market the companyto new investors who did not purchase shares at IPO.Once a company has delivered on its expectedperformance, it is much easier to convince investorsthat it will do so again on the basis of a demonstrabletrack record.

Investor relations

Some broking houses also have an investor relationsteam in the corporate broking department. Roadshowswill be arranged after results and the company may beinvited to participate in special investor events such assector conferences. These provide a valuableopportunity for the company to remain directly incontact with its shareholders. Following a roadshow orconference, investor feedback will be provided to thecompany, summarising the market’s thoughts on thecompany, its progress and the management team. Onoccasion, this may contain criticism from theinvestment community, but it is essential that this isaccurately communicated back to the company so thatissues may be addressed.

As this again requires management time, the IR teamwill work closely with the company to agree acommunication plan and ensure that a disciplinedapproach is taken.

Trading – market makers

The fundamental reason for a company to join a publicmarket is to create a market for its shares so that theymay be freely traded. The trading arm of a brokerfacilitates this by making a market for the company’sshares, essentially acting as the focal point for buyersand sellers to congregate. This function is essential toproviding liquidity and determining price.

Secondary fundraisings

One of the main benefits of being traded on a publicmarket is continued access to equity capital from bothexisting and new shareholders. As on admission, theremust be a compelling investment case carefullyexplaining the reason for the new capital requirementand the effect that it will have on the company, such

as an earnings enhancing acquisition. Though thissection will not seek to summarise technical details,the significance of AIM’s regulatory environment isthat it provides a flexible environment for a secondaryfundraising which can be performed in a number ofways.

If time is of the essence, a fund raise can be limited toan institutional audience as on flotation. Alternatively,the company may wish to include a pre-emptiveelement to the fundraising, whereby all shareholdersare offered the ability to participate, including retailinvestors. This is typically performed through a rightsissue or open offer, which is viewed as a positivedecision as shareholders are not diluted by the issueof new shares and therefore not seen to be‘disenfranchised’.

As the previous sections imply, access to furtherfunds from the market will be dependent upon thecompany’s performance since flotation and the trackrecord that it has established by accomplishing thatwhich was promised. This emphasises the importanceof establishing a realistic initial investment case onadmission to AIM, for whereas supportiveshareholders would most likely be willing to providefurther funding to a successful management team,disappointed shareholders are unlikely to ‘throw goodmoney after bad’.

Summing up

The role of broker is often seen solely as enablingaccess to equity capital upon admission to AIM. Thischapter hopefully demonstrates that the relationshipbetween the company, broker and market isconsiderably more complex and long-lasting. Whenappointing a broking house, a company should seekone with expertise in the relevant industry sector. Thiscan be ascertained by ensuring that the researchdepartment covers the sector and that the sales teamhas a track record of raising finance for similarpropositions. Speaking to institutional investors andclients of broking houses should allow a company todistinguish between those that support their clients inthe aftermarket and those that are primarily interestedin the IPO fee and may offer a reduced level of servicefollowing admission. It is vital for a company toconsider these factors when selecting a broker.

The ability of a broking house to raise finance uponadmission to AIM is a key factor in deciding which firmto appoint, but placing power alone does not lead to asuccessful existence on the public market. It isimportant to appoint a broker that understands thebusiness model and believes in the future prospectsof the company. This allows the broker tocommunicate effectively progress to the investmentcommunity, thereby ensuring a healthy long-termrelationship with the market as well as access tofurther finance.


A leading UK independent investment banking and stockbroking business.

Numis Securities, London Stock Exchange Building, 10 Paternoster Square, London EC4M 7LT www.numiscorp.comThis advertisement is directed at, and the services described herein are available only to, non-private customers. Numis Securities Limited does not carry out business with private customers and the latter should not rely on anything stated herein. Registered No. 2285918. Authorised and regulated by the Financial

Services Authority. A member of the London Stock Exchange.

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A leading UK independent investment banking and stockbroking business.

Numis Securities, London Stock Exchange Building, 10 Paternoster Square, London EC4M 7LT www.numiscorp.comThis advertisement is directed at, and the services described herein are available only to, non-private customers. Numis Securities Limited does not carry out business with private customers and the latter should not rely on anything stated herein. Registered No. 2285918. Authorised and regulated by the Financial

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THE CHIEF EXECUTIVE: ‘I want this IPO to be

perceived as a success in the media. I want my

employees to be looked after, and my customers to

be reassured. I want to be assured that my

reputation is in good hands if I am not in the UK to

monitor it.’

Going public may be one of the most taxing and time-consuming things you do as a company. Not only dosenior management consistently underestimate theworkload, but they are shocked by the probing natureof their audiences, whether about how much the sellerstands to make personally, or in areas of commercialsensitivity. No matter how well prepared themanagement team is, when asked if things ran asexpected, the answer invariably is a unanimous ‘no’.While there are processes to follow and principles torely on, engaging with the right Public Relations (‘PR’)adviser who knows the process, the sector youoperate in, and has strong relationships with youraudiences and other advisers, can take away some ofthe strain.

By joining AIM, companies are able to access growthcapital within a flexible regulatory system and at thesame time be part of an international market with

sector knowledge, expertise and an appetite for risk.By its very nature, the journey to and beyond AIM willattract fans and detractors in a company’s stakeholderbase. The key to being a successful company is tobuild and protect your reputation and brand.

Your audience is wide

The audience to whom a company will becommunicating goes well beyond investors. It includesall stakeholders, including employees, customers,suppliers, partners, analysts, online investor services,rating agencies, capital providers, regulators, unions,governments, opinion formers, trade associations, and media.

Today, ‘the media’ is a broad term, including online,blogs, commentators, editors, correspondents,investment columns, trade, social and broadcast (radioand TV). In the age of 24-hour news, the speed atwhich information changes hands is breathtaking. Forsmall companies, worrying about whether CNN willpick up good or bad news will not be relevant, butwhat investors are saying on internet message boardswill be. Communication across all stakeholder groupsmust be consistent and viewed with equal importance


Communicating with investors – it mattersBy Carole Cable, Partner, Brunswick Group

DAILY PAPERS

SUNDAYPAPERS

TRADE

ONLINE

SOCIAL

BROADCAST

INTERNATIONAL BUSINESS PUBLICATIONS

GLOBALNEWSWIRES

CITY EDITORS

COMMENTATORS

SUPPLIERS

PARTNERS

CUSTOMERS

EMPLOYEES

CAPITAL PROVIDERS

INVESTORS

DIY ONLINEANALYSTS

RATINGS AGENCIES

TRADE ASSOCIATIONS

REGULATORS

OPINION FORMERS

GOVERNMENTS

UNIONS

Sector Correspondents, Financial, Investment Columns

Other Media

Opinion Formers and Public Affairs

International Media

UK City Editors andCommentators

Business Partners

Financial stakeholders Industry Commentators

Communicating to your audience

Page 55Communicating with investors – it matters

as the lines defining the groups are often blurred; youremployees might also be your shareholders.

Does PR make a difference?

A common question posed by companies looking tojoin AIM is how much influence public relations canreally have on the outcome of an IPO. Mediacommentary, analysis, message boards and blogsare key sources of information among investorsduring an IPO, so clear communication really doesmatter. The principles of a successfulcommunications strategy around admission are tohave a strong credible story, be well organised with aclear plan, ensure your ‘fan club’ is built and ready tosupport you, and position the IPO as a means to anend, not an end in itself. The journey is just asimportant as the destination.

Building the story

It is stating the obvious to say that companies need tohave a strong credible story, but the story needs to bejust as compelling to an investor as it does to ajournalist, and the two audiences often view AIMcompanies in different lights. Journalists, analysts andinvestors will look for the positive core story but theywill also be sceptical. In smaller AIM companies, ajournalist often takes on an investigative role andbecomes less of a reporter and more of an investmentadviser. He may pick up on issues that matter less toan analyst but could detract from the core story. Goodcommunications around the IPO becomes as muchabout anticipating questions and having robustanswers as it is about the overarching narrative.

The company should start by thinking about how thestory might be heard in the newsroom and on a tradingfloor. When the correspondent has one minute to pitchhis story to the editor in morning conference, whatangle will he take to make the story a ‘must read’. Andwhen the analyst briefs his sales desk, what will theysay when they pick up the phone to their clients?

The equity story will focus on the growth and the‘uniqueness’ of the company. It may be the appeal of

l have a strong, credible storyl be well organised – have a proper planl have the right friends at the right timel position the IPO as a means to an end – not as an

end in itself

Communication principles around an IPO

Issues to Address

The Equity Story

The view from the trading room / newsroom

the sector in which it operates that makes the equitystory attractive. One PR issue specific to AIM is thatsmall companies often come with big personalities andas a result, the track record of the company and itsmanagement will be closely scrutinised. This may bethe case, but it shouldn’t detract from the core storyalthough it may be an issue to be managed.

Part of the story is the management’s track record andconviction. Are you committed to joining AIM and areyou ready for the new levels of transparency anddisclosure? We have seen executives hesitate at thisquestion or talk about other options and it looksawkward. Having the mindset to embracetransparency and governance as a public company is agiant step in the IPO process. If a journalist believesmarket conditions to be difficult and receives a lessthan confident reaction to the question, his confidencethat the float will be taken up at the right price willevaporate and he is likely to find that a story in itself.One of the most frequently asked questions by ajournalist pre- and post-IPO is: ‘Why list in London andwhy on AIM?’

THE JOURNALIST: ‘Why list in London and why

on AIM?’

The use of the proceeds from the flotation will beanalysed by the investment community as part of theequity story – will it fund the next stage of growth forthe company; is it being used to pay down debt; or willthe proceeds pay for the existing shareholders to exittheir holding?

THE SELLING SHAREHOLDERS: ‘We are worried

about our personal profile. We want publicity to

focus on the value we have put into the business

rather than the money we have made from it’

There will invariably be the two-hour powerpointpresentation for analysts, but can the CEO tell thestory in a compelling way? If you sat next to him at adinner party and he told you the business story in acouple of minutes, would you be getting your chequebook out?

There is no need for jargon and ‘banker speak’ in agood story if the key facts are honest and compelling,useful for investors, and indispensable for time-

starved correspondents. A good spokesperson for thecompany is a tremendous asset but as is often thecase with international companies, managementteams may not have English as their first language.This can be overcome with good media andpresentation training and is highly recommended.Needless to say, there is a fine line between beingover-promotional and telling a compelling story. Theskill is to find the balance and to resist over-promising;reputations are made and lost by tipping the balance.

The strategy paves the way

Having a clear communications strategy is part of theplanning process and it should take you well beyondthe admission date. It is about thinking creatively todetermine the news angle or hook that goes beyondthe corporate story. It is about developing thecompany’s website to tell the story as this is often thefirst port of call for a newcomer to the story. It isimperative to work closely with the other advisers onthe team to ensure publicity guidelines are followed toremain within the regulatory framework pre-IPO and toensure the investment case set by the bankers is notcompromised. When the communication strategy isagreed, it will be incorporated as a separateworkstream into the IPO timetable and managed byregular conference calls, a strict timetable ofdeliverables and responsibilities, and rehearsals.International companies will have the addedcomplication of different time zones and busy travel schedules.

THE FINANCE DIRECTOR: ‘I want to know I am

getting value for money, I want to understand the

legal implications of what we say and I want to

learn about how PR fits into the process overall.’

The communications strategy and plan is executedaround the IPO timetable which has very littleflexibility once the Intention to Float announcement(‘ITF’) is released to the market. Ideally, a PR adviseris appointed well before this date in order to raisethe awareness of the business while remaining withinthe guidelines of regulation. It is around the events ofthe IPO timetable that the PR activity intensifies tothe outside world. This may be the first time thatyour external stakeholders are hearing your storyfrom a management team that may not be well

Page 56 Communicating with investors – it matters

Page 57Communicating with investors – it matters

known within the UK and with assets outside thecountry.

The communications objectives should be set with thestrategy in mind which will vary according to issues orvulnerabilities the company might be facing. Theobjectives are to introduce the management team, tellthe story, identify the news hook or media angle,

focus on the investment case, link the company withsector or broader trends, work hard to argue thevaluation case, use third-party commentators toendorse the story, reach out to investors by targetingspecific media, and to set long-term expectations.Don’t over-promise!

Looking for the media-friendly angle needs creativityas some issues specific to AIM are size and whetherthe company has a well-known brand, managementteam or assets in the UK. These issues may act asbarriers with some media, but there are ways toovercome them. The use of good photographs cannever be underestimated. There have been instanceswhere a UK national newspaper has published a goodphotograph with nothing more than a few sentencesbelow the photo containing the key message thecompany wishes to convey; a fantastic result.

Media will engage with a story when there is corporatenews flow, but there is an opportunity to begin buildingrelationships between news with backgroundbriefings. However, beware of the sceptical journalistor editor and be creative whilst operating in the realmsof regulatory requirements. It may be the case that theappeal to the journalist is the sector and that the

Pre Admission Announcement

Intention to Float Connected analyst research

Pathfinder announcement

Institutional roadshow

Pricing 1st day’s trading

! Press release! Investment story! Press meeting

! Investmentstory

! Backgroundpress meetings

! Continue momentum

! Impact day! Non-connected

analyst meeting! Management story! Price range

! Pricing pressure! Manage media and

analyst comment

! Press release! Photo opportunity

! Press release

Interesting ideaExcitingprospect,Good timing,Logical nextstep

Interesting investment, Attractive story

Great story, Buy the shares

Top of therange, Over-subscribed

Successfultrading

N E W S F L O W A N D P L A C E D S T O R I E S

The IPO timetable

Event

Activity

Story line

l introduce the management to all key stakeholdersl explain what you dol find a media-friendly anglel keep the focus on the business and investment case

l establish competitive advantagel link the company to larger, positive industrial/economic trends

l win the argument on valuation – method and valuel gain positive endorsementsl attract the investors you wantl set long-term expectations

Communications objectives

corporate story fits into a broader piece. Attracting theinvestors you want can be done by targeting themedia they read, whether it be trade journals, share tipcolumns, or online investment services where privateinvestors can research and trade shares.

Having the right friends at the right time will provide aninvaluable support during and after the IPO process. Acompany should begin identifying and building theirstakeholder ‘fanclub’ early on. Look to friendly mediawho understand the sector, the brand, the company orthe management, and to non-aligned and houseanalysts, employees and third-party commentators suchas trade associations, investors, or partners. Buildingand maintaining strong relationships in the context ofthe legal restrictions will pay dividends in the long term.

When building support amongst the analyst community,the tendency is to neglect the non-aligned analysts.Companies will want these analysts to begin writingabout them after admission so early relationshipbuilding is important. Holding a group presentation tothe sell side can often be done before pricing or if not,after admission. Hosting site visits is often welcome byanalysts as is access to management.

The most important and loyal supporters are youremployees; they are a company’s best ambassador.Demotivated or disenfranchised employees in today’sage of the internet could create a difficult situation.Implementing an internal communications programmeto fit with the corporate communications strategy andthe regulatory guidelines around the IPO will ensureemployees feel like they are part of the process andwill engender a positive response to the company’sstrategy of going public.

Life as a public company

And finally, your IPO is a means to an end. Life beyondadmission day brings with it new challenges butestablishing a positive communications message fromthe outset will enable a company to negotiate thejourney. Remember, the company will now be underthe spotlight as a public entity.

Building relationships with the media, managingmarket and media noise, and observing disclosure

requirements will all continue after admission. Oncethe company is admitted to AIM, management may betempted to refocus on the business and may neglectits new stakeholders. It is important that thecommitment to best practice in investor relations (‘IR’)demonstrated from the onset is maintained. It is worthnoting that the day of admission will be one of the fewtimes that a company will know exactly who theirshareholders are as the list will change daily, reflectingtrading and changes in share ownership. An effectiveIR programme will keep your shareholders close.

The objective of the IR programme is to ensure thevalue of the company is reflected in the share price.The PR adviser will often provide the IR support, asthe two should mirror the company’s strategy andethos. Building a following of non-aligned analystsincreases the breadth of investors the company canreach out to. Private clients can be accessed throughspecialist brokers who, in turn, can be introduced tothe company’s story by the media. If there is a goodshare-tip in an investment magazine read by privateclients, their broker may express an interest to meetthe company and listen to the story.

Between the rigorous financial reporting calendarand reporting requirements, news flow, site visits,and creative story ideas can maintain the momentumand keep the story intact. Clear communication withall stakeholders on the road to admission to AIMand beyond will not only help the company navigatethe twists and turns of the journey, but will build andprotect the company’s reputation and brand. Andthat matters.

Page 58 Communicating with investors – it matters

l under the magnifying glass

l disclosure requirements

l financial calendar work

– issue management – media advocacy– building and maintaining analyst and media network

l ongoing news flow to support trading

Life on AIM: what changes?

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Continuing obligations

The AIM Rules for Companies (the ‘AIM Rules’) setout the continuing obligations of a company on AIM.The company needs to retain certain advisers, mostimportantly a Nominated Adviser (‘Nomad’), tomaintain a transparent market in the company’ssecurities and ensure compliance with the continuingobligations rules. There are various other rules andregulations which may apply to a company’s ongoinglife on AIM, depending on the company’s country ofincorporation.

Continuing eligibility

Retaining a Nomad

A company must retain a Nomad at all times. There isa complete list of approved Nomads on the LondonStock Exchange website. The Nomad is responsible tothe London Stock Exchange (the ‘Exchange’) forassessing the appropriateness of a company on AIMand for advising and guiding an AIM company on itsresponsibilities under the AIM Rules.

Responsibility to the Nomad

A company is required to seek advice from its Nomadand provide any information the Nomad might requirein order to carry out its responsibilities under the AIMRules. For example, a company must provide advancecopies of all proposed changes to the board andnotifications required under the AIM Rules. A Nomadmust maintain regular contact with the board of theclient company. This can include attending certainboard meetings and monitoring internal companyforecasts and trading figures as well as consulting onstrategy and all other matters relating to managementof the company.

The Nomad should be the first point of contact for thedirectors of an AIM company regarding any regulatory,market or corporate issue. The Nomad will then advisethe company how to deal with those issues, inconsultation with the relevant regulators wherenecessary, to ensure compliance with the AIM Rules.It is usual, but not always the case, that the company’sNomad is also the broker to the company.

Ceasing to engage a Nomad

If a company ceases to engage a Nomad and a

replacement Nomad is not appointed immediately, theExchange will suspend the company from trading onAIM with immediate effect. If a replacement Nomad isnot appointed within one month, admission of thosesecurities will be cancelled.

Other eligibility requirements

Retention of a broker An AIM company is required to retain a broker at alltimes. A company may retain more than one broker.

Transferability, settlement and admissionIn order to maintain a fully transparent mechanism fortrading, the AIM company must ensure that itssecurities are freely transferable and appropriatesettlement arrangements have been put in place. AIMsecurities must be eligible for electronic settlementunless otherwise agreed with the Exchange.Application must be made for the admission of allsecurities within a class and the securities must beunconditionally allotted in advance of admission.

Fees and contact details An AIM company is required to pay fees set by theExchange at the required time. Furthermore, contactdetails including an email address must be provided tothe Exchange and updated with any changes.

Announcements

A key ongoing requirement for an AIM company is todisclose certain information to the market in a timelymanner. The failure to release price-sensitiveinformation is a breach of the AIM Rules as well as ofcertain provisions of the FSMA (Financial Servicesand Markets Act) relating to market abuse.Information requiring notification to the marketpursuant to the AIM Rules must be released as anannouncement via a regulatory information service(‘RIS’). Information notified via an RIS must be of aregulatory or legal nature; it is not the place for thecompany to generate market interest in the company,for example, by making marketing-styleannouncements.

In order for the Nomad to execute its obligations underthe AIM Rules and the AIM Rules for NominatedAdvisers, internal company procedures should be in


Being on AIMBy John Cowie, Director, Corporate Finance, Seymour Pierce Ltd

Page 61Being on AIM

place for the company’s Nomad to review andauthorise all non-routine announcements in advance ofrelease to the market.

Release of price-sensitive and other miscellaneous

information without delay

Price-sensitive informationAn AIM company must issue without delay notificationof any new developments which are not in the publicknowledge concerning a change in its financialcondition, its sphere of activity, the performance of itsbusiness or the expectation of its performance which,if made public, would be likely to lead to a substantialmovement in the price of its securities. The AIM Rulesalso require that announcements are not misleading,false or deceptive or leave out anything significant.

This can be a complex assessment to make and thereare several areas of subjectivity and opinion relating tothese rules. Therefore, the assessment of therequirement to make such an announcement shouldbe made following a detailed consultation with thecompany’s Nomad.

Announcement of share dealings A company is required to announce without delay anydealings by directors and any relevant changes to theholdings of significant shareholders (holders of 3 percent or more of the shares).

Directors should take advice from the company’sNomad before any form of dealing in the securities ofthe AIM company. An AIM company must ensure thatits directors and applicable employees – defined as anemployee who is likely to be in possession ofunpublished price-sensitive information relating to thatcompany – do not deal in any of its AIM securitiesduring a close period. This is typically the period oftwo months ahead of the notification of the company’sannual or interim results, one month ahead of thenotification of quarterly results, or any other periodwhen an individual at the AIM company is inpossession of unpublished price-sensitive information.

Directors and applicable employees should also takenote that the definition of ‘deal’ is wide ranging. Forexample, it not only includes any sale or purchase ofsecurities, but also grants of options and other rights

over financial products. Certain members of adirector’s family, trusts and companies of which theyhave more than 20 per cent equity or voting rights willalso be included under the definition of deal. Directorsare advised to consult the Nomad in advance of anydeal in which they have a beneficial or non-beneficialinterest.

Announcement of other informationAn AIM company should also notify othermiscellaneous information including changes to theboard, the year end, the registered office and thecompany name. If trading performance is likely todiffer materially from expectations, if there is a changeto the Nomad, the broker or the website address, or ifcertain information relating to its directors needs to beupdated, an announcement must be made.

The company must also disclose details of anypayments pertaining to its AIM securities, reasonsfor the admission or cancellation of AIM securities,and the occurrence and number of shares taken intoand out of treasury. Finally, the company mustdisclose the admission to trading or cancellation ofAIM securities on any other exchange or tradingplatform, where such application is at the request oragreement of the company.

Companies carrying out corporate actions (eg, thepayment of dividends) which have the effect ofchanging the rights of existing shareholders arerequired to make announcements to the market aboutsuch events. This should be discussed with thecompany’s Nomad and the Exchange in advance.

Transactions

The disclosure requirement for transactions carriedout by an AIM company varies depending on the sizeand nature of the transaction. In order to establish thesize of the transaction and the nature of the disclosurerequired, the class tests found in Schedule 3 of theAIM Rules need to be calculated.

It is important to note that in some cases, the classtests need to be calculated taking into account previoustransactions which the company has performed toassess the overall impact. A company should seekguidance from its Nomad as to when this applies.

Page 62 Being on AIM

Being on AIM opens up a whole range of opportunities toambitious companies. It is designed to attract smaller,growth companies and achieves this by having a simplifiedroute to admission (usually without the need to produce aprospectus), a simplified set of rules governing life on AIMand access to the deepest pool of investment capitalanywhere in the world. As such, an AIM company has adistinct advantage over its private company rivals whenconsidering raising money, making acquisitions or carryingout corporate finance activities.

It is important to maximise the advantages that being apublic company provides – the relative standing andprofile can really set a company apart when itscompetitors are still privately owned.

Raising moneyMost companies which join AIM do so because they wantto grow. There are two ways of achieving growth, eitherorganically or by making acquisitions. Both place demandson cash, albeit in different ways. In order to make anacquisition, there may be a cashrequirement up front but there islikely also be a cost tointegrating the target business. Ifa company chooses to groworganically, there are going to bedemands on working capital andthe company may find it needsto open new offices or branches,buy new equipment or hire new staff.

Simplistically, companies raisemoney through debt or byissuing equity, the formertypically from banks, the latter byinviting people to participate inthe equity share capital of thebusiness. Being admitted to AIMsignificantly enlarges theuniverse of investors which acompany can approach andtherefore makes raising funds by issuing equityconsiderably easier.

Money raised can be used in a number of other ways: forexample, to reduce the dependency on bank finance,reduce pressure on working capital, pay down significantcreditors and buy out founder shareholders.

If a company does not want to raise money by issuing equity, many banks understand the rigorous processthrough which a company and its board has to go to join

AIM and this often allows them to be more flexible whensetting covenants and the terms of any loan. Also, tradecreditors are often able to give more generous paymentterms to a public company than they would a privatecompany.

Making acquisitionsBeing on AIM also allows a company to use its equityshare capital as ‘currency’ for acquisitions. Shares in apublic company, with an open market value, are far moreattractive to a potential target company than shares in aprivate company. AIM also provides a mechanism forselling the shares which can allow target companyshareholders to realise the value in any shares receivedas consideration. In order to maintain an orderly market, aNomad will typically insist on a moratorium over sellingshares for a period immediately post-acquisition for thesignificant shareholders and, thereafter, will look for‘orderly market’ provisions so that any desire to sell isproperly managed.

Under the AIM Rules, onlytransactions which constitutereverse takeovers (transactionswhere 100 per cent is breachedunder any of the class tests setout in the AIM Rules) requireshareholder approval. Thisstreamlines the process ofmaking acquisitions considerablyand provides AIM companieswith a significantly reduced levelof costs and compliance duringthe acquisition process whencompared to fully listed (MainMarket) companies. Time isoften of the essence in acompetitive bid for a targetcompany and the AIM Rulesessentially allow AIM companiesto move as quickly as privatelimited companies.

Bid approachAn AIM company, if approached by another company witha view to being taken over, should be mindful of theprovisions of the City Code on Takeovers and Mergers.All UK-based AIM companies – and many which are notbased in the UK – are subject to the provisions that arethere to protect shareholders and, in essence, ensure thata fair deal is put on the table and that all shareholders aretreated equally.

Corporate finance opportunities

Some tips

l Speak regularly to your Nomad so they understand what your intentions are as they develop

l Make use of your Nomad, broker and analyst –they should understand what you want to doand they may well come across opportunitiesyou haven’t seen

l Don’t be shy about asking for input and ideasfrom your Nomad and broking team

l Seek value from your Nomad – the mark of agood AIM adviser is the level of activefeedback you get

l The golden rule in any corporate action is tokeep your Nomad and your legal adviserinformed.

Page 63Being on AIM

In the case of all transactions, the requirement tomake an announcement may be brought forwardshould there be a leak to the market about thetransaction. The company should seek to keepconfidential transactions which are in the course ofnegotiation. Should there be a suspected leak, thecompany must liaise with its Nomad immediately toensure the appropriate steps are taken, includingannouncements where necessary.

Class tests

There are five tests, each of which results in apercentage, used to determine the size of a transactionon AIM. They are known as the ‘class tests’:

l the Gross Assets Testl the Profits Testl the Turnover Testl the Consideration Testl the Gross Capital Test.

Substantial transaction

Where a company undertakes a transaction whichexceeds 10 per cent in any of the class tests, it isknown as a ‘substantial transaction’. The AIM companymust notify the transaction via an RIS as soon as theterms have been agreed. The notification must includecertain information prescribed in Schedule 4 of the AIMRules, including particulars of the transaction, adescription of the business, the profits attributable tothe assets, the value of the assets involved, the fullconsideration and how it is to be satisfied, the effects ofthe transaction and any other information necessary toenable the investors to evaluate the effect of thetransaction on the AIM company.

Reverse takeover

Where a company undertakes a transaction, or anumber of transactions over a period of 12 months,which exceeds 100 per cent in any of the class testsor which will result in a fundamental change in itsbusiness, board or voting control, it is known as a‘reverse takeover’. For investing companies, a reversetakeover can also be triggered by the companydeparting materially from its investing strategy. A reverse takeover is conditional on the consent ofshareholders and notification of the transaction mustbe accompanied by the publication of a full admissiondocument in respect of the proposed enlarged entity

and documents to convene the general meeting toapprove the transaction. The AIM company mustnotify the market via an RIS as soon as the terms ofthe transaction are agreed.

Related party transaction

Where an AIM company undertakes a transaction witha related party which exceeds 5 per cent of any of theclass tests, notification is required without delay assoon as the terms of the transaction are agreed. Thedefinition of a related party under the AIM Rules isquite wide and includes parties such as directors,substantial shareholders or associates (being family orcompanies controlled by such parties). The notificationmust include the information required under Schedule4, name of the related party concerned and nature andextent of involvement in the business. Finally, thenotification must include a statement that the directorswho are independent of the related party to thetransaction, having consulted with its Nomad, considerthat the terms of the transaction are fair andreasonable insofar as shareholders are concerned.

Fundamental disposal

A disposal which, when aggregated with any otherdisposal(s) over the previous 12 months, exceeds 75 per cent in any of the class tests, is treated as afundamental change of business and is conditional onthe consent of its shareholders in a general meeting.It must also be notified without delay disclosing theinformation specified by Schedule 4 and insofar as itis with a related party, the additional informationrequired by Rule 13. It must also be accompanied bythe publication of a circular containing details of thedisposal and any proposed change of businesstogether with the information specified above and anotice convening the general meeting.

Investing companyWhere the effect of the disposal is to divest the AIMcompany of its trading business or assets, it will betreated as an ‘investing company’ and must adopt aninvesting policy at the general meeting. The investingcompany will then have 12 months to make one ormore acquisitions which constitute a reverse takeoveror otherwise implement the investing policy.

Financial reporting

An AIM company will be required to produce both half-yearly reports and annual accounts, respectively.

Half-yearly reports

Half-yearly reports (or interims) are required to benotified without delay and not later than three monthsafter the end of the relevant six-month period. Whilethe form of the interims must be consistent with theannual report, the required information includes just abalance sheet, an income statement, a cash flowstatement and must contain the prior year comparativefigures. These figures need not be audited.

Annual accounts

The annual accounts must be published by an AIMcompany and sent to shareholders not later than sixmonths after the end of the period to which theyrelate. The accounts must be prepared in accordancewith International Accounting Standards if thecompany is incorporated in an EEA country, unless thecompany is not a parent company, in which case it canprepare its accounts in accordance with theaccounting and company legislation and regulationsthat are applicable in its country of incorporation. Acompany incorporated in a non-EEA country mustprepare its accounts in accordance with IAS or certainprescribed GAAP standards.

The accounts produced must also contain details of anytransaction with a related party, even if it has beenpreviously disclosed, where any of the class testsexceed just 0.25 per cent. The identity of the relatedparty and the consideration for the transaction must bedisclosed.

In addition, details of directors’ remuneration mustalso be disclosed for the past financial year, includingpayments such as salaries, share options, non-cashbenefits and contributions to pensions schemes.

Website disclosures

Under Rule 26, an AIM company must maintain an up-to-date website, free of charge, including detailedinformation on the company such as:

l a description of its business

l names and biographical details of the directorsl copies of certain company documents (eg constitutional documents)

l the company’s latest admission documentl its most recent half yearly and annual accountsl all notifications released in the last 12 monthsl identity and percentage holding of significant shareholders.

Creating and maintaining a secondary market

Why maintain a secondary market?

In order for a company’s share price to reflectcompany performance, there needs to be sufficientliquidity in the company’s shares. Liquidity is a termused to describe the ability of investors to buy andsell shares in a company. The higher the liquidity of acompany, the higher the daily volume of sharestraded.

Market and trading considerations

Following a successful IPO, there are a number ofmatters which a company should consider in order tomaximise its success on the market:

Research coverage

Many companies on AIM attract less researchcoverage than their larger peers. Often theeconomics and low commissions from smaller or lessliquid companies mean that multiple brokers will notinitiate coverage on a stock.

In a common scenario, where a company is coveredonly by the house broker, it may seek to expand itsresearch coverage. If other brokers will not initiatecoverage, the company may consider paid-for researchcoverage or the appointment of a joint broker.

Wide market maker bid and ask price

It is not uncommon for the spread – the differencebetween the bid and ask price – to be quite wide insmaller or less liquid AIM companies. Adding one ormore new market makers can assist in reducing thedifference between the buy and sell prices. Improvingliquidity and daily volumes may also reduce thespread.


Page 65Being on AIM

Improving liquidity

Many companies actively seek to increase dailyvolumes in an effort to improve liquidity. One way ofachieving this is by increasing the number of privateinvestors on the shareholder register as privateinvestors tend to trade more regularly than institutionalinvestors and hold much smaller shareholdings.Typically, they also have varied investment strategies,investment criteria and risk requirements and much ofthe daily volume in AIM companies is brought about bythese small private investors.

Attracting private investors can take a significantinvestment in management time. There are a numberof ways a company can attract private client investorsincluding:

1) Incorporate private client brokers (PCBs) in investorroadshows, particularly around the results reportingcycle. Usually, the company’s advisers can arrangefor the company to have meetings with several ofthe larger PCBs.

2) Attend private investor events. There are a numberof private investor events that allow companies to present to a large private investor audience.

3) Increasing independent research and paid-forresearch to provide investors with furtherinformation on the company and broaden thepotential investor audience.

4) Press coverage, including magazines and journals.Although the broadsheet newspapers may notprovide regular coverage of smaller AIMcompanies, some investor magazines and journalsfocus specifically on them.

Directors’ ability to buy shares

Directors in an AIM company will often hold or seek tohold shares in the company on whose board they sit.This can be problematic as directors of fast-growingbusinesses may often be in possession of unpublished,price-sensitive information regarding company results,

Market makersMarket makers help to make smaller companies more liquid by quoting a price at which they will buy shares and a price at which they will sell.

Private investorsPrivate investors, who typically hold

much smaller shareholdings than institutional shareholders,

also tend to have a varied investment strategy, investment

criteria and risk requirements and much of the daily volume in AIM companies

is brought about by these smaller private investors.

Free floatFree float is the term used

to describe the proportion of shares in public hands. Some investors

will look to invest in companies with a high free float. In theory,

the higher the free float, the more liquid the market in the shares

is likely to be.

Market capitalisationLarger companies tend

to attract a more diverse range of investors

which tends to give rise to higher

daily trading volumes.

Investor relationsInvestor relations is the

communication of a company with its shareholders.

It is necessary in order to maximise liquidity and the potential

access to capital of an AIM quote for an

AIM company to maintain an effective investor relations policy.

Factors affecting liquidity


strategy and potential acquisitions, thereforepreventing them from dealing.

It can be frustrating if the company is making goodprogress but the directors cannot invest in thecompany ‘like ordinary shareholders’. It is typicaltherefore to see directors of an AIM company takethe opportunity to buy shares after the announcementof the full- or half-year results when up-to-datefinancial information has been made public. It isimportant for the board of an AIM company to have aclear and transparent policy for directors’ dealings. AnAIM company may seek to implement the policy atIPO following consultation with its Nomad.

Corporate governance

Corporate governance is the set of principles bywhich a board of directors manages a company’saffairs to protect shareholders’ interests. Effectivecorporate governance helps to ensure that acompany is administered for the benefit ofshareholders and not merely for the benefit of thosewho run the company. Where matters of doubt ariseon issues regarding corporate governance, AIMcompanies should consult their Nomad.

The main source of these principles is the UKCorporate Governance Code (the ‘Code’) which iskept under review by the Financial Reporting Council.Compliance with the Code is mandatory forcompanies listed on the Main Market of the LondonStock Exchange (those admitted to trading on theOfficial List) but is voluntary for AIM companies.Compliance with the Code by AIM companies is,however, widely regarded as good practice and hasbecome expected of larger AIM companies. Manyinvesting institutions expect their investee AIMcompanies to comply with the Code or set out thereasons for non-compliance in much the same way asMain Market companies have to adopt the ‘comply orexplain’ principle.

Guidelines for compliance

For many AIM companies, the costs of fullcompliance with the Code would outweigh thebenefits to the average shareholder. Other AIMcompanies simply cannot comply with all of the termsof the Code. For these reasons, some organisations,notably the Quoted Companies Alliance (QCA) andthe National Association of Pension Funds, haveproduced guidelines which are designed to help AIMcompanies understand how best to achieve Codecompliance within the scope of resources available tothem. Both are based on the provisions of the Codeand it is here where the underlying guidance is to be

found. An AIM company should discuss with itsNomad which corporate governance guidelines it willseek to follow and implement.

The principles of the Code deal with governanceunder the following broad headings:

l directorsl directors’ remunerationl accountability and auditl relations with shareholders; andl institutional shareholders.

The overarching goal is to ensure that a company’sboard is sufficiently independent, experienced andefficient to enable it to deal effectively with companyaffairs in a timely way. As such, the QCA guidelines setout the key features of governance which will help aboard operate efficiently, effectively, in anentrepreneurial way and in a way which benefits allshareholders over the longer term. These aresummarised in the box opposite.

Maintaining committees

The board of an AIM company should also set up,maintain and review the terms of reference of an auditcommittee, a remuneration committee and, morerarely, a nominations committee.

Audit committeeThe audit committee should comprise at least twomembers and all should be independent non-executivedirectors. Most AIM companies have an auditcommittee. Its formal terms of reference will include:

l monitoring, alongside the auditors, the integrity ofthe financial statements, company announcementsregarding performance and financial reportingjudgments

l reviewing internal controlsl reviewing the internal audit function, if any, orconsidering whether one should be created

l making recommendations regarding theappointment, reappointment and remuneration ofthe external auditor

l monitoring the performance and independence ofthe external auditor

l developing and implementing the policy for usingthe external auditor for services other than auditservices, bearing in mind relevant ethical guidance;and

l reviewing the whistleblowing policy.

Remuneration committeeThe remuneration committee should also comprise atleast two members who should all be independent

Page 67Being on AIM

l A company board should not be overweight but should be leanenough to make decisions in a timely way.

There should be a good balance of executive and non-executivedirectors sufficient to ensure objectivity but to avoid inefficiencies.

l The decision-making process should be transparent. The board should have a formal schedule of matters for which it isresponsible. The board should establish an audit committee and aremuneration committee with clear terms of reference.

l Responsibilities for different areas of company business shouldbe clearly laid out.

The roles of chairman and chief executive should be performed bydifferent people. It should be clear who is responsible for ‘running’the board of directors and who has executive responsibility for therunning of the business. No one director or group of directorsshould have undue influence.

l The mechanism for the protection of the company’s assetsshould be clearly spelt out.

There should be a regular formal review of internal controls, theresults of which should be reported to shareholders.

l The board should possess the right skills to do the job expectedof them.

An appraisal process helps ensure that directors have the relevantskills and identifies those who lack them. A nominations committeeis helpful in formalising this process and keeping it objective.

l Relevant information must be provided in a timely way to permitinformed decisions.

Those responsible for providing information should be aware ofwhat is required of them and when.

l All board members should play an active role in the decision-making process.

There should be a formal agenda of matters reserved for theboard’s attention and individuals board members views should beminuted.

l All board members should understand the longer-term objectivesof the business.

An open dialogue with shareholders is essential.

l Board members should play an active part in setting and testing strategic objectives.

Regular attendance at board meetings by non-executives shouldbe encouraged.

l Board members should avoid conflicts of interest or vested interests.

The roles of chairman and chief executive should be kept separateand at least two non-executive directors should be appointed tothe board. It should be clear how the board protects shareholdersfrom the risks of concentration of power.

l The mechanism for identifying and recording transactionsinvolving the board should be robust.

All directors need to be aware of their duties and reportingresponsibilities.

l Dealings by or involving directors should be reported in a timelyand transparent manner.

The channel for communicating transactions and dealings in sharesmust be clear.

l There should be an open dialogue between the board andshareholders so mutual goals are understood.

The board is responsible for maintaining an open dialogue withshareholders and ensuring the company business is run to seek toachieve those goals.The board is responsible for maintaining anopen dialogue with shareholders and ensuring the companybusiness is run to seek to achieve those goals.

Efficient

Effective

Entrepreneurial

Long-term benefit of all shareholders

Corporate governance guidelines ...and notes

non-executive directors. Most AIM companies have aremuneration committee whose formal terms ofreference will include:

l determining policy for setting remuneration of thechairman, chief executive and other seniormanagement to whom delegation of this role is

deemed appropriate by the board. No director ormanager should be involved in any decisions as totheir own remuneration

l determining targets for performance-related payschemes

l determining policy and scope of pension provisionsfor executive directors ensuring that contractual

terms on termination and payments made are fairand do not reward failure within the agreed policy

l determining the total reward package for allexecutive directors including bonuses, incentivepayments and share options

l coordinating with the nominations committee,where there is one, as to remuneration to beoffered to incoming directors

l keeping abreast of changes in employee benefitstructures throughout the company

l setting the policy for agreeing expenses claimsfrom the chairman and chief executive

l ensuring remuneration is properly disclosed inaccordance with relevant legislation; and

l setting the terms of reference of remunerationconsultants, if any are used.

Nominations committeeRecommendations to the board regarding new boardappointments should be made by a nominationscommittee, where an AIM company has one. Thenominations committee can comprise the wholeboard, though a majority of its members should beindependent non-executives. Nominationscommittees are rare among AIM companies and theNomad can provide assistance in reviewing andsetting its terms of reference.

Disclosure

The annual report should include a detailed statementof how the company achieves good corporategovernance. An AIM company should formally reviewand minute the mechanisms by which it has complied

with the principles of corporate governance. In line withRule 26 of the AIM Rules, AIM companies shouldpublish or make available on their website the termsand conditions of appointment of non-executivedirectors and the terms of reference of the auditcommittee, remuneration committee and, ifappropriate, the nominations committee.

In summary

For an AIM company embarking on life as a publiccompany, the value of good corporate governanceshould not be underestimated: a demonstrably robustinternal control structure, a willingness to deal in anopen and straightforward manner with shareholdersand the market at large, an independent andresponsible board – it should come as no surprise thatbodies representing the investor community, like theAssociation of British Insurers and the NationalAssociation of Pension Funds, put great store bycompanies with a good corporate governance culture.

The process of putting in place the key attributes ofstrong corporate governance should improve the waya company is run and thereby make it more attractiveto the wider investor community, allowing it betteraccess to the deep pool of sophisticated capitalavailable to companies on the London markets.


Seymour Pierce Limited20 Old Bailey, London EC4M 7EN

Tel. +44 (0)20 7107 8000email. [email protected]

www.seymourpierce.com Seymour Pierce Limited is authorised and regulated by the Financial Services Authority.

If you really want to grow,start big.Seymour Pierce is one of the UK’s leading independent investment banks for companies wanting to list on AIM. We’ve advised clients operating in virtually every industry and ranging in size from start-ups to the largest in the AIM sector. In fact, during the past five years, we’ve raised over £1.5 billion to help our clients achieve their objectives.

Ambitious?If growth is your goal, our experience o!ers a big advantage. Call Jonathan Wright or Mark Percy today on +44 (0)20 7107 8000.

Seymour Pierce Limited20 Old Bailey, London EC4M 7EN

Tel. +44 (0)20 7107 8000email. [email protected]

www.seymourpierce.com Seymour Pierce Limited is authorised and regulated by the Financial Services Authority.

If you really want to grow,start big.Seymour Pierce is one of the UK’s leading independent investment banks for companies wanting to list on AIM. We’ve advised clients operating in virtually every industry and ranging in size from start-ups to the largest in the AIM sector. In fact, during the past five years, we’ve raised over £1.5 billion to help our clients achieve their objectives.

Ambitious?If growth is your goal, our experience o!ers a big advantage. Call Jonathan Wright or Mark Percy today on +44 (0)20 7107 8000.

Page 70A guide to AIM

London Stock Exchange GroupUK companies: + 44 (0)20 7797 3429International companies: + 44 (0)20 7797 4208

Grant Thornton UK LLPColin Aaronson, Director, Capital MarketsEmail: [email protected]: +44 (0)20 7383 5100

Grant Thornton UK LLP Sunil Patel, Director, Transaction Advisory ServicesEmail: [email protected]: +44 (0)20 7383 5100

Olswang LLPMax Audley, PartnerEmail: [email protected]: +44 (0)20 7067 3000

Numis Securities LimitedSimon Blank, Associate Director, Corporate FinanceEmail: [email protected]: +44 (0)20 7260 1000

Brunswick Group LLPCarole Cable, PartnerEmail: [email protected]: +44 (0)20 7404 5959

Seymour Pierce LimitedJohn Cowie, Director, Corporate FinanceEmail: [email protected]: +44 (0)20 7107 8000

Useful contacts

For further information, please contact

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