Client Alert

Euopean Law Bulletin, October 2004

10/1/2004

With effect from 12 October 2004, the London Stock Exchange (the "Exchange") has announced that the regulatory status of the AIM market will change. In preparation for the implementation of certain European Directives focused on the Financial Sectors, AIM will adopt the regulatory status of an "Exchange Regulated Market". According to the Exchange, the change is driven by the Exchange’s intention to preserve the appeal of AIM as a successful marketplace for young and growing companies by continuing with the use of the regulatory structure that has proved highly successful as a destination for IPOs to date.

Why is This Change Occurring?

An EU Directive concerning the publication and content of prospectuses is currently due to come into force in July 2005 (the "Prospectus Directive"). Under the current structure of AIM, this Directive would require UK companies and non-EU companies that have chosen the UK as their home member state to have their prospectuses approved by the Financial Services Authority (the "FSA"). Currently, one of the strengths of AIM is that the FSA does not approve prospectuses but relies on the Company’s Nominated Advisor ("Nomad") to ensure compliance. In order to avoid increasing the regulatory burden on companies seeking to list on AIM, the Exchange has resolved to classify AIM as an "Exchange Regulated Market". It is anticipated that as a result AIM will retain its streamlined admission process, thereby maintaining the simplicity and cost effectiveness of AIM as a target market for companies considering flotation.

In addition to the issues posed by the Prospectus Directive, the UK implementation date of 12 October 2004 for the Market Abuse Directive, has also contributed to the change of AIM’s legal status. The Market Abuse Directive concerns itself with obligations in relation to ad hoc price sensitive information and dealings in a company’s shares. In its implementation in the UK this would have placed further regulatory obligations on AIM listed companies, should AIM not change its status. As with the applicability of the Prospectus Directive, by changing its status, the impact of the Market Abuse Directive on the day to day running of AIM can be minimised. On this basis, (i) the Exchange will continue to monitor the ongoing disclosures of price sensitive information by AIM companies; and (ii) AIM admitted companies will not be required to draw up "insider lists", as dictated by the Market Abuse Directive.

How Will this Affect the Current Operation of AIM?

In order to assess the impact of these changes, the Exchange has met with and written to many institutional investors and found their responses generally to be supportive. It is the stated intention of the Exchange to ensure that AIM’s high standard of regulation will not be weakened by the change of status and it is the Exchange’s belief that the conversion is unlikely to have a significant impact upon investors’ interaction with the market. Nevertheless, it will be interesting to observe the progress of AIM in the period following its change of status and in particular what impact, if any, this will have upon the ability and enthusiasm of institutional investors to invest in AIM. It is the conclusion of the Exchange that the alteration of AIM’s status will avoid an increased regulatory environment and associated increase in costs which the EU Directives would have necessitated. It is, therefore, the Exchange’s hope that this change will make investing in AIM even more attractive to investors worldwide. It is, however, important to note that regard will need to be given to any consequential amendments that may be needed to documents such as investment mandates, shareholders agreements and employee share option arrangements to ensure that AIM remains an available avenue to companies considering listing on or investing in the public market. Furthermore, certain fund documentation may not allow investment in anything but a "Regulated Market", an issue most likely to be encountered in respect of overseas funds. This may force certain funds either to alter their fund documentation or to invest only in companies on the Exchange’s Main Market.

What Does "Exchange Regulated Market" Mean?

Technically, AIM will become a 'multilateral trading facility' but domestically will be termed an "Exchange Regulated Market". This is because AIM will be regulated by the Exchange, as it is now. This designation will achieve it’s immediate objective of preserving the simplicity and flexibility that has contributed significantly to the comparatively strong performance of AIM as a market in recent years; what remains to be seen is the effect, if any, that this decision will have on the enthusiasm and ability of companies to list on AIM and funds to invest in AIM companies.

Comment

In time, this change of status may provide a structural inhibitor on the ultimate growth and success of AIM. It is not in the Exchange’s interests for AIM to grow at the expense of its Main Market, as we have seen over the last year or so. The practical and strategic impact for companies preparing to undertake an IPO, for current AIM companies and for current and future investors in the AIM market will, however, differ from company to company and fund to fund.

 


 

U.K. and U.S. qualified lawyers in Morrison & Foerster’s London office advise a broad range of clients, from start-ups and emerging companies to major blue chip U.S., Asian and European businesses and financial institutions. The London office has a strong transactional emphasis, with a particular focus on representations in the life sciences, technology, IT/Internet, media and telecommunications sectors.

Our corporate finance advice embraces all aspects of equity and debt issuance, private equity and venture capital, debt restructuring and corporate re-organisations and general corporate counselling. Lawyers in the London office advise on securities transactions such as initial public offerings, secondary equity offerings and other public and private placings of equity and debt. We also advise on public and private mergers and acquisitions, strategic partnering and alliances, joint ventures, outsourcing and licensing deals. Through our relationships with financial institutions and banks, we also have special expertise in assisting issuers from the U.K. and elsewhere in Europe to raise capital in cross-border private placements.

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