Snubbing AIM carries serious risk

Small companies are increasingly deciding to float on the standard list rather than AIM. However, investors should not think that a company on the standard list has exactly the same regulatory requirements as Vodafone. This is because the larger companies, such as the mobile behemoth, have a premium listing, which means that regulation is stricter.

The main hurdle that standard list companies have is the approval of their prospectus by the UK Listing Authority (UKLA) - and any subsequent prospectus, if a reverse takeover is secured.

Many of the companies joining the standard list are shells intending to make acquisitions. When the standard list started there were some extremely large shells such as Justice Holdings, which raised £900 million and acquired Burger King Worldwide, and Nomad Holdings, which acquired frozen food brands including Findus. Both subsequently moved to the New York Stock Exchange. It is interesting that they did not seek a premium listing.

In recent years, advisers and directors have realised the potential to float tiny companies on the standard list at a lower cost than on AIM and use the flexibility to make acquisitions without the requirement for shareholder approval.

In terms of cost, Silver Falcon raised £1.41 million when it joined the standard list and the total expenses were £110,000. At around the same time, Wey Education moved from ISDX to AIM and raised £1.75 million and its total expenses were £228,000. That is a significant saving for a small company.

There are examples of much lower costs on the standard list. For example, Mithril Capital joined at the end of 2014, raised £3.32 million and the total flotation cost was £80,000.

AIM is always thought of as having the lighter regulation but it is really to the standard list that the lighter regulation tag really applies.

There are five chapters of the listing rules that tend to be highlighted in standard listing prospectuses as applying to premium listings and not to standard listings. Many standard list shells say that they will comply with some of the regulations, but the UKLA does not oversee whether or not they keep those promises.

Chapter eight

This relates to the appointment of a sponsor, which standard list companies do not have to do. This means that there is no equivalent of a nominated adviser. A standard list company may have a broker, but it does not have to have anyone to advise it on its corporate governance and listing matters.

Nominated advisers are criticised by some, but at least they are required to keep in contact with clients and guide them on matters relating to their quotation, although that is part of the reason AIM costs a company more.

In the past, those from companies that moved from the full list to AIM would say to me that one of the differences was that, even if they did have a broker or adviser previously, they hardly ever heard from them - whereas on AIM their nominated adviser was in regular contact.

Chapter 10

Premium listed companies require shareholder approval of significant transactions and, while the rules are less strict, AIM also requires shareholder approval of transactions of a slightly larger size.

This is particularly relevant for reverse takeovers, which in the case of AIM are deals that exceed 100% in any of the class tests. There are a number of class tests set out in the AIM rules and they include the gross assets, profit and consideration tests. All these are based on the figures for the transaction as a percentage of the relevant figure for the company.

For example, Silver Falcon in its prospectus states: "It should be noted therefore that the acquisition will not require shareholder consent, even if ordinary shares are being issued as consideration for the acquisition". The wording tends to be the same in most of the shell prospectuses. This means that shareholders are likely to be heavily diluted when a transaction happens.

Chapter 11

This chapter sets out how related party transactions should be handled. In the case of AIM, a transaction with a related party is one that exceeds 5% in any of the class tests and the directors not related to the transaction have to consult the nominated adviser and state that the transaction is fair and reasonable.

Some standard list companies say that any related party transactions will have to be approved by the directors. However, there is no sponsor or nominated adviser to make sure that these related party transactions are handled appropriately.

Chapter 12

This chapter includes rules about a company purchasing its own shares. Some companies state that they have specifically not adopted a policy consistent with listing rules 12.4.1 and 12.4.2.

Rule 12.4.1 says that, if less than 15% of the ordinary shares are being bought back, then the price paid for the shares should not be more than the higher of 5% above the average market price over the previous five trading days and the price of the last independent trade, or the highest current independent bid on the market.

A premium listed company would have to make a tender offer to buy back more than 15% of its own shares, or it would have to set specific buy-back terms approved by shareholders, according to rule 12.4.2.

Many of the standard list prospectuses say that the company will have unlimited authority to buy back its shares. In theory, a company can offer to buy back shares at much higher than the market price without offering the opportunity to all shareholders, even if it is a related party transaction.

Chapter 13

This sets out what should be included in any shareholder circulars and the approvals they require, including what financial information needs to be published in particular types of document.

Who's on the standard list?

These exclusions from regulations show that standard listed companies are nowhere near as regulated as their premium listed counterparts and that, in many cases, AIM has more stringent regulation, some of which has been added over the years. Of course, that is part of the attraction of the standard listing to a shell and its directors.

Dowgate has analysed the performance of standard list shells floating in 2015 and early 2016. There were 12 companies and 11 had been trading for at least one month by the 18 February - the date of the share price used to analyse performance. The average performance in the first month was a gain of 47%, while over three months it was a gain of 148.1%, helped by strong performances by Challenger Acquisitions and Highland Natural Resources. The share prices of two out of the 12 companies had fallen.

The overall performance since flotation was an average gain of 40.4%. Cleantech Building Materials had cancelled its listing in June 2015, so it is not included in this figure. CBM said it was going to acquire Diamond Wood China, a supplier of AIM-quoted Accsys Technologies' Accoya wood, but this does not seem to have gone through - CBM has held a general meeting to change its articles of association and remove pre-emption rights in recent weeks and has the same two directors.

These performance figures suggest that potentially limited liquidity in these companies can lead to share prices being pushed up when there is initial interest, but they fall back later. Because of the low share prices, millions of shares may be traded, but the value of the transactions is in the tens of thousands.

None of these companies would have been allowed to join AIM during this period. That is because none of the nine companies that floated in 2015 raised anywhere near the £3 million minimum they would have had to on AIM.

The rules were changed on AIM at the beginning of 2016, meaning that investment companies had to raise at least £6 million - so even RockRose Energy, which raised £4.4 million, would not have been eligible.

Room for manoeuvre

Not all of the companies stay on the standard list. Cleeve Capital and Mithril Capital both moved to AIM after completing the reverse takeovers of Satellite Solutions Worldwide and Agenda 21 (becoming Be Heard) respectively.

One of the reasons behind the transfers is that once a company has a business it is easier to join AIM and they can then benefit from the tax advantages, such as IHT relief, that are not enjoyed by a listing.

If a company joins the standard list, investors should not think that they are as protected as a premium listing. This is very important, because the focus tends to be on the fact that they are on the Main Market or have a full listing, making it seem like they are highly regulated. In fact, in many cases, AIM companies are more regulated than standard list ones.

Investors' can benefit from the fact that the companies do not have to spend as much money to float and the greater flexibility they also have to be wary that the board can do much more without shareholder consent.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.