Alternative Investment Market

Regulatory model

AIM is an exchange regulated venue featuring an array of principles-based rules for publicly held companies. AIM's regulatory model is based on a comply-or-explain option that lets companies that are floated on AIM either comply with AIM's relatively few rules, or explain why it has decided not to comply with them.

Nominated Advisers (Nomads)

Aside from granting leeway in regard to regulatory compliance, the Exchange also mandates continuous oversight and advice by the issuer's underwriter, referred to as a Nominated Adviser (Nomad). The role of Nomads is central to AIM’s regulatory model, as these entities play the role of gatekeepers, advisers and regulators of AIM companies. In advising each firm as to which rules should be complied with and the manner in which existing requirements should be met, Nomads provide the essential service of allowing firms to abide by tailor-made regulation, reducing regulatory costs in the process. Theoretically, Nomads are liable for damages from tolerating misdemeanors on behalf of their supervised companies, including the loss of reputational capital. However, this heavy reliance on Nomads has been criticised as creating a conflict of interest, since Nomads receive fees from the companies they purportedly supervise while, in practice, managing to avoid liability for market misconduct.

In 2006, the London Stock Exchange launched a review of Nomad activities, resulting in a regulatory "handbook" for Nomads published by the Financial Services Authority in 2007.

Self-regulation

Because AIM is an unregulated market segment, it escapes most of the mandatory provisions contained in European Union directives – as implemented in the UK – and other rules applicable to companies listed in the LSE. AIM believes self-regulation is pivotal to AIM’s low regulatory burden: companies seeking an AIM listing are not subject to significant admission requirements; after admission is granted, firms must comply with ongoing obligations which are comparatively lower to the ones that govern the operation of larger exchanges; and certain corporate governance provisions are not mandatory for AIM companies. Therefore, AIM-listed companies are often subject to manipulation by institutional investors. AIM-listed companies usually are only required to adhere to the corporate governance requirements of their home jurisdiction, which, as a practical matter, vary widely.

However, the regulatory requirements are more onerous than for private companies and AIM listed plcs are required to prepare audited annual accounts under IFRS.

Investor base

Another important element of AIM’s model is the composition of its investor base. Although AIM-listed companies are not start-ups, most are small and potentially more risky than a FTSE listing. This may prove to be hazardous for unsophisticated investors who lack both the knowledge and resources to conduct proper inquiries into a firm’s prospects and activities, or even larger investors which lack strong internal control and risk management requirements. As a consequence, AIM’s investor base is largely composed of institutional investors and wealthy individuals.

Market capitalisation

The following table lists the 10 biggest AIM companies on 17 May 2012.

Source: File linked from this page.

"Casino" environment

In March 2007, U.S. securities regulator Roel Campos suggested that AIM's rules for share trading have created a market like a "casino". Campos reportedly said: "I'm concerned that 30% of issuers that list on AIM are gone in a year. That feels like a casino to me and I believe that investors will treat it as such." The comment resulted in several angry retorts, including one from the London Stock Exchange, which controls AIM, pointing out that the number of companies that go into liquidation or administration in a year is actually fewer than 2%.

AIM has since issued new rules requiring that listed companies maintain a website.

The calibre of participants in the market has also been criticised by fund manager John Hempton of Bronte Capital Management.

Langbar International fraud

AIM was criticised for allowing Langbar International to be listed. This £375 million ($750m) share fraud was investigated by the Serious Fraud Office and the City of London Police when it was discovered in November 2005 that Langbar had none of the assets it declared at listing. This was due in part because the Nomad (Nominated Adviser) failed to carry out due diligence. Also, the Exchange did not ensure that the AIM rules had been complied with. The AIM changed the rules for Nomads in 2006. On 19 October 2007 they fined Nabarro Wells £250,000 ($512,500) and publicly censured them for breaches of the AIM rules.

Trends

In March 2007 the Daily Telegraph noticed a tendency to use listing vehicles incorporated in offshore financial centres prior to floating on AIM. Some 35% of the companies floated on AIM during 2006 were from OFCs, of which the majority came from the Channel Islands or the British Virgin Islands.

On 29 January 2009 it was announced that AIM is to form the basis of an Asian-orientated growth or incubator market called 'Tokyo AIM', which will be run as a joint venture between the Tokyo Stock Exchange and LSE. Tokyo AIM will replicate AIM's system of oversight by NOMADs, with 'J-Nomads' being "selected and approved by TOKYO AIM ... to assess companies’ suitability for the market".