Quoted Business - A Briefing For Quoted Companies, June 2007

Fighting talk: is AIM really "a casino"?

In this edition of Quoted Business, we investigate the recent US jibes on the integrity of AIM. We explore post-flotation issues for executive remuneration and hear about the recent listing of Vycon. We review the impact of the Budget on aim and evaluate changes to aim rules for nomads.

AIM UNDER ATTACK: A CASE OF SOUR GRAPES?

Smith & Williamson's head of AIM, John Cowie, discusses US criticism of AIM

AIM has recently come in for some criticism from the US, with accusations that it is underregulated.

In January this year, John Thain, chief executive of the New York Stock Exchange, said that AIM "did not have any standards at all".

Then, in March, Roel Campos of the US Securities and Exchange Commission (SEC) branded AIM "a casino". He went on to say that "it is a losing proposition to tout lower standards as a way to promote your markets."

These charges from across the pond caused ripples in the City. The London Stock Exchange (LSE) issued strong rebuttals, drawing further press attention to the slurs.

Behind the attack

The premise behind these comments is that AIM is lightly regulated and therefore likely to attract poor quality companies. To us, these attacks sound like sour grapes over AIM's obvious appeal to businesses worldwide compared to US markets, where the administrative burden (and cost) of complying with Sarbanes-Oxley (SOX) tends to discourage smaller companies from listing. US market practitioners doubtless feel that SOX ought to have been imposed worldwide rather than in just their backyard. It may even be that these remarks are a deliberate attempt to belittle the LSE, to help US rival Nasdaq's bargaining position should it make another bid for the UK exchange.

A balanced view

Whatever the reasons for these criticisms, it is worth reminding ourselves of AIM's strengths and why it has been so successful. Since its launch in 1995, it has raised more than 34bn of capital to help all sorts of companies fund development, pursue their goals and, in some cases, make the transition to the LSE's main market.

AIM is a successful growth market because it purposely takes a flexible approach to minimum listing requirements, devolves interpretation of its rulebook to the Nominated Adviser (Nomad) network and provides funding and liquidity to budding companies. Many testify to their success and positive experiences, as we see in the case of Vycon, a US 'clean tech' company profiled in this edition of Quoted Business.

Faulty figures

In addition to his 'casino' comment, Campos remarked that "30% of issuers that list on AIM are gone in a year". His figures are questionable. If you look at how many companies fail on AIM, the proportion is virtually identical to the Official List in terms of percentage. For a growth company market - which investors accept is likely to carry higher risk than a market which caters for larger, established companies - that's an exemplary record. In fact, company failures on AIM probably run at below 3%; so the origin of Campos' 30% figure is a mystery and suggests that he has either not researched the facts properly or, more worryingly, has a fundamental misunderstanding of what AIM is about.

The view of many informed commentators is that SOX runs counter to AIM's essential principles. Rather than an overarching regulatory body like the SEC (which oversees the US exchanges) and the UK Listing Authority, which fulfils the same role for AIM's bigger brother, the Official List, AIM is largely policed by the Nomad community. Getting the Nomad to take responsibility for the suitability of a company coming to AIM (we have to sign a declaration to that effect) was AIM's masterstroke. Tying the fortunes of the regulator to those of its client helps to ensure that the decision to take a company to AIM is not made lightly and goes some way to explaining the remarkably low failure rate of companies joining AIM

Good practice in place

Unlike Campos, most believe AIM's regulations are sufficient, despite a recent slowdown in admissions that has coincided with the implementation of new rules governing companies and Nomads (which we discuss later in this issue). In fact, it is likely that this slowdown reflects wider economic conditions rather than the new AIM rules.

Most Nomads are already doing what the new AIM rules require as a matter of good practice. The underlying regulatory environment for Nomads is unchanged and doesn't look like it will alter. That's what makes AIM so successful - and may explain why others can only look on in envy.

NOTES ON A FLOAT

For AIM companies, taking care of executive remuneration, share options and equity-based awards is often a major consideration. Kiki Stannard takes you through the main issues to consider post-flotation.

Executive remuneration, share options and other equity-based awards are key areas of focus for companies on AIM.

For companies that joined AIM around the turn of the millennium, it is likely that business goals will have extended beyond the strategy for the early years, which unsurprisingly tends to focus on shortterm goals and enhancing the value of the business.

Three to six years on from f lotation, many companies will have updated and adjusted their original business strategy to reflect the current marketplace, adapting to new demands to keep pace with the competition. If acquisitions have taken place, this can change the original business model, introducing new performance measures and strategic goals.

Aligning incentives and goals Where share and other cash-based incentives are performance or target-based, it will be necessary to revisit performance conditions to align them with business goals. This is important because if incentives aren't properly aligned to the business, it makes it difficult for staff to earn their performance-based rewards. In a tough market, where it's difficult to recruit and retain the best people, this is a situation all companies should avoid.

Even where the business has not changed significantly, how often should incentive schemes and share plans be reviewed? There is no definitive answer, although every three...