“We started off trying to set up a small anarchist community, but people wouldn’t obey the rules,” quipped playwright Alan Bennett. He could have been talking about the Alternative Investment Market for small companies, except there is no “but”. Aim is 22 years old, three times the size when it started, and has still not lost its anarchic edge.
That might change. The London Stock Exchange, Aim’s regulator, is mulling beefing up its rule book in ways — such as more vetting and minimums for fund raisings — that would make the junior market more homogeneous. It would be the biggest overhaul of Aim for a decade.
About time, too. The LSE has been wary of tampering with what it sees as a winning formula of low-cost and light-touch regulation. However, there are 966 Aim companies now. The influx of joiners has slowed in recent months but the average market capitalisation of new entrants has grown to nearly £100m. And Aim’s investment returns, for a long time underwhelming, have beaten most UK stock market indices this year.
So it is fitting for the LSE to think how raising standards could make Aim work better, buff up its reputation and draw in more capital. There have been enough failures in recent years to mar the junior market’s image. The Chinese companies that quit the market after a slew of scandals did nothing for investors’ confidence. Nor did Quindell, the software-insurer group founded by the entrepreneurial Rob Terry. Memories of Globo, the Greek technology group founded by a windsurfing champion that went into administration amid allegations of falsified data, will make anyone close to Aim wince.
Broadly the LSE proposes to hold the hands of Nomads — the nominated advisers who bring companies to Aim — for longer and take an earlier interest in cross-checking entrants. It is also considering setting hurdles for fundraising and on the amount of shares sold to outsiders.
The plans will help to winnow out the unsuitable and whackier candidates looking for an easy billet and a place to raise cash. It might make the market more monochrome. Aim’s fans will worry that higher thresholds will deter businesses that could one day rival Asos, one of Aim’s more celebrated successes. Asos floated 16 years ago at £12m having raised £2.3m. It is now valued at £4.8bn and ranks easily alongside FTSE 100 constituents.
Still, the median size of Aim ventures is a mere £28m. The market is clogged by companies that are too small to raise money, with shares that are tightly held and rarely traded. Some are so teeny their equity is worth less than the yearly fees for staying on Aim.
No doubt some Nomads will worry their revenues will suffer. But they should look on the bright side. The LSE outsources much of its supervision to Nomads expecting them to vet, coach and police companies joining Aim. But most Nomads are small and under-resourced. They have narrow shoulders to bear such a broad responsibility. The LSE’s proposals could make their jobs easier while obviating the temptation to push through questionable floats for the sake of fees. Not only will Nomads have additional eyes checking the numbers, they will have more clarity on what the LSE deems appropriate.
The LSE’s plans are a form of housekeeping that should keep Aim ticking for decades.
That said, it could do more. The review flirts with automatic fines for groups breaking rules, for example on disclosure, and late filing of accounts (which happens a lot). It promises a further review of its policy on sanctions. But it must not dally. The LSE should address criticisms that its wheels of justice turn slowly and shakily.
It revealed last week that it reviewed a whopping 190 cases of potential rule breaches a year on average. Of these about half come to nothing or are passed to other regulators, half are recorded as breaches and the Nomad or company is reminded not to do it again. About 16 result in anonymous warning notices and private censures and fines. Yet in 20 years the LSE has named less than a handful of the Nomads it has fined or ticked off. No need to be so shy. To quote Voltaire, another great satirist and playwright: “It is wise to kill an admiral from time to time to encourage the others.”