Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Why cash shells have turned their back on AIM
You may have noticed that small investment companies are increasingly shunning the AIM market in favour of having a standard listing on London’s Main Market. Historically cash shells and SPACs (special purpose acquisition companies) would have always joined AIM which supposedly has looser regulation.
Cash shells and SPACs are vehicles which have no assets apart from cash. They are generally set up by people with experience in capital markets or specific industries with the intention of finding a business to acquire. They reverse the acquired business into the shell vehicle and generally adopt the former’s name for the plc group.
Current examples of cash shells on the stock market include Derriston Capital (DERR) which hopes to buy something in the medical technology space. There is also Spinnaker Opportunities (SOP) whose board members have experience in the oil and gas sector.
Why is AIM no longer the natural home?
AIM closed the door firmly in the face of cash shells following the Gate Ventures debacle in 2015. Gate went from boom to bust in less than a year with shareholders losing all their money.
Asian investors were mysteriously paying above-market price for the shares, even though Gate had no assets apart from cash and the rights to produce a musical about Woody Allen. The nomad resigned and Gate was kicked off AIM as it no longer complied with market listing rules.
The level of cash required for a SPAC was raised to £6m and various other unattractive conditions were imposed, killing AIM as a viable home for listing all but the largest cash shells.
In contrast, a SPAC with a standard listing on London’s Main Market needs as little as £700,000 in cash on admission. The costs of listing are also low.
With no need for a sponsor or nomad (or even reporting accountants), the all-in expenses for a bringing a SPAC to the market will normally be less than £100,000 and can even be lower.
AIM imposes quality control
There should be little surprise that those wishing to float SPACS are flocking to the Main Market.
But it’s not just the shellmeisters whose attention has been attracted. A standard listing on the Main Market is also seen as increasingly attractive to operating companies.
Admission to AIM is meant to be policed by the nomads whose role is to judge the suitability of companies for admission, but the AIM team have begun imposing their own (increasingly conservative and risk-averse view) as to what should be coming to the market, second guessing their front-line regulators.
AIM rejects (or those fearing rejection) will naturally seek an alternative and the LSE’s Main Market via a standard listing, along with NASDAQ’s OMX First North, are the next ports of call.
One company whose float was killed by AIM at the end of 2016 (against the protestations of our client, the nomad) is now pursuing a standard listing.
We are also receiving a number of enquiries from AIM listed companies or their advisers who are looking for a simpler life on the Main Market, away from what they see as the increasingly intrusive and over-bearing reach of AIM regulation and, for many, the expense of having to retain a nomad.
Having a standard listing is also seen as an attractive option, especially for overseas companies, who tend to view it as more prestigious than AIM which is still struggling to shake off its image as a ‘casino’.
Cost benefits of being on London's main market
As well as status, there is a significant attraction from a cost perspective, with the expenses of a standard listing on the Main Market being as little as half of the equivalent on AIM.
The absence of fees for a nomad (and their lawyers), together with increased flexibility in the flotation process (e.g. as to whether a long-form report is commissioned) are the biggest factors.
Post-listing there are also potential cost advantages over AIM with, for instance, no requirements for fair and reasonable opinions on related party transactions or to retain a nomad.
A premium listing on London’s Main Market, on the other hand, is only (with limited exceptions) available to companies with a three-year track record and requires the appointment of a sponsor for coming to the market and for certain transactions.
There are also other onerous continuing obligations for a premium listing which make it less attractive to companies, such as the need for shareholder approval for significant transactions as well as all but the smallest related party transactions.
Not an easy ride
So what are the downsides to having a standard listing on London’s Main Market?
The looser corporate governance and reporting regime makes institutional investors wary and the lack of eligibility for market indices put standard listed companies beyond the remit of many.
So it is more suitable for retail investor-backed fundraisings, which probably makes it unviable for those looking to raise more than £5m.
The requirement to have 25% of shares held in public hands in the EEA (European Economic Area) can also cause difficulties. In addition, a company needs to publish a fresh prospectus when it wants to do secondary fund raisings involving an increase in the number of shares in issue of 10% or more in a year.
The FCA is currently consulting on changes to the standard listing regime to make its role clearer and further enhance its attractiveness to overseas issuers as part of its review of the effectiveness of UK primary markets. The upshot of that review is likely to enhance further the appeal of the regime – including the creation of an international segment and a potential change of name.
By Richard Beresford, a co-founder, chairman and head of corporate at law firm McCarthy Denning.