AIMing high: Europe's leading growth market responds to market challenges

AIM, the London Stock Exchange's (LSE) market for small and medium-size growth companies, is Europe's most active growth market, responsible for 53% of all capital raised on European growth markets in the past five years. A new discussion paper is looking to ascertain how best to sustain its future as a central feature of UK capital markets.

Although often described as the "jewel in the crown" of London's markets, recent macroeconomic developments and events, such as Covid-19 and conflict in Ukraine and the Middle East, together with global financial volatility have posed large challenges to the small- to mid-cap sectors worldwide.

In July last year, the UK Listing Rules (UKLRs) were introduced and narrowed the differences between the regulatory regimes on AIM and the LSE's Main Market, with market participants eagerly awaiting AIM's response to the reforms.

'Shaping the future'

The LSE published a discussion paper, "Shaping the Future of AIM", on 7 April to solicit feedback from stakeholders on the functioning and positioning of AIM. Rather than suggest wholesale changes to AIM Rules for Companies, the LSE has preferred to pose 39 questions to market participants.

These cover AIM's regulatory design, its admission documents, working capital statements, reverse takeovers, accounting standards, related party transactions, directors' remuneration, class tests, the role of nominated advisers, dual-class share structures and the admission of second lines of securities. The aim is to generate debate and ideas to ensure AIM remains the leading growth market in Europe and globally.

To aid respondents, the LSE set out its view on a range of areas, providing guidance on the direction of travel it thinks will likely come to pass.

Risk appetite

In the absence of material changes to the AIM Rules for Companies, market practices have focused on managing downside risk, often resulting in additional due diligence, compliance, and record-keeping requirements.

This has lengthened AIM admission documents and annual reports without a corresponding increase in capital or liquidity. Striking the right balance between risk and reward will be crucial, and the focus is likely to shift towards seeking reward in line with the UK government's growth agenda.

PISCES and AIM

Notwithstanding concerns that the anticipated introduction of the Private Intermittent Securities and Capital Exchange System (PISCES) might detract from AIM's significance, the discussion paper clarifies that PISCES is designed to relieve secondary liquidity pressure for mid-sized and later-stage private businesses, preventing them from being sold before entering public markets.

Increased liquidity

Capital outflows from UK equities have disproportionately affected smaller quoted companies. The discussion paper notes the median market cap of AIM-quoted companies as £22 million with the average market cap as £97 million.

There are initiatives that offer hope. The Mansion House Compact could unlock over £50 billion from default pension funds into unlisted equities – which include AIM securities – by 2030. Additionally, Rachel Kent's Investment Research Review together with the changes anticipated to be implemented and set out in the consultation on the new Public Offers and Admission to Trading Regulations aim to boost equity research and retail investor involvement.

Audit fees

Audit fees have increased exponentially in recent years with the Quoted Companies Alliance (QCA) suggesting a 127% increase between 2018 and 2023. The LSE is advocating for the government to amend the public interest entity threshold to companies with £750 million turnover and 750-plus employees to reduce audit costs for most AIM companies.

Corporate governance and social responsibility

The LSE has continued to support the "comply or explain" regime available to companies in terms of their compliance with the QCA Corporate Governance Code. Using the example of climate-related disclosures, the discussion paper suggests that AIM companies should not face increased regulatory burdens.

Working capital statements

The discussion paper considers easing the requirements for "clean" working capital statements (mimicking the UKLRs). However, by their nature, AIM companies are smaller and stereotypically represent riskier investments than the Main Market companies. Moreover, there is no certainty that investors would be more inclined to invest in these type of companies than they are currently, in the absence of any assurance as to sufficiency of working capital for, at least, 12 months.

Future of AIM

The discussion paper confirms AIM's place in the UK's funding continuum, positioned between PISCES (once it is introduced) and the Main Market. The LSE believes that AIM will continue supporting growth companies with proportionate regulation and tailored tax advantages and calls on market participants to contribute to AIM's evolution through responses to the discussion paper and ongoing interaction.

Next steps

Responses to the discussion paper are requested by 16 June. The LSE will consider feedback and consult on proposed changes to the AIM Rulebooks, though no timeline for the consultation is provided.

Osborne Clarke comment

AIM has faced existential questions in recent times as the number of quoted companies diminishes and the number of initial public offerings fade. The discussion paper is a welcome first step towards addressing these challenges, as is a holistic approach to ensure that the discussion is as wide as possible.

Overall, the focus of the discussion paper is on reducing the regulatory burden and costs associated with listing on AIM. Nevertheless, the LSE would be wise to exercise caution in certain circumstances (including working capital statements) and to consider AIM on its own merits rather than simply seeking to follow the Main Market's lead.

The LSE should be encouraged to move forward as quickly and efficiently as possible with any changes that come out of the consultation to ensure that AIM can remain relevant and competitive as capital markets worldwide evolve.