Companies listing on the UK’s Alternative Investment Market (AIM) could be forced to comply with Europe’s Prospectus Directive despite the exchange’s efforts to remove itself from the new regime. The Directive, which takes effect on July 1, would impose strict form and content rules on the smaller-cap growth market’s issuers, requiring a comprehensive three-part prospectus and detailed financial information for deals worth more than €2.5 million or those offered to more than 100 investors.
AIM opted for exchange-regulated status in 2004 to prevent its listed companies from having to comply with the EU rules, which apply only to companies listed on an EU regulated exchange.
“This will start affecting deals as July 1 gets closer, but it is already a problem because some of the deals we are now working on will not come to market until after July 1 and so will have to comply with the new regime,” says AIM specialist Anthony Brockbank, a partner at Field Fisher Waterhouse in London.
Outside scrutiny
Despite AIM’s best efforts, uncertainty about what constitutes a public offer for the purposes of the directive could yet subject some issuers to extra regulatory scrutiny. The problem relates to AIM brokers with discretionary private clients, on whose behalf they invest.
These private clients are not qualified professional investors as defined by the Prospectus Directive, so any offering of shares to them must be kept below a total value of €2.5 million or be offered to fewer than 100 clients.
If not, the sales will be characterized as a public offer requiring a full Prospectus Directive-compliant offering circular, including a requirement for the issuer to provide IAS accounts. A number of AIM brokers, such as Seymour Pierce Ellis and Hoodless Brennan, are leaders in the discretionary private-client market.
Some lawyers argue that sales to brokers should not constitute public offers because those brokers make the investment decision on behalf of the end investor. But, so far, the UK’s regulator, the Financial Services Authority, has been reluctant to embrace this interpretation. It remains unclear whether the broker or the issuer will be responsible for producing a prospectus.
“The FSA is toying with a look-through to the underlying investor,” says Freshfields Bruckhaus Deringer lawyer Alexandra Hope. “Is the AIM broker just an intermediary? It depends on who is making the investment decision.”
Sources close to the regulator suggest that the FSA is minded to stay silent on the issue in its Prospectus Directive regulations, due to be finalized this month, because the directive itself does not address the question of an issuer making an offer of securities to an underlying client through an initial sale to a qualified investor. But Article 3.2 of the Directive does refer to final placement, implying that you have to look through the intermediaries to the final holder.
“If you take a step back and look at a deal where an issuer sells to just a few brokers but some 500-odd underlying clients end up owning the shares, the deal does look rather like a public offer,” says one source.
The FSA wants to avoid damaging AIM but has to interpret the implementation legislation being prepared by the UK Treasury accurately. In the early drafts put out by the Treasury six months ago, there was no exemption from the requirement to produce a prospectus when selling to qualified investors acting as agents for underlying clients.
“Everyone is waiting for this issue to be resolved, and some retail brokers are saying they won’t get involved in a deal unless there is a prospectus,” says a London Stock Exchange official. “If the interpretation goes against us then, yes, there could be some impact on retail participation in AIM deals, but the market will settle down after a few months.”
In addition, some issuers are avoiding retail investors to ensure that they do not accidentally trigger requirements to produce a prospectus and submit it to the UK Listing Authority for approval. Previously, even public offers on AIM were not subject to UKLA scrutiny.
Retail protection
It seems the FSA would also be likely to characterize a deal split into amounts of below €2.5 million and placed with several AIM brokers as a single deal and potentially a public offer. “You can see from a policy point of view that if retail investors are ending up with shares in the immediate aftermath of an offer, they should benefit from full retail-style protection,” says Linklaters partner John Lane.
In addition, any AIM company wanting to make a rights issue would need to write a full prospectus and pass it to the UKLA, because there is no clear way to execute a rights issue that is not a public offer of securities. It is unlikely that any AIM-listed company would undertake a rights issue at present. But as the market matures and some companies grow bigger the chances of its happening also grow.
Some lawyers believe that placings through brokers could avoid triggering prospectus requirements so long as they are held rather than being immediately sold on to the end investor. “Basically, if you can make sure you raise money from institutions buying as an investment and holding the stocks for more than the short term, it should be OK,” says Brockbank at Field Fisher Waterhouse. “The trouble is that it is not clear how long the holding period should be.”
