This section covers some of the most commonly asked questions we get from management and investors regarding the listing of their company on AIM. This is clearly not an exhaustive list of considerations and each company will face its own unique set of issues:
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AIM valuations versus other options? Public market valuations are generally superior to private valuations and valuations on AIM are often superior to other small cap exchanges.
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Can investors get liquidity at IPO? Investors are unlikely to be able to exit at IPO if the company is early stage. If the company is profitable or in high demand then up to 30% can be sold down at IPO.
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What is ongoing investor liquidity like? AIM’s daily liquidity is improving exponentially. Off market trades and secondary placings enable larger stakes to be traded.
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Key legal issues for US companies? The two main considerations for US companies are Regulation S and the number of shareholders.
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Are there investor lock-ups? Generally large investors with over 10% should expect to be locked-up for a 12 month period.
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Are there board requirements? While nothing is required under regulation, investors expect proper corporate governance.
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What are the management time considerations? Management should be prepared to make several trips to London ahead of the IPO during the three month IPO listing process and at least 2-3 per year post IPO.
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Are there fund raising size issues? In general it is easier to raise more than less as the brokers become increasingly incentivised and demand from large investors can be catered for.
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What are the AIM listing costs? Listing on AIM is more cost effective than most other exchanges.
AIM valuations versus other options?
Valuation considerations are a key issue when assessing a private company’s options. It is generally the case that small growth companies typically get a better valuation on the public markets than through a further round of private equity backed funding, or indeed a trade sale. It is therefore critical to make the right selection as to which exchange to IPO on.
Good quality AIM listed stocks, underpinned by regular broker research and an investor base specifically focused on small cap, maintain premium valuations, at least equal to if not better than those in the US market, especially so in certain niche sectors. It is worth noting that a significant number of AIM listed companies have been private equity backed. This is a simple reflection of the fact that AIM is usually a far more attractive option, in terms of valuation and hence limiting dilution, relative to a further round of private equity financing as a source of additional capital raising.
Other factors that will have a bearing on each company’s valuation include:
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Relative peer group ratings (PE, EBIT and EV/EBITDA multiples)
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Sector and market ratings
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Investor appetite for the space
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Liquidity factors
Can investors get liquidity at IPO?
For companies that have already demonstrated the commerciality of their product or are generating profits/cash, it is often possible for early investors to exit up to c.30% of their holdings at IPO. The NOMAD will advise on this after gauging appetite amongst institutional AIM investors during the IPO marketing road show. For earlier stage companies this is generally not possible at the IPO stage. The key point is that early investors should not view an IPO on AIM as a route to fully exit immediately but as a start to effecting an exit over a period of time.
What is ongoing investor liquidity like?
Daily trading volumes on AIM are currently growing exponentially, up 9 fold since 2003 (click here). Furthermore, for AIM stocks with market caps between $100-200m, the median daily value traded as a percentage of the market value of the free float is greater than their peers on both the Euronext and NASDAQ exchanges (research conducted by a large US investment bank). Again this stems from the fact that AIM specifically caters for small and mid cap stocks.
It should be taken into account that normally large stakes cannot be traded at will. Netherless, around results and other key news flow events liquidity can be high and significant stakes can change hands in market transactions facilitated by the broker. In addition, it is common for AIM companies to conduct secondary placings to raise additional capital. Providing the equity story progresses in line with expectations, these events can also be used by pre IPO investors to sell down their positions further.
Other considerations that will have an influence on a stock’s liquidity include:
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Achieving a quality shareholder roster at IPO (again highlighting the importance of the NOMAD/broker selection)
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Number of market makers
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Quality of broker research and sales effort in the after market
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Market cap and free float – the greater the better for institutional investors
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Regularity of news flow and importantly achieving forecasts
Key legal issues for US companies?
There are two broad legal issues that US companies need to consider:
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Regulation S – US companies listed on AIM, which are exempt from SEC regulation under Regulation Safe Harbour, are required to have certificated settlement rather than electronic settlement via CREST to ensure shares aren’t traded back in the US. This makes the selling process marginally slower for the first 12 months, after which the shares can then settle electronically on CREST as per normal (also note that most large investors are generally locked up for the first 12 months so are unable to trade in any case). The LSE is currently addressing this issue through a number of solutions including SIS - a Swiss based electronic settlement system.
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Minimum shareholders – If a US stock listed on any exchange, with assets in excess of $10m, surpasses 500 shareholders (regardless of their residence), the SEC deems it necessary that the company should then fall under SEC regulation including quarterly reporting and Sarbanes-Oxley. However on AIM, given that IPO capital is generally raised through a small number of large institutions, none of the 57 US stock to date (December 2006) have yet experienced this problem. Furthermore, once a company gets this large, arguably it will make sense to dual list back in the US in any case.
Other legal issues will be covered and explained by the chosen law firm which First Columbus helps companies appoint.
AIM regulation stipulates that if the company joining AIM has less that two years of revenue history, ‘related parties’ must be subject to a minimum of a 12 month lock-up. Otherwise there are no regulatory requirements for investors to be prevented from trading post IPO. Nevertheless, in most circumstances the NOMAD will ask management and major investors (10% or more) to commit to a 6 month, and more typically 12 month, lock-up in order to help create an orderly market post IPO and give the new investors confidence in the post IPO performance. However, if the stock performs well post IPO and investor demand is strong, it is common for the NOMAD to allow the lock-up period to be waived in order to get stock to satisfy the demand.
AIM investors expect companies to demonstrate strong corporate governance which will require a proper board structure to be in place, both at the management and independent non-executive levels. Furthermore, while not essential, it is often worth appointing an experienced UK based non executive to the Board to give UK based investors a close point of contact. First Columbus can advise of the specific requirements and also help appoint high profile PLC experienced individuals.
What are the management time considerations?
The IPO process is not overly time consuming from a management perspective as the NOMAD/broker co-ordinates the entire process. In addition to a couple of trips to the UK to appoint the advisory team at the start of the three month process, the management will be required for two weeks or so for an intense marketing road show in London, and often Edinburgh, just prior to raising the capital and admission to AIM. Unless it is a very large fund raise, it is rare that a company will need to go to Europe for meetings.
Once listed, management should be prepared to visit London at least twice a year at the interim and full year results to meet with key institutional investors. In addition to this there are a number of conferences and events through the year that management are likely to get invited to attend which can be helpful for the share price.
Are there fund raising size issues?
There are no restrictions of the type and size of company that can come to AIM and, with nearly 100 NOMADs operating on AIM, there are a whole spectrum of fund raising preferences from c.$1m to over $1bn. However, if a company is looking to get a well respected NOMAD/broker involved and high quality investors interested, fund raisings should generally be in excess of $10m.
If a company needs a smaller amount, say $3m or less, in order to accelerate growth, then often the best route is to do a pre IPO financing round first in London which First Columbus can facilitate. Please click here to learn more.
What are the AIM listing costs?
Listing and annual subscription costs on AIM are materially less than on the US markets:
Of greater importance however, for US companies, are the cost savings that stem from not having to comply with Sarbanes-Oxley regulation and Section 404. Annual compliance costs for an average company with a market cap of $100m are estimated to be in excess of $2m (excluding the opportunity cost of management time spent complying). This can be avoided on AIM.
In terms of total expected costs to IPO on AIM, companies should budget for advisors fees (NOMAD/broker, accountants, lawyers, financial PR and printing) to be around $1,000,000. Much of this can be paid out of the success fees so if the IPO doesn’t happen, for whatever reason, the abort costs will be significantly less. In addition there will be a standard broker commission of around 5% of funds raised (which compares to 6-7% on NASDAQ) which again comes out at the back end on success.
Feel free to contact us if you have any questions or you would like to discuss your position further:
Telephone: +44(0)20 3002 2070 or by email: info@first-columbus.com