Is AIM the new NASDAQ?

About Osborne Clarke

Osborne Clarke is a European law firm that providesbusiness-focused legal solutions to a wide range oforganisations. With a presence in the US and officesacross Europe, we are one of the world’s experts inAIM transactions. Over the past 10 years we haveadvised on more than 50 AIM flotations, involvingcompanies from around the world.

Is AIM really the new NASDAQ?Today, global capital markets are experiencing huge change.Now 35 years old, NASDAQ has grown from a junior marketinto a market senior in all but name. It is now the domain ofbig players.

Alternative markets have had to step up to the plate – in particular, the AIM market of the London Stock Exchange(LSE), which is increasingly seen as ‘the new NASDAQ’.In this white paper, we ask if perception is actually reality.Has AIM become today what NASDAQ was yesterday – a platform critical to public fundraising in the IT, biotech,and media and communications sectors?

In Europe, we believe the answer is ‘yes’. The market is seen tooffer many benefits similar to NASDAQ, but also offers additional advantages to growing companies. AIM's investorshave an appetite for the risk entailed in growth companies whilethe market's best-practice approach to governance is viewed as well balanced, protecting investors without adding overwhelming compliance costs to newly quoted companies.

But is AIM also ideal for non-European companies – particularlyUS companies? Osborne Clarke has helped organisations fromaround the world to float on AIM and our answer here is ‘perhaps’. It’s not the ideal environment for every business –but where it works, it is a far better alternative than NASDAQ.

We hope that this white paper gives an insight into our views onthe attractions of AIM for international companies and theimpact that AIM is having on the choice of junior market for US companies in particular. We hope this paper will help youdecide whether AIM is appropriate for your business.

Andrew Gowans Partner Osborne ClarkeSilicon Valley

Introduction

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What makes a ‘junior market’?To understand why AIM has recently become successful, it is firstimportant to understand the need for a global junior market – andthe best way to do that is by looking at one of the most successfuljunior markets worldwide, NASDAQ. First established in 1971, ithas transformed the way investors look at emerging industries.

NASDAQ, arguably, created the first market focused on sectorssuch as IT, biotech, and media and communications at a timewhen no other market adequately catered for companies in these sectors.

Now, 35 years later, NASDAQ is so successful it has outgrown its beginnings. Its dynamic has changed and it is dominated bylarger, more established businesses. While more than half ofthe companies on NASDAQ have a market capitalisation underUS$250m (£142m), larger cap companies account for 95.5 per cent of NASDAQ’s value.

NASDAQ has effectively become a senior market and, in the view of investment bank Canaccord Adams,1 “it is no longer a hospitable place for companies with less than US$250m capitalisation”. As an example, 58 per cent of NASDAQ companies – the small to mid-sized organisations also welcome on AIM – have no assigned analyst. That can result in thinly traded stocks and poor liquidity.

That is partly why AIM became such a talking point in 2004 and2005. A junior market with global reach first established in 1995,it now has 1,399 members.2

Like NASDAQ, it has a range of smaller, mid-sized and evensome large companies. (The largest AIM quotation is SportingBet,with a capitalisation of US$2526m (£1,437m)3. But unlike NASDAQ,AIM offers a level of engagement for mid-sized companies that issimply not available in more senior markets such as the New YorkStock Exchange (NYSE), the LSE and arguably, NASDAQ.

That is what we believe makes AIM a true junior market and, asalready mentioned, that type of market must offer quality investorattention and a balanced compliance regime. AIM does that.In addition it provides a number of other critical benefits. Theseare detailed on pages 6 and 7, but two should be mentioned here, as they have particular application to the question ofwhat makes a ‘junior market’.

First, AIM is arguably an institutional – or at least mostly institutional – investment market, which simplifies investor relations. Second, AIM devolves much of the work involved in taking businesses through to admission and the ongoing compliance to Nominated Advisers, known as Nomads.That makes the AIM IPO process simpler than the approachsometimes encountered on other markets. Many companies find that the management and financial costs of admission andmanaging relations with the AIM market are greatly reduced byusing a Nomad.

The partner of choiceBut if AIM is arguably a better fundraising option for mid-sizedcompanies than NASDAQ, is it equally good for all countries,types of company and industry sectors? We believe that AIM is in many respects already the junior market of choice for the UK,Canada and Australia. But is this true for the US?

The US remains home to an overwhelming number of the world’sfast-growth companies, and as such we expect to see significantnumbers of US companies joining AIM in the next few years. AIMadded 874 members in 2004 and 2005 – an increase in size of 75per cent – and its greatest growth was in international admissions.In 2005 120 non-UK companies joined AIM, 100 per cent morethan in 2004 and over seven times the number admitted in 2003.

But have those international companies made the right decision?

AIM – the new internationalmarket of choice?

1 Formerly Adams Harkness2 December 20053 London Stock Exchange 31/10/05

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Growth of AIM 1

companies Market value (£m)19/06/1995 10 82.21995 121 2,382.41996 252 5,298.51997 308 5,655.11998 312 4,437.91999 347 13,468.52000 524 14,935.22001 629 11,607.22002 704 10,252.32003 754 18,358.52004 1021 31,753.42005 1399 56,618.5

Money raised £m 2

New Further Total19/06/19951995 69.5 25.3 94.81996 514.1 302.3 816.41997 344.1 350.2 694.31998 267.5 290.1 557.61999 333.7 599.8 933.52000 1,754.1 1,319.7 3,073.82001 593.1 535.3 1,128.42002 490.1 485.8 975.82003 1,095.4 999.7 2,095.22004 2,775.9 1,880.2 4,656.12005 6461.2 2481.2 8942.4

“The listing mechanics and corporate governance requirements on AIM are good for a highquality growth company of our size. It accelerated our ability to raise funds to grow to the nextlevel and continue to be competitive against large organizations. With required financial reporting only every six months, we have the structured discipline to report, but we are notoverwhelmed by the cost and management time that quarterly reporting requires. The sophisticated investors of the AIM community give our company the flexibility to structure our growth in a dynamic market and to stay focused on our fast moving business, which in turn gives us a run at success.”

Rafferty Atha, General Counsel, Ubiquity Software Corporation, USA

“On AIM, your liquidity is very closely related to how much demand you create. You need tobring yourself to the attention of institutional investors out actively looking for large blocks ofshares. Going to AIM is making a commitment to a very different style of market – but thereisn’t another junior capital market with the same credibility anywhere else in the world.”

John Voltz, Jane Capital Partners, LLC, USA

35

30

25

20

15

10

5

0

<$10m

0.0

1%

2.8

4%

0.1

0%

6.4

3%

0.3

0%

0.8

8%

18.8

5%

3.2

9%

27.2

1%

3.6

2%

14.1

0%

7.7

1%

9.9

2%

12.2

2%

$10-25m $25-50m $50-100m $100-250m

NASDAQ

AiM

$250-400m $400m-1bn >1bn

84.0

9%

8.4

2%

1 Source: AIM 2 Source: AIM3 Source: Canaccord Adams, chart excludes companies in the mining and resources sector

AIM’s ‘sweet spot’ for capitalisation 3

5

To understand whether AIM can be a fertile ground for international companies, it is important to look at how it competes against other junior markets such as the TorontoStock Exchange (TSX) and NASDAQ. But AIM also offers substantial benefits additional to its junior-market status.These are a result of the LSE drawing on UK best practice tocreate AIM’s unique structure and regulatory environment.

AIM has many benefits that attract companies, investors and analysts. Here are what we believe are the most important:

Access to capital for smaller companiesThis is probably the most important benefit that AIM offers.In the early stages of development, it is helpful for a companyto be a big fish in a medium-sized pond – exactly the kind ofopportunity offered by AIM. The majority of AIM members(56.4 per cent) have a market capitalisation between US$44mand US$885m (£25m and £500m). Only a very small proportion(0.8 per cent) of companies on AIM have market capitalisationsover US$885m (£500m). The limited number of new investmentopportunities in senior markets, and the restricted growth potential they offer, has driven more adventurous investors to AIM. There, they are matched with smaller companies withhigh growth potential, making AIM a dynamic environment forfast-growth companies.

Simplified, appropriate governanceIn order to provide entrepreneurial companies with an environment in which they can flourish, AIM does not imposeany specific governance regime. Nomads, however, require the development of a tailored governance regime before IPO,designed to suit the particular circumstances of each company.

To ensure the right levels of investor interest and, in turn,liquidity, companies are encouraged to follow governance best-practice guidelines based on the Combined Code.

AIM, however, is a disclosure-based market and, as such,

companies are required under the AIM rules to keep the marketfully appraised of specific matters relating to, among others, theirperformance and financial position. In order to be able to meetthe disclosure obligations set down by the AIM rules, it is keythat appropriate levels of corporate governance and internal controls are maintained.

The result is a market-driven governance regime that meets therequirements of Nomads and investors, while allowing the company the room it needs to grow.

It should be noted that even at its most rigorous this regime ismuch less onerous than that imposed by Sarbanes-Oxley.

Full quotation for all companiesAll companies joining AIM, regardless of size, are part of theAIM community rather than being potentially relegated to sub-markets such as NASDAQ’s OTC Bulletin Boards.

Nomad mentoringAIM devolves many compliance tasks to Nomads. They areresponsible for vetting the suitability of new AIM entries and can offer a great deal of practical advice to smooth the transitionfrom a private to a quoted company. After a company is admittedto AIM, the Nomad relationship continues to ensure ongoingcompliance with the AIM rules and guidance on corporate governance matters.

Fast admission processA company that meets AIM criteria can be admitted within as little as two or three months from first appointing a Nomad andother advisers. In part, this is because for non-retail offeringsthere is no Securities and Exchange Commission (SEC)-typereview of the AIM admission document by the UK regulatoryauthorities. It is for the Nomad, the company and its other advisers to ensure that the admission document complies with the AIM rules.

Lock-ins Most markets require some form of lock-in for substantial shareholders and directors of new companies. AIM is no exception: it requires substantial shareholders and directors of companies with a less than two-year trading record to belocked-in for one year from admission.

The benefits of AIM

Average market capitalisations per companyAIM: US$66.5 millionNASDAQ: US$1.13 billionSource: Canaccord Adams

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“If you have a logical reason to be on AIM and don't have a burning requirement to have a US listing, AIM isa much more cost effective way to create liquidity. AIM is the attractive option right now.”

Jeremy Woan, Bampton Group, USA

Even for companies that do have the requisite track record, it islikely that the Nomad will require similar lock-in arrangements toengender investor confidence and help maintain an orderly market in the company's shares for that critical early period following admission, although in certain circumstances exceptions may be made for private equity investors. Theserequirements will vary from company to company although they are usually comparable to those required by NASDAQ.

Leaner reporting requirementsAIM does not have a quarterly reporting structure.Companies are required to file annual accounts and to make a short form half-yearly interim statement.

Low cost of admissionAIM charges only US$7,319 (£4,180) for its admission fee and thesame amount each year for its annual fee. This is significantlylower than main market fees or even other junior markets –NASDAQ, as an example, asks a minimum admission fee ofUS$25,000 (£14,276) and annual fees between US$17,500 andUS$21,000 (£9,993 and £11,991 respectively). Data suggeststhat the cost of an AIM IPO for a US$50m company is 25 percent less than the cost of listing on NASDAQ. Data fromCanaccord Adams suggests the ongoing annual costs ofmaintaining a quotation (compliance costs, admission fees,and expenses related to investor relations) are also significantly lower on AIM than on NASDAQ.

Institutional focusAIM is now a global market but it has grown from a base in the UK – a country where institutional investors dominate themarket. While AIM does have significant numbers of retailinvestors, which it attracts through tax breaks, there are far fewerretail shareholders than the average US market. It has beenmore common for AIM IPOs to be effected as institutional plac-ings rather than the public offerings common to markets outside the UK. This reduces cost and can also allow close relationships to be formed with key shareholders.

Useful liquidity levels for smaller companiesAn average-sized AIM company would almost certainly be thinly-traded on NASDAQ. However, as the table below shows,the prevalence of smaller companies on AIM, and the absenceof significant numbers of the much larger players seen on NASDAQ, leads to a liquidity advantage for smaller companies.

While liquidity for larger companies on AIM has been an issue inthe past, AIM has now introduced AIM 50 and AIM 100 indicesin a move to improve liquidity across the board. This move hasencouraged some funds to develop AIM tracker products.In addition, AIM has also recently introduced the SETSmm trading platform designed to reduce price spreads and, again,improve liquidity.

Avg. Volume/$m of Market Cap.1

2,000

1,600

1,200

800

400

0

2002 2003 2004 2005 YTD

174

1,382

AIM

NASDAQ

118

1,795

112

1,751

96

1,090

1 Source: Canaccord Adams

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Governance is one of the biggest challenges faced by any company moving from private ownership to being publicly quoted. Investors and regulators demand a much higher stan-dard of risk management, and stronger and better-documentedprocesses, than is typically employed by private companies.The challenges can be particularly acute for smaller organisations undergoing enormous growth, where establishinggood process can often take a back seat to business issues.

But strong governance must be established. Credible investorswill only commit to companies who follow best practice in managing business risk.

The LSE’s management of AIM takes a markedly differentapproach to the regulation the SEC places on NYSE and NASDAQ companies. To create the right environment for growing companies AIM does not itself require any specific governance regime. Instead each company is expected, underthe guidance of a Nomad, to adopt governance processesappropriate for its size. This usually means partial observance of the provisions of the Combined Code on CorporateGovernance or, more recently, following the recommendedguidelines of the Quoted Companies Alliance. AIM’s approach ismost easily understood by considering two of its principal ele-ments: institutional investor expectations and the Nomad.

Institutional investor expectationsAIM’s institutional investors closely monitor the companies inwhich they invest. This allows direct scrutiny on governanceissues. Rather than needing to impose a ‘one-size-fits-all’regime on to every company regardless of fit, companies areable to tailor their governance processes to what is and is notimportant to that particular company. Governance can be fine-tuned to ensure the most critical risks are contained,while ensuring that management time is not necessarily wasted on overly rigid control.

For more detail about best practice see Corporate governanceguidelines for AIM companies published by the QuotedCompanies Alliance (QCA) in July 2005.

The NomadThe goal of any market is to match appropriate investors withcompanies to give companies the opportunity to raise money.Nomads are the link between the two sides of the market. Theyare responsible for guiding new AIM members through theadmission process, then guiding the organisation toward bestpractice in management and governance.

In practice, that means investors rely on Nomads to police governance issues within the companies they represent.

The overall effect is that companies must meet the Nomad’sstandard before they are allowed to approach the market.However, Nomads provide hands-on guidance through the difficult process of transition from the looser private companyregime governance to the standards demanded of quoted corporates.

A Nomad’s main asset is its reputation and it cannot afford to beseen as ‘light’ on governance with the companies it represents.So Nomads improve the overall trustworthiness of the AIM market by offering close oversight of each member.

Nomads are also useful gatekeepers to AIM. They have extensive experience in evaluating companies wishing to join themarket, and potential investor appetite. As such, we believe theyprovide a useful filtering service. They ensure that inappropriateofferings are not allowed to waste investor time.

Understanding AIM governance

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• Small numbers of investors; close relationships

• Can speak to key members of investor base quickly and often inexpensively

• Nomads can advise on appropriate governance and guide members to best practice

• Close, frequent oversight through Nomad

"The most useful advice that a Nomad will give is this. It can't make a company as successful as itcould be if you don’t get the governance right. It helps to have someone on the board who's beenthrough the process before."

Richard Smerdon – a UK governance expert and author of A practical guide to corporate governance

Tailored approach to governance

• No minimum shares to be in public hands

• No trading record requirement

• No prior shareholder approval for acquisitions(except reverse takeovers)

• Admission documents not pre-vetted by LSE or by the UK regulatory authorities in most circumstances

• Nominated adviser required at all times

• No minimum market capitalisation

How AIM simplifies listing and otherregulatory requirements

AIM – a growing market In the last three years, AIM’s market-capitalisation growthhas clearly outpaced NASDAQ. In 2005, NASDAQ’s figurewent down 5.1 per cent but AIM grew 56.8 per cent. 100%

80%

60%

40%

20%

0%

(20%)

(40%)

2001 2002 2003 2004 2005 YTD

(21.8%) (22.3%)(30.2%)

(11.7%)(5.1%)

55.0%

79.1%

14.9%

73.0%

56.8%

AIM

NASDAQ

Total Market Cap. Growth 1

1 Source: Canaccord Adams

9

Many international companies could meet the AIM admissioncriteria, but not every company will find AIM a sensible placeto be publicly traded.

There are a number of important issues to consider.

Is the quotation credible?For international companies, coherent and logical businessreasons for seeking to access the London market are essentialif they want to interest the widest possible investor base.Nomads are currently being approached by an unprecedentednumber of candidates, and therefore have little need to workwith candidates without such credibility for whom it will bemore difficult to attract investor interest.

In particular, a degree of European credibility can be useful forcompanies considering joining AIM.

But what constitutes European credibility? It is less cut anddried than you might assume. A company with European localmanagement, offices, customers and sales automatically hascredibility. But many international companies coming to AIM donot have a full European presence when they are admitted –in some sectors, a strong European revenue stream will beenough, while in other cases investors have been willing to buyinto an AIM quotation as part of a strategy for opening upEuropean markets.

Then there are some situations and/or sectors that do notrequire any sort of European ‘connection’ at all. AIM is themarket of choice for many mining and resource companies,few of which have local operations. In addition, AIM is seeingthe emergence of quotations by SPACs (Special PurposeAcquisition Corporations), US groups that IPO to make theirshares available principally to US private equity and hedgefund investors.

Is your offer strong enough to attract a Nomad? The vast majority of Nomads are London-based. The currentlevel of interest in AIM is such that the additional hurdles inherent in bringing a non-UK company to the market meanthat US businesses often have to work hard to attract the interest of a Nomad. Making use of the experience and contacts of legal, accountancy or investment banking firms withgenuine transatlantic experience in the AIM market can help.

Are you the right size?The benefits of AIM’s junior market status are most appropri-ate for companies with a projected market cap on IPO belowUS$875m (£500m). Beyond that point, it may be more sensible to list on a senior market such as the LSE main market, NASDAQ or NYSE. Although there is no regulatoryrequirement to do so, it is arguable that any company growingbeyond that capitalisation on AIM should consider moving to a full market.

Already listed elsewhere? AIM could be an optionCompanies that have already traded on one of nine international markets for 18 months can leverage their existing listing to move to AIM. Costs are reduced because no admission document is required. The ‘designated markets’are the Australian Stock Exchange, Deutsche Borse, Euronext,JSE Securities Exchange of South Africa, NASDAQ, NYSE,Stockholmsborsen, Swiss Exchange and Toronto Stock Exchange.

Who should join AIM?

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“AIM is a uniquely global market for smaller growing companies, offering ambitious companiesfrom across the globe access to levels of investment capital and profile that they are unable togain elsewhere. However, in order to make the most of their AIM quotation, overseas compa-nies must be aware of the additional steps they must take and the competition for investmentfunds and public profile they will face.”

Martin Graham, Head of AIM

“If a US company wants to delist to join AIM, it must think through its public communicationsvery carefully. The company’s stakeholders could easily conclude the company is ‘going dark’and seeking to evade regulatory and investor scrutiny if the reasoning and strategy behinddelisting and relisting in another country is not properly explained.”

Peter Denison-Pender, Associate Director, Interregnum

Is your investor profile appropriate?AIM offers significant benefits – but they do not apply to everycompany incorporated in the US. Those organisations wouldbe well advised to take steps to prevent the number of US resident investors rising above 500. Once that number ispassed the company will become subject to SEC registrationrequirements. The consequences of that may includeSarbanes-Oxley obligations, regardless of whether the business is quoted on a market outside the US, such as AIM.

Will Regulation S apply?Many US companies coming to AIM raise new money by issuing shares under Regulation S of the US Securities Act.Under Regulation S, there are restrictions on the resale of such shares back into the US, typically for a period of oneyear post the IPO. One further consequence of this is thatwhile most AIM shares trade in an electronic form via theCREST settlement system, shares subject to Regulation Srestrictions are usually represented by a physical and legended share certificate. Such shares cannot be traded via CREST, which can lead to the restricted shares trading at a discount to the market price for non-restricted shares.

Can you re-list credibly?Some companies grow out of junior markets. Others maydespair of the lack of analyst or investor attention in large markets, and move to a market more appropriate to their size.Others may decide that the cost of compliance in a particularmarket outweighs its benefits. Whatever the reason, anecdotalevidence suggests that an increasing number of companiesare interested in joining AIM’s ‘right-sized’ environment fromtheir existing market. But it can lead to a PR disaster if donebadly. To avoid the pitfalls, the services of good PR and lawfirms should be obtained.

11

Im

pa

ct

D

ay

AIM – countdown to admission

Advice received from financial adviser on suitability for admission

Preparation of legal due diligence report

Draft verification notes and conduct verificationexercise

Draft admission document,short form report, andworking capital report

Board meeting to approve “pathfinder”admission document anddraft reports

Institutionalpresentations commence

Announcement of intention to apply for admission to AIM

1 This table is for illustrative purposes only

Marketing exercise concluded

Board meeting to approve finaladmission document, the offerprice and final versions of allreports and other documentation

Placing/offer agreementsigned

Dispatch of placing letters

Final admission document published

Formal application foradmission

Irrevocable commitmentsreceived from investors

This table illustrates a typical journey towards AIM admission. Under the right circumstancesthis can take as little as 2 to 3 months 1

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AIM is a growing market. A large proportion of European IPOstook place on AIM in 2005, demonstrating that it is already thepreferred junior market for Europe, with Canada and Australiaalso seeing 29 IPOs in the same year.

AIM is also a market of choice for mid-sized companies thatwant to see significant trading in their shares.

But what about AIM for US companies that have traditionallylooked to NASDAQ? AIM has made inroads in the US marketand four times as many US companies were admitted to AIM in2005 compared to 2003.

We believe that more and more US companies will move to AIMas an alternative, as it offers significant benefits over NASDAQ interms of:

• Investor appetite for smaller companies• Liquidity for those companies• A manageable, yet credible governance environment

But US companies considering joining AIM must be careful thatthey do so for the right reasons. The AIM investor community isrelatively small and extremely canny: it is fast to pick up on goodopportunities but possibly even faster to reject offers that lackcredibility. So US companies must be careful – to make the rightoffer, and seek the right advisers.

AIM is already bringing significant benefits to many internationalcompanies as a true global junior market.

Joining AIM is not a trivial process. But it can bring enormous benefits to your business.

Is AIM a true alternative to NASDAQ?

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Acknowledgements

Osborne Clarke would like to acknowledge the help and adviceit received compiling this white paper. Thanks to:

Anne Moulier, AIM Janet Coyle, UK Trade & Investment (San Francisco)Jeremy Woan, Bampton Group John Voltz, Jane Capital Peter Denison-Pender, Interregnum PlcRafferty Atha, Ubiquity Software CorporationRichard SmerdonTL Stebbins, Canaccord Adams

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Andrew Gowans, Partnert +1 650 462 4020e andrew.gowans@osborneclarke.comOsborne Clarke200 Page Mill Road, Suite 100Palo AltoCA 94306USA

Andrew Saul, Partnert +44 (0)20 7105 7372e andrew.saul@osborneclarke.comOsborne ClarkeOne London WallLondonEC2Y 5EBUK

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Is AIM becoming the new global junior market of choice?Osborne Clarke’s AIM expertise has guided our clientsthrough 19 IPOs and many secondary fundraisings in thelast 18 months, raising well over £350m. We are a largeUK law firm, with a level of business insight that will surprise you. We also have offices in the US and across Europe.

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