London Stock Exchange

London Stock Exchange

A Introduction

B Alternative Investment Market (AIM)

C Prospectus Rules

D Listing Rules

E Disclosure Rules

Part A

Introduction

1.01 The London Stock Exchange trace their roots to about 1700. Partly due to the British Navy dominating the main sea trade routes the London Stock Exchange flourished and became a regulated exchange in 1801. [In 2004, 80 per cent of all European IPOs floated in London]. [By the end of 2004, the market capitalization of UK and international companies on the London Stock Exchange’s markets amounted to £3.5 trillion, with £4.7 trillion of equity business transacted over the year.] [In _____ 129 international companies from 29 countries were admitted to the Exchange's markets.]

1.02 The Exchange has two primary equity markets – the Main Market and AIM. AIM is the Exchange's international market specifically designed for small, growing companies and has a reduced level of regulation compared to the Main Market. The Main Market is for established companies seeking international recognition. In 2010 there were around 3,000 companies with securities trading on the Exchange from over 70 countries.

1.03 The Exchange also operates the Professional Securities Market which is particularly attractive for overseas issuers who want to avoid having to restate their financial information in IFRS. Debt securities or depositary receipts of any denomination may be listed on this market on production of listing particulars (similar to a prospectus) aimed at a wholesale or professional audience. There is no separate rule book and the relevant rules are largely contained in the FSA Handbook, Listing Rules 4 and 17.

1.04 In addition the Exchange provides trading platforms which are used by broking firms around the world to buy and sell securities. More than 400 firms (mainly investment banks and stockbrokers) worldwide trade as members of the London Stock Exchange. The Exchange provides real-time prices, news and other market information through data providers to the global financial community.

Costs

1.05 [Estimated costs of obtaining an admission to trading on the Main Market are £750,000 plus 2-5% commission on funds raised and ongoing advisory costs of £250,000 pa.]

1.06 [Estimated costs of entry to AIM are £300,000 plus 2-5% commission on funds raised and ongoing advisory costs of £50,000 pa. For instance, the fees for the solicitor to the company normally range from £50,000 to £100,000 and the fees for the solicitor to the Nominated Adviser/Broker normally range from £20,000 to £25,000 but can be £40,000 for an overseas company.]

Recognised Investment Exchange

1.07 The London Stock Exchange is a recognised investment exchange (“RIE”) supervised by the Financial Services Authority ("FSA"). Recognition provides an exemption from the need to be authorised to carry on regulated activities in the UK. In order to be recognised the Exchange has to comply with the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001.

1.08 As an RIE, the Exchange has to satisfy the requirements detailed in the FSA's RIE and RCH Sourcebook. Orderly markets are maintained via rules, guidance and through the monitoring of trading and market activity. Stock Exchange Notices disseminate amendments to market rules and guidance. Details on the requirements for a RIE are contained in 2.2 of the FSA's RIE and RCH Sourcebook.

Regulated markets

1.09 The FSA is also responsible for maintaining the list of regulated markets in the UK[1]. There are currently six regulated markets including a couple of futures markets and a metal exchange. In addition the London Stock Exchange operates the so called unregulated Alternative Investment Market ("AIM"), Professional Services Market and certain other international markets.

Admission and Disclosure Standards

1.10 It is important to note that the London Stock Exchange also has its own requirements for companies quoted on its markets, including the right to decide whether to admit a listed security to trading and to make and enforce its own rules.

1.11 There is a two stage admission process for companies wanting their securities admitted to the Exchange's market for listed securities. First the securities need to be admitted to listing by an EEA competent authority (which, if the UK is the Home Market State, is the FSA) and then also admitted to trading by the Exchange. The Exchange has published the Admission and Disclosure Standards which sets out admission requirements and continuing obligations for companies seeking admission to trading on the Exchange's market for listed securities. As AIM is not classified as a regulated market and AIM securities are not part of the Official List these Standards do not apply to AIM companies.

1.12 The Standards, in the main, relate to compliance with the requirements of the issuer's EEA Competent Authority. However, they also deal with matters such as timetables, settlement, fees and sanctions.

1.13 The Standards contain a form for application for admission of securities to trading which the Exchange asks to be submitted at least 10 days prior to the consideration for admission – although formal application is only deemed to be made when a prospectus has been approved by the relevant EEA competent authority and published.

1.14 Notification to the market is required by several rules. Such notifications must be through an approved Regulation Information Service (“RIS”) including RNS provided by the London Stock Exchange.

1.15 The remainder of this paper will first focus on the Alternative Investment Market of the London Stock Exchange (where companies have to follow the AIM Rules). Then it will comment on the Prospectus Rules, the Listing Rules and finally the Disclosure Rules, all of which have to be satisfied before admission and maintenance on the Main Market.

Part B

The Alternative Investment Market (AIM)

1.16 The main headings of this Part B are:

·  Introduction

·  Nominated adviser (or “Nomad”)

·  Admission document

·  Special conditions for certain applicants

·  Disclosure/Notification of information

·  Major acquisitions and disposals

·  Restrictions on deals

·  Further issues of securities following admission

Introduction

Background to AIM

1.17 The London Stock Exchange has long operated a mechanism for trading shares in companies not on the Main Market. A rule (known as 535 and then as 4.2) allowed members of the Exchange to trade such shares. There was also the Unlisted Securities Market (USM) which flourished for most of the 1980s but hit hard times in the recession of the early 1990s. During a review of the USM in the depths of the recession in about 1992 the question was asked whether the USM was profitable for the Exchange and the USM was then closed. A lobby group was formed which was initially called CISCO and is now (because of problems with the computer giant of the same name) called the Quoted Companies Alliance. This lobby group established the need for a junior market in the UK and AIM was born in 1995. AIM now has over 1,200 companies whose shares are traded on its market with an average value of about £45m.

1.18 Suitable companies for AIM include:

·  young growing companies;

·  companies whose shareholders need a trading facility but prefer the tax structure of AIM rather than the Main Market;

·  companies with an existing wide shareholder base (e.g. Enterprise Investment Scheme companies);

·  private equity controlled companies;

·  companies otherwise not qualifying for Main Market (e.g. few shareholders); and

·  certain overseas companies particularly natural resource companies.

1.19 Attractions of AIM include that:

·  it facilitates fund raising to pay off loans or to fuel expansion;

·  it creates a market for the shares and this gives a potential exit for investors (which usually increases the demand for minority holdings and improves the value of such holdings);

·  it facilitates future takeovers (as the AIM company can offer quoted shares);

·  AIM securities may be eligible for various tax reliefs including the Enterprise Investment Scheme and the Venture Capital Trust Scheme;

·  there is less regulation than on the Main Market;

·  there is enhanced profile increases credibility with suppliers, lenders and others;

·  it gives experience of being a publicly quoted company and provides a stepping stone to the Main Market; and

·  it creates an alternative to venture/investment capital organisations and this should help keep the cost of capital competitive. Indeed with venture capital organizations having moved out of the smaller company sector AIM is now probably the main source of venture capital in the UK.

1.20 Potential problems with AIM include:

·  some companies coming to AIM (e.g. venture capital backed MBOs) will have too many sellers and not enough buyers;

·  the Stock Exchange may lose interest (after all the USM was closed because it was not making a profit in the early 1990s). The Exchange's natural inclination is to focus on the top 350 companies. The Exchange may make more profit from one very large company on the Main Market than from all the AIM stocks;

·  Market Makers may have a large spread between bid and offer thus deterring buyers (and leaving the market illiquid).

1.21 Points to consider when comparing AIM with the Main Market are that AIM companies:

·  do not require pre-vetting of documents by the FSA (acting as UK Listing Authority) with associated time delays and cost, unless they are also making an offer to the public;

·  do not require an annual filing update (with associated costs);

·  do not need a Sponsor but they do require a Nominated Adviser and a Nominated Broker and their roles are similar to that of a Sponsor;

·  [do not require a three year trading record];

·  have no minimum capitalization and no minimum shareholding by the public. For the Main Market at least 25% must be in the hands of the public;

·  only require to notify the Exchange of certain transactions. For the Main Market certain transactions require a circular and prior approval of shareholders;

·  do not require a statement in compliance with the guidelines on corporate governance;

·  where the company's business has not been independent and earning revenue for at least two years, its directors and employees must agree not to dispose of their shares in the company for at least one year after admission to AIM.

Tax reliefs

1.22 For individual investors the following reliefs are available for AIM securities:

·  Capital gains tax (CGT):

-  business asset taper relief;

-  gift relief;

·  The Enterprise Investment Scheme (EIS);

·  Inheritance tax (IHT):

-  business property relief

·  Relief for losses; and

·  Venture Capital Trusts (VCTs).

In addition the Corporate Venturing Scheme (CVS) is also available for corporate investors

CGT business asset taper relief

1.23 Taper relief was introduced in 1998 and applies to individual investors and trustees (but not to corporate investors). The relief reduces a chargeable gain assessable to CGT in relation to the period the investment is held, and the scales of relief depend upon whether the investment is a ‘business’ or ‘non-business’ asset.

1.24 ‘Business’ assets, which include shares or securities in qualifying unquoted trading companies, attract significantly higher rates of taper relief. AIM companies for the purpose of the relief are classified as unquoted. Also to qualify the AIM company must be a trading company or the holding company of a trading group (no more than 20% of the activities may be non-trading). For disposals after 5 April 2002, after one year CGT is only charged on 50% of the gain on a ‘business’ asset and after two years 25%. Thus for a 40% taxpayer the effective rate of CGT after two years is 10% (ie on a £100 gain, tax is charged on £25 which at 40% is £10).

1.25 If the AIM company does not qualify as a trading company then shares in it will be classified as a ‘non- business’ asset and the taper relief is slower and tax will be charged on a minimum of 60% of the gain.

CGT gift relief

1.26 There is no general CGT relief for gifts (although transfers between husband and wife are on a no gain no loss basis). However, if shares or securities in an AIM trading company are transferred, other than at arm’s length, the deemed capital gain arising can be ‘held over’, (ie the CGT liability is postponed until a subsequent arm’s length disposal by the transferee, who effectively inherits the transferor’s base cost).

1.27 The relief must be claimed by both the transferor and transferee within five years and ten months of the end of the relevant tax year.

Enterprise Investment Scheme (EIS)

1.28 Main points of this scheme include:

·  the maximum amount of qualifying investments for a tax year is £200,000;

·  income tax relief is given at 20% for a qualifying investment in an AIM company which qualifies as a trading company;

·  provided an investment is held for a minimum period of three years, investors are exempt from capital gains tax on the disposal of their shares;

·  a qualifying company must not be a subsidiary and must carry on a qualifying trade in the UK for a minimum period of three years from issue of shares (or the start of trade if later);