AIM FOR US COMPANIES THE AIM MARKET OF THE LONDON STOCK EXCHANGE - www.kslaw.com

AIM FOR US COMPANIES
 THE AIM MARKET OF
    THE LONDON
  STOCK EXCHANGE

      www.k s l aw.co m

AIM - THE AIM MARKET OF THE LONDON STOCK EXCHANGE

This Memorandum provides a brief overview of the AIM Market of the London Stock
Exchange (“AIM”), its development as the world’s leading international equity market place
for small and mid-cap companies, and identifies some of the reasons for its success. This
Memorandum also highlights some of the reasons for AIM being chosen by an increasing
number of US businesses as a route to the capital markets, and their market of choice for the
raising of development capital.

Background

The London Stock Exchange launched AIM in 1995 as a secondary market for small,
growing companies which had not yet reached the stage where they were ready for a main
market listing. The rules and regulations applicable to AIM companies were deliberately
designed to strike a balance between providing an environment in which a small, growing
company could focus on developing its business rather than applying disproportionate
resources to regulatory compliance, while also providing a level of regulatory control to
ensure the integrity of the market. The structure adopted, and the level of regulation applied,
have contributed to AIM developing as a highly successful IPO and fundraising market
regarded by investors and other market participants as a safe place to undertake business.

The Development of AIM

Some thirteen years after its launch, initially with just a handful of companies, the number of
businesses on AIM has grown rapidly, particularly over the last three years, with the number
of companies listed now standing at approximately 1,700 - more than London’s main market.
In fact, AIM is being chosen as the market of choice not only by new entrants, but also by a
steady stream of companies which have moved from the main market to AIM. In the last
three years alone, approximately 1,200 companies have joined AIM. While there has been a
slight moderation from the huge number of companies coming to the market in the “gold
rush” years of 2004, 2005 and 2006, this does not reflect any diminishment in the
attractiveness of AIM but rather reflects its growing maturity, and the quality and size, of
businesses adopting an AIM strategy. The amount of funds being raised on AIM continues to
increase. Indeed, in 2007, while the number of IPOs was significantly lower than in 2006,
the amount of funds raised was higher. In 2007, more than double the amount of funds was
raised by AIM companies than was raised by a considerably larger (almost double) number of
companies in 2005. The total market capitalisation of AIM now stands at close to $200
billion, and there are some 20 companies with an individual market capitalisation of more
than $1 billion. Despite recent challenging market conditions, companies are continuing to
flourish on the AIM market, and returns from good businesses have outstripped other markets
by a margin.

While AIM has been the target of an amount of largely politically-generated negative
comment in the last twenty four months, particularly from those connected with the US
capital markets, reality is reflected in the increasing flow of capital to AIM companies.
These negative comments are almost invariably wholly misplaced and ill-informed. The true
picture of AIM is provided through the increasing, strong growth in institutional money being
invested in AIM stocks, with much of this growth being driven by US investors. For
example, in 2006 Fidelity, the largest institutional investor in AIM securities, increased its
investment in AIM companies by some 67 per cent. and US institutions generally are among
the most active players in the AIM market. The institutional investors which dominate AIM

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are highly sophisticated firms which clearly see AIM as a market on which they are highly
comfortable to undertake investment transactions.

It is also worth noting that, while there have been more IPOs on AIM than on the US markets
put together for several years now, in 2006 more money was raised on AIM than on Nasdaq
for the first time. London and New York were close to equal.

International Expansion

Although AIM began life as a largely domestically-focused market, in recent years - and, in
particular, over the last three years - there has been exponential growth in the number of
international (i.e. non-UK) businesses floating on AIM. There are now well over 400 non-
UK businesses (pushing up towards one-third of the total, in fact) listed on AIM, from some
thirty or so jurisdictions around the world. Well over 30 per cent. of new admissions are now
by international companies and the proportion is continuing to grow. The amount of money
raised by international companies is also generally higher than for domestic businesses and
the average size of an AIM company is increasing strongly - average market capitalisation
now exceeds $100 million, up from $60-$80 million less than twenty four months ago.

Another development has been the growth in secondary fund raisings. While secondary fund
raisings have been very familiar territory on the AIM market for many years, with companies
often returning to the market repeatedly for further funds with relative ease, 2007 saw
significantly more funds being raised through secondary issues than in IPOs and this trend
has continued in 2008. This is another of AIM’s key attractions - the ability to return to the
market for further funding as required without onerous filing or approval requirements.
Provided a company has sufficient authorised share capital, it can seek further funds from
investors at any time very simply, without having to go through the procedures generally
encountered on the larger markets, in a speedy and cost-effective way.

The Growth in US Company Admissions

At the same time as AIM has been developing as a highly attractive market for smaller,
growing companies, the US capital markets have increasingly moved away from such
enterprises, creating a far less hospitable environment for these companies to successfully
operate in. While the US capital markets remain the largest and deepest in the world
(London is second), the focus of the investment and advisory community in the States has
moved up the size scale to the point where companies with a market capitalisation of less
than $500 million will find it at best challenging and at worst impossible to elicit any
meaningful interest from the investor and analyst communities, and both fundraising ability
and share price support have largely evaporated for companies of a size which, by contrast,
have been able to flourish on AIM. While the focus of the US markets has increasingly been
on larger enterprises, the entire structure and fabric of the AIM market has been focused on
small and mid-cap companies, with both the institutional investors and the AIM advisors
targeting this specific sector of the market extremely successfully.

In addition to these challenges for a US business wishing to access the capital markets, and
either failing to do so altogether, or capital market funding only being available at an
inappropriate cost in the United States, increasing regulation in the US has compounded
matters, particularly as a result of the Sarbanes-Oxley legislation. Although the US
regulators have made some moves towards easing the burden of Sarbanes-Oxley for smaller
companies, the US regulatory environment remains generally adverse for smaller businesses

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and, even without this additional burden, there is still effectively no IPO environment for
smaller companies on the US markets in any event. This seems unlikely to change for the
foreseeable future and it is considered to be for these reasons - a lack of focus on the US
capital markets on small or mid-cap companies, the consequent inability to raise capital
effectively, and the regulatory burden imposed on those companies in the United States - that
we have seen a rapid increase in US company admissions on AIM.

Three years ago there were just 5 US businesses on AIM. Now there are more than 70. The
pipeline of new business is also growing strongly and the number of US companies deciding
the adopt an AIM strategy is increasing rapidly. It should be noted that the US is not the only
jurisdiction from which the growth in international companies on AIM is being driven; strong
growth is also being seen from Canada, China, India and mainland Europe. Indeed, many of
the international businesses coming to AIM have chosen London in preference to New York
for the same reasons as US businesses are forming this view.

The Structure of the Market

The success of AIM has, to a large extent, been driven by its underlying structure including:

       •       the absence of onerous admission criteria

       •       its balanced regulatory system

       •       its simplified admission process

       •       its simple secondary fundraising procedure

       •       its easier acquisition rules

       •       the nominated adviser system

Admission Criteria

The AIM rule book sets few eligibility criteria for companies wishing to join the market. So,
for example, no trading record is required, there is no minimum requirement for a particular
percentage of shares to held in public hands and there is no minimum market capitalisation.
This contrasts with other leading markets although it should be noted that in order to admit to
AIM, a company will in practice need to demonstrate a sound financial position and strong
future prospects to satisfy the gatekeepers of the market that it is suitable for admission. The
gatekeepers of the market are the nominated advisers and the brokers, who are highly
selective in the companies they are prepared to bring to the market. So, the market, rather
than a regulator, dictates which businesses are strong enough to join.

Nominated Advisers

Nominated advisers (Nomads) are corporate finance advisory firms who are responsible for
pre-vetting companies wishing to list on AIM. A company’s Nomad is required to confirm
to the London Stock Exchange that, having undertaken extensive due diligence, the company
is suitable for admission. The London Stock Exchange has effectively delegated to the
Nomad community responsibility for ensuring that only companies which are appropriate for
public life, and which have been thoroughly examined by a Nomad, are allowed to get

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through the gate. Nomads are governed by a specific rule book dictating the steps that they
are required to take in order to fulfil their pre-vetting responsibilities. This task is taken
extremely seriously by the Nomads and their role supplants that normally carried out by the
regulator on other markets. This system is one of the principal advantages of AIM in terms
of the cost and timing of an AIM listing compared to a listing on one of the main markets,
whether those in New York, London or elsewhere. Most major markets require pre-vetting
and approval by a regulatory body (in the US, the SEC) and the process of vetting and
approval is generally burdensome, expensive and usually results in a long timetable for an
IPO.

The AIM Admission Process

The AIM admission process is governed by the AIM rules. AIM admissions are generally
accompanied by some form of fundraising to institutional investors. As part of the admission
process, an admission document is prepared by the Nomad in consultation with the company
and its other advisors. The overall transaction is very similar to most other listing processes,
the main difference being the absence of regulatory pre-vetting and approval.

The cost and timing of an AIM admission are generally less and shorter than on other
principal markets. Where fundraising activities are also carried out, there is also a significant
cost difference in terms of commission rates between the US and the UK. In the US,
commissions of 7 or 8 per cent. are usual while, for an AIM fundraising, commission will
normally be in the range 3 to 5 per cent. The overall cost of an AIM IPO can be expected to
be in the range of 7 to 8 per.cent of funds raised, but can be higher or lower, depending to a
large degree on the size of deal, as the brokers commission is a fixed percentage.

Liquidity

AIM is often criticised for being an illiquid market. This is a misplaced comment. It is true
that the lower end of the market is relatively illiquid, but this contrasts with the upper level of
the market where liquidity is strong. A good business of a reasonable size, with sufficient
shares in public hands (free float), can expect greater trading liquidity than a small company
whose shares are held by only a small number of shareholders Trading volumes have been
increasing steadily in recent years. However, AIM is not a market for short term investors.
The institutional investors who invest in AIM stocks generally do not invest in order to “flip”
their holdings. As noted above, these institutional investors - from the UK, Europe, the US
and elsewhere - are highly sophisticated investors who invest in AIM stocks for their growth
potential. These are not short term investments. Consequently, the institutions are generally
not in the market to buy and sell, buy and sell - they take a position because they believe that
the companies they invest in will deliver their growth potential.

That is not to say that AIM does not provide an exit for investors. In many cases, founder or
early stage investors may cash out at least a part of their holdings at IPO. This is particularly
relevant in the case of private equity investors who have supported the company for some
time but who wish to realise at least some of their investment at IPO.

Conclusion

AIM is a market that has gone from strength to strength and continues to develop strongly.
US companies, both private and existing public companies - including many on the OTC BB
- are recognising an AIM strategy as far more appropriate for them in their development

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plans than listing in the United States. King & Spalding is actively involved in a number of
transactions for US businesses seeking an AIM listing and would be pleased to provide
assistance and advice to any business which wishes to consider AIM as an option for their
own development.

Jonathan Martin
Partner
King & Spalding International LLP
Direct: +44 (0)20 7551 7539
Fax:    +44 (0)20 7551 7575
Email: jmartin@kslaw.com

Spring 2009

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