"Inside AIM" re-emerges: Exchange publishes guidance on free float and a reminder on systems, procedures and controls

After a hiatus of just under three years, AIM Regulation has published its latest edition of “Inside AIM“, its publication for providing advice to AIM market participants on technical issues arising from the AIM rulebooks.

The new edition covers the issue of free float in connection with a company’s appropriateness for AIM, and a gentle reminder of the role that nominated advisers are expected to take to ensure that an applicant’s systems, procedures and controls are up to scratch.

Free float

No minimum requirement, but an “important qualitative assessment”

Many companies coming to AIM are attracted in part by the absence of a formal free float requirement, enabling closely-held companies to benefit from access to the capital markets whilst keeping control substantially within the pre-IPO shareholder ranks (this contrasts with the standard minimum 25% free float requirement applicable for companies admitted to the premium and standard segments of the Main Market). However, the lack of significant free float can contribute to the trading illiquidity which affects many AIM companies.

Against this backdrop, AIM Regulation has given guidance on the role that free float should play in the nominated adviser’s assessment of a company’s appropriateness for AIM. It observes:

“A company’s free float is an important qualitative assessment, which can have a significant impact on the ability of the company to attract investors and the functioning of the secondary market. Whilst we do not prescribe levels of free float, the issue of free float is something that we consider an important factor in the work a nominated adviser undertakes when bringing an applicant to market. Sufficient free float is fundamental to the orderly trading and liquidity of the securities once admitted to AIM, which is inextricably linked to the company’s appropriateness to be admitted to AIM.”

Engagement with nominated advisers on issues related to free float

AIM Regulation says that it often discusses free float with nominated advisers as part of the application process, and has taken the opportunity to clarify some of the factors that are raised regularly in those discussions. These include that:

• the nominated adviser should consider how the securities are likely to trade when admitted to AIM, following discussion with the company’s broker(s) and potential market makers. AIM Regulation expects consideration to be given to the spread and nature of the shareholders comprising the free float;
• failure to raise initial target funds (which in itself might give rise to free float questions) may be indicative of more fundamental issues of appropriateness and is a matter that should be properly explored by the nominated adviser;
• limited free float should give rise to questions about the rationale for the applicant to seek admission to AIM; and
• where there are concentrated shareholdings (for example, connected due to family, business or other interests/ connections) free float issues should be considered in conjunction with issues of undue influence, control and ongoing corporate governance arrangements within the company.

Systems, procedures and controls

AIM companies are required to have in place sufficient systems, procedures and controls to enable them to comply with the AIM Rules for Companies, with the nominated adviser in turn being required to confirm that it is satisfied that this is the case as part of their declaration to the Exchange. AIM Regulation has provided a gentle reminder to nominated advisers that they need to go beyond a “box ticking” approach to the examination of a company’s systems, procedures and controls, and ensure that they will actually be effective post-admission. The Exchange points out that:

“Such consideration involves, for example, the review of financial policies and procedures documentation prepared by the company (in conjunction with its reporting accountants). Nominated advisers should approach this consideration in a meaningful way, which would go beyond merely a review of the relevant documents to include an assessment of whether those policies are capable of working in practice, taking into account the nominated adviser’s knowledge of the company and its management.”

The Exchange also reminds nominated advisers that such systems, procedures and controls must be in place by the time of admission.

Source: Inside AIM, June 2015