The London Stock Exchange is consulting on a plan to tighten up regulation for AIM. Could this damage London's highly successful junior market?
London's Alternative Investment Market (AIM) for small and growing companies has been a roaring success. More than a thousand companies are now members and some of these companies aren't small. New Star Asset Management
(LSE: NSAM)
, for example, has a £1.1bn market cap while gold miner Peter Hambro Mining
(LSE: POG)
is currently worth around £940m.
What's more, many overseas companies have also chosen to join AIM. US diagnostics company SpacelabsHealthcare
(LSE: SLAB)
is one example.
One major factor behind AIM's success has been a relatively light approach to regulation -- AIM's rules are more tolerant than those for New York's market for growth companies, Nasdaq for example.
Of course, the problem with "light touch" regulation is that it may mean investors are sometimes lured into buying shares in companies with very little substance. Sadly, many people bought shares in Langbar due to the then management's claims that the company had £365m in the bank. A new team of directors hasn't been able to find any sign of the missing cash and the shares have delisted.
On balance, I think AIM regulation should still sway towards tolerance and I believe the new proposed AIM regulations don't tighten things too much. Indeed many of the new proposals are just providing greater clarity and should make it easier for the London Stock Exchange (LSE) to clamp down on miscreants.
The core of AIM's regulatory system has always been companies' nominated advisers (Nomads), and that isn't going to change. It's up to the Nomads to perform appropriate due diligence on a company before it floats and to ensure that the company continues to behave appropriately in the years following a float.
The new proposals make it clear what due diligence should entail and they also say that a Nomad should contact the LSE immediately if it has any doubts about the fitness of a company. This clarity is especially important now that more non-UK nomads are expected to bring overseas companies to AIM.
The proposed rules also say that any AIM company should have a corporate website and that the website should make it clear whether the company trades on any other stock exchange or trading platform. This is important information as it has implications for the tax treatment of any AIM investment by private investors.
The LSE's consultation period for these proposals ends on 1 December. My view is that they are an appropriate modest tightening which won't damage the growth of the market. I especially like the idea that all companies must operate an investor relations website.
That said, AIM will remain a relatively risky investment area, so it makes sense to be especially careful if/when you consider buying shares in an AIM company.
More:
Aim Grows Up | Aim For The New Nasdaq
