Alternative Investment Market IPO Process - A Guide

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CONTENTS
Introduction ................................................................................................................3 AIM...............................................................................................................................4 Preparation .................................................................................................................5 Structure and Process/Timetable .............................................................................7 Continuing Obligations ...........................................................................................10 Illustrative AIM IPO Timetable.................................................................................12

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INTRODUCTION
The purpose of this guide is to summarise certain key issues for a company preparing for an initial public offering (IPO) on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE). This guide includes a summary of some preparatory steps a company should undertake, some key basic listing requirements for AIM (and an illustrative timetable) and also a short summary of some of the continuing obligations imposed upon companies listed on AIM.

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AIM
AIM is the junior London stock market operated by the LSE. It is an exchange regulated market and is therefore regulated by the LSE itself (rather than the Financial Services Authority (FSA) which regulates the LSE Official List (the senior market)). The LSE produces the rules which govern companies listed or seeking admission to listing on AIM (the AIM rules). As a less regulated market than the Official List, AIM is proving to be popular with high growth/high risk businesses. The AIM market has grown at an impressive rate in the last two years (almost doubling in size in terms of the number of companies listed). There are certain UK tax benefits for UK investors in AIM company shares, but this guide is not intended to cover those. Separate advice should be taken on eligibility for any favourable tax treatment for investors in the companys shares.

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PREPARATION
There are various steps which need to be taken by a company preparing itself for an IPO on AIM. Two of the key steps during this period are (i) appointing advisers and (ii) carrying out initial health check due diligence on the company.

Appointment of advisors
One of the first things which a company preparing for an IPO will do is appoint its advisers. For an AIM IPO, this would typically include the following: Nominated Adviser A company looking to float on AIM and/or which is listed on AIM is required under the AIM rules to have a nominated adviser (NOMAD) which would be an LSE registered firm (often a smaller investment bank or firm of accountants). The NOMADs role is to guide the company and its management through the IPO process and liaise with the LSE. The NOMAD will, ahead of admission, provide a declaration confirming compliance with the AIM rules by the company/management and the suitability of the company for listing. Nominated Broker The corporate broker acts as the main interface between the company and the stock market/potential investors. The broker will assess demand for the companys shares, will advise on the best method of marketing the shares, the size, timing and price of the issue and will carry out the marketing exercise for the shares. The broker may also partly underwrite the issue and/or place some of the shares to be issued/sold to its own institutional investor clients. The broker and NOMAD may be part of the same investment bank. Registrars A specialist company will be appointed to establish and maintain a register of shareholders in the company following its admission to listing. Lawyers On an AIM IPO, there would ordinarily be two sets of lawyers involved, one acting for the company and one acting for the NOMAD. The major role will be played by the companys legal team (especially in preparing/structuring the company for listing, carrying out due diligence on the company, carrying out verification of the AIM admission document/prospectus and advising the company/management on relevant contractual arrangements (eg the placing/underwriting agreement, directors service contracts etc. - see later for key documents)). Accountants The reporting accountants role is to review the companys financial record, preparing a long form financial report (for use in preparation of the admission document/prospectus) and a short form report for inclusion in the admission document/prospectus itself. They will also prepare a report on the working capital of
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the business, so as to enable the directors to include a statement in the admission document/prospectus as to the adequacy of working capital for the period following IPO. Bankers It may be necessary to review the companys banking facilities with a view to obtaining additional working capital following admission.

Due diligence
Initial due diligence should be carried out in the preparatory period. This would include commercial, financial and legal due diligence and should cover a number of areas including: assessing the commercial eligibility of the business for listing establishing the ownership/right to use key assets (e.g. property, IPR) with a view to assessing whether any reorganisation of these assets is required reviewing key contracts in the business for any material issues (including any change of control issues on an IPO) assessing any taxation liabilities which may arise in the period following IPO reviewing contracts for key employees (these may not be suitable and new agreements may need to be agreed with management) assessing compliance issues (e.g. data protection, employment laws, health and safety etc) assessing any litigation/dispute which may be material to the company/its business assessing any regulatory consents which may be required for a change of control/IPO reviewing the corporate structure - is the structure appropriate for listing or is a reorganisation required? reviewing the constitutional documents of the company to assess if they are suitable for a listed company (i.e. there are no special voting rights, restrictions on transfer etc) reviewing the terms of any share option (and other) schemes operated by the company ensuring the company to be listed (and other companies in the group) are duly incorporated in accordance with local laws reviewing pensions issues - what schemes does the group have (and are there any funding issues) reviewing insurances (ie does the company have adequate cover in place following IPO).

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STRUCTURE AND PROCESS/TIMETABLE

Structure
The structure and process of the IPO and its timeframe will depend on a number of factors. These include: the amount of cash to be raised and the number of shares to be sold by existing investors the potential appetite of investors for the shares the ideal shareholder base following IPO whether employees and/or existing shareholders are to be invited to participate whether the intention is to avoid application of the Prospectus Rules in the UK (see further below).

The majority of AIM IPOs are now carried out by way of an institutional placing (ie a non pre-emptive offer of new and/or existing shares to institutional investors). Carrying out the IPO on AIM in this way usually involves less regulation and can be less costly. Carrying out an institutional placing on AIM, provided certain conditions are met, will not require the publication (and approval by the FSA) of a full prospectus in the UK. Instead, assuming certain conditions are met, the offer will be governed by the AIM rules, which require only that an AIM admission document is produced and sent to the prospective institutional investors in the UK (and filed with the LSE). The admission document does not need to be formally approved by either the FSA or the LSE and therefore the listing process is quicker and easier than a process requiring a full prospectus to be published and approved. A timetable for a typical AIM IPO by way of an institutional placing (and which is exempt from the Prospectus Rules) is attached as an appendix to this guide.

Key documents
Key documents in the AIM IPO process include: AIM admission document/prospectus This is the key document containing information about the company being floated, its business, assets, liabilities, risks and the shares being offered/listed. A separate memorandum will be circulated to directors of the company nearer to the time of the proposed IPO, which will set out details of their duties and liabilities in respect of the admission document/prospectus. However, it suffices to say at this stage that the directors of the listed company will be primarily responsible for the contents of that document (and will need to accept this responsibility on the face of the document). For this reason, amongst others, it is essential that the document is accurate and not misleading and does not omit any information which may be material to investors.

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The companys lawyers will carry out what is called a verification process in relation to the admission document/prospectus. This is a question and answer process, based on all statements set out in the admission document/prospectus, whereby directors are asked to consider and verify each statement and, where appropriate, provide evidence to support such statements. Verification notes will be prepared which can then be considered by the directors in finalising the admission document (and which will provide evidence of a thorough review of the contents of the admission document should any challenge be made later). The required contents of the AIM admission document (assuming it is not a prospectus - see above) are set out in Schedule 2 of the AIM rules. Such information would include: the history and development of the issuer principal activities of the issuer organisational structure audited financial information covering the last three financial years (or such shorter period as the issuer has been in operation) and the audit report in respect of each year any interim financial information published since the last financial audited statements if the admission document is dated more than nine months after the end of the last audited financial year, interim financial information which may be unaudited and made up to a date covering at least the first six months of the financial year information on share capital a summary of material contracts entered into by the group shareholdings of directors/related persons/other significant shareholders a statement by the directors on the adequacy of working capital

Placing/Underwriting Agreement This is an agreement between the underwriter(s), the NOMAD, the broker (all three of which are often the same), the company, the directors and any selling shareholders. The agreement forms the basis of the obligation on the part of the broker/NOMAD to place new shares/existing shares with institutional investors, usually as agent for the company/selling shareholders, and for the underwriter(s) to acquire shares pursuant to any underwriting obligation. Other than the obligations relating directly to the placing and underwriting, the agreement will also contain: provisions relating to the payment of fees and commissions to the underwriter certain indemnities/warranties from the company, the directors and/or the selling shareholders conditions to the placing/underwriting (the last of which will be the admission of the shares to listing on AIM)

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Other Other key agreements will include: NOMAD Agreement - the agreement between the company and the NOMAD providing for the ongoing performance of NOMAD duties and the payment of a NOMAD fee Broker Agreement - the agreement between the company and its nominated corporate broker directors service contracts - new service contracts between the company and its directors, in a form suitable for a listed company new constitutional documents (if required) shareholder resolutions/notices of shareholder meetings to approve any reorganisation and any other matters required prior to listing lock-in agreement - the agreement by which directors, key employees and/or certain key shareholders may be required to undertake not to sell their shares in the newly listed company for a period of time after flotation (often one year)

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CONTINUING OBLIGATIONS
An AIM company has continuing obligations under the AIM rules with which it will need to comply or face disciplinary action from the LSE. The following is a broad summary of some of the key continuing obligations for AIM companies: Disclosure of general price sensitive information An AIM company must publish (without delay) any price sensitive information via the Regulatory Information Service at the London Stock Exchange. Disclosure of specific information A company must disclose certain specific information via the Regulatory Information Service without delay (for example, any dealings in shares by directors, any change as to the holding of a significant shareholder, the resignation, dismissal or appointment of any director, any substantial transactions (being those which exceed 10% in any of the class tests - see below) and any material change between trading/financial performance and any forecast, estimate or projection included in its admission document or otherwise made public on its behalf). Half yearly reports A company must produce interim half yearly reports in addition to its annual audited accounts. Half yearly reports must be published via the Regulatory Information Service not later than three months after the end of the relevant period. The half yearly report must include at least a balance sheet, an income statement, a cash flow statement and comparative figures for the corresponding period in the preceding financial year. The half yearly report must be presented and prepared in a form consistent with the companys annual accounts. Annual Accounts An AIM company must publish annual audited accounts. Currently, these should be prepared either in accordance with UK or US GAAP or International Accounting Standards (IAS). With effect from 1 January 2007, all AIM companies incorporated in an EEA member state will be required to produce consolidated accounts (and report consolidated figures in AIM admission documents) in accordance with International Accounting Standards. The rules for non-EEA AIM listed companies may differ, permitting such companies to report using either IAS, US GAAP, Canadian GAAP, Japanese GAAP or Australian IFRS (both in admission documents and on an ongoing basis). Reverse Takeovers - shareholder consent A reverse takeover is an acquisition (or acquisitions during a 12 month period) which for an AIM company would exceed 100 per cent in respect of any one of a number of class tests or which would result in a fundamental change in its business, board or

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voting control. following:

The class tests comprise five percentage ratios relating to the

gross assets of the transaction/gross assets of the company profits attributable to the transaction/profits of the company turnover attributable to the transaction/turnover of the company consideration for the transaction/aggregate market value of all issued ordinary shares (excluding treasury shares) of the company gross capital of the company or business being acquired/gross capital of the company

Where any of these ratios is 100 per cent or greater, a circular is required to be sent to shareholders and shareholder consent for the transaction is required. Assuming consent is obtained, the companys AIM listing will be cancelled. If the resulting enlarged entity wished to seek re-admission, it should do so on the same basis as any other applicant (ie producing an AIM admission document and going through the IPO process as discussed above). Restrictions on Share Dealing AIM companies must ensure that their directors and key employees do not deal in shares during certain close periods. This term generally means the period of two months preceding publication of annual or interim results and any period when the company is in possession of unpublished price-sensitive information. It is customary for AIM companies to put in place a share dealing code which, amongst other things, requires any employees to seek consent from a named officer of the company before being entitled to deal in shares. There are criminal and civil offences which relate to insider dealing and other market abuse activities and which apply to AIM listed shares. Such offences are outside the scope of this guide. Corporate Governance Unlike companies listed on the official list of the LSE, there are technically no formal corporate governance requirements applicable to AIM companies. However, it is common for AIM companies to apply certain principles of good corporate governance, including having a number of independent non-executive directors on the board and establishing non-executive audit, remuneration and nomination committees. The Quoted Companies Alliance, a group acting on behalf of smaller quoted companies (including those on AIM) has produced a guide to good corporate governance for AIM companies which can be obtained from its website (www.qcanet.co.uk).

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ILLUSTRATIVE AIM IPO TIMETABLE

A means date of admission to AIM A - 7 weeks Announcement of intention to float on AIM. Brokers research note published and blackout period commences. Limited pre-marketing to assess initial investor appetite (on the back of the brokers research note). Commence legal/financial due diligence and commence accountants reports and AIM admission document. drafting of

A - 6 weeks to A - 3 weeks Carry out verification exercise on AIM admission document. Placing Agreement/NOMAD/brokers documents drafted and negotiated. agreement and other ancillary

A - 3 weeks to A - 10 days Approve and publish pathfinder AIM admission document (blank as to price). Sign NOMAD/brokers agreements. Commence investor roadshows.

A - 10 days to A - 3 days Make 10 day announcement in accordance with AIM Rules. Sign placing/underwriting agreement and any sub-underwriting letters. Publish placing proof of admission document (including price). Send placing proof and placing letters to interested investors. Signed placing letters returned by interested investors.

A - 3 days A Completion, settlement/issue of new shares. Funds paid to company/selling shareholders. Dealings in shares commence on AIM. Final form AIM admission document filed at London Stock Exchange. Hold completion meetings.

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