Taking AIM at higher risk

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The London Stock Exchange has gone out of its way to make clear that its latest offshoot, the Alternative Investment Market, is no place for widows and orphans.

A Stock Exchange brochure introducing the soon-to-be- launched market hails AIM as a new opportunity for investors, as well as a new source of capital for smaller companies.

But the brochure also points out that companies traded on AIM may be a higher risk and their paper less liquid. "AIM is designed for professional or experienced investors who understand the nature of the market," it emphasises.

So: caveat emptor - let the buyer beware.

But all this, of course, is in the nature of the beast. The risks are higher, but the potential rewards are quite exceptional.

AIM is designed for small but expanding companies. They may be start- ups or well- established family businesses, high-technology computer firms or traditional metal-bashers.

The common thread is that these are companies whose ambitions exceed their ability to attract finance.

A classic example might be a software firm in a science park, after patenting an exciting new programme concept that has generated advance orders from the United States and Japan. It needs £10m to put the prototype into full production - but its bank has balked at the figure.

What are the company's options? Few banks would lend that sort of money under such circumstances. Venture capitalists might - but they would want a stake. Then there are the investment "angels", but they tend to be as rare as their heavenly counterparts.

Another option is to seek a full listing. This, however, can prove an expensive means of raising money. A £20m share issue may cost the company as much as £800,000 in fees.

Which is where AIM comes in. It offers all the advantage of public finance - access to capital, greater credibility among financial institutions, higher public profile - at a much lower cost.

It is hardly surprising that many companies have jumped at the chance to become involved, and indeed a pilot for the AIM project has been established in Scotland. Dozens of job-creating Scottish firms have lined up for a piece of the action, representing a wide range of industrial sectors from software houses to engineering factories.

It is estimated that AIM has the potential to raise £2bn annually across Britain as a whole, equivalent to a privatisation every single year.

A central feature of AIM is that it is easy for companies to join. There are few of the cumbersome, complicated and sometimes downright obscure regulations that characterise the London Stock Exchange.

The rules governing membership of AIM are simple and kept to a minimum. There are no restrictions on capitalisation, the percentage of shares in public hands, or length of trading record.

Good news for everyone? Well, not quite. When it comes to regulation, one man's meat is another's poison. Most companies see AIM's lightness of touch as an attraction. Many investors may see it differently.

The best advice is to read carefully, and to stick to the old adage, that if you can't afford to lose your stake, stay away from the market.

People investing in AIM directly, or via an investment club, would be well advised to do their homework with particular care before choosing a stock.

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