Expert View: If AIM is so flawed, why do they all want to clone it?

The sum raised by companies on AIM reached £16bn last year. We should be proud to possess the world's most successful market
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The Alternative Investment Market (AIM) has been the most successful stock exchange in the world in recent years, partly because of London's record of investing internationally and partly because of developments in other markets, such as the introduction of Sarbanes-Oxley in the US.

The amount raised by companies on the junior arm of the London Stock Exchange (LSE) has doubled every year since 2002, reaching nearly £16bn in 2006. AIM now has as many firms listed as the main market.

More and more companies - from countries like Canada, Australia, China, Sweden and the US - are listing on AIM in preference to their domestic markets, attracted by its flexible regulatory regime and the ease with which it lets them raise money. So successful has AIM's model been that several exchanges have established junior markets that are almost clones.

Yet despite this success, a lot of recent press comment about AIM has been negative, with calls for regulation of the market and a tightening of its corporate governance standards. Some of this has come from across the Atlantic, with comments about the lack of standards applied by AIM to the companies it admits. This from a country that, despite the apparent attempt to improve standards of corporate governance after the Enron and WorldCom scandals, now finds that a number of its major companies have been backdating share options?

One hears remarks from Americans that AIM is "unregulated". Yet when it is explained to them that the market is in fact regulated but in its own unique way, and then they are told how this works in practice, the response is often praise for its real-time, principles-based regulation. Americans often end up contrasting this positively with the rules-based and often retrospective nature of US regulation.

Not that criticism of AIM has been restricted to the US. Recent articles in the British press have stated, for example, that over half of AIM companies floated in the past three years are trading below their issue price, or that some American companies have not been a success. Criticism has also been levelled at individual nominated advisers.

What much of this comment appears to forget is that AIM is first and foremost a risk market. Furthermore, the main market in London has seen its share of companies collapsing or near -collapsing in recent years - anyone remember Independent Insurance or Marconi?

This is not to say AIM can't be improved. The LSE itself recognises this and is constantly seeking to maintain, if not improve, standards. For example, it is currently in the process of tightening the regulation of the nominated advisers, known as nomads (the investment banks responsible for bringing companies to AIM and for advising them after the flotation). The LSE is codifying best practice into a rulebook for nomads.

The upshot of all this is that the cost for companies floating on AIM is likely to increase because nomads could end up raising their charges as more rigour is put into advising a company on its flotation. The costs of the due diligence undertaken by accountants and lawyers are also likely to rise for similar reasons. But this can only be positive if it dissuades some marginal companies from floating.

These measures will help to underpin the integrity of AIM and assist in its continuing and long-term success. We should be proud to possess in this country the world's most successful growth market.

Chris Searle is a partner at BDO Stoy Hayward LLP

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