The role of the nominated adviser in an AIM flotation

Further to a Discussion Paper on the Growth Enterprise Market (GEM) published by the Hong Kong Stock Exchange (HKEx) earlier this year, many comments were made referring to the relevance of other successful new markets overseas. Among them, the UK's Alternative Investment Market (AIM) was often mentioned.

When the London Stock Exchange created AIM in 1995, it sought to establish a flexible and practical method of regulation that would be appropriate for the younger, smaller companies that it wanted to attract. Realising that many AIM companies would not have a management team with experience of running public companies, and not wishing to employ large numbers of additional regulators itself, the Exchange chose to outsource the responsibility for ongoing regulation of its AIM companies to nominated advisers (Nomads).

Who can be a Nomad?
In order to be a Nomad, a firm of advisers must be authorised by the London Stock Exchange to act in that capacity, a selection made on the basis of the firm's previous experience of dealing with publicly-quoted companies. Nomads include accounting firms, investment banks, corporate finance firms and stockbrokers, all of whom employ a sufficient number of suitably qualified individuals.

The Nomad's three principal tasks
The Nomad has three principal tasks: determining if the company is appropriate for admission; managing the flotation process; and after flotation, advising the company on compliance with AIM rules and general corporate governance good practice.

Determining suitability for admission
A company's suitability for admission to AIM is assessed by the Nomad. The Nomad must ensure that the admission and conduct of a company do not impact adversely on the reputation and integrity of the Exchange.

Sometimes a company may be appropriate for flotation on AIM, but joining AIM may not necessarily be in the company's best interests. The costs and ongoing obligations of an AIM quotation may well outweigh the benefits that admission brings, particularly where there are other stock markets and fundraising methods that may be more appropriate. As a general corporate finance adviser, the Nomad should ensure that an AIM flotation is actually in the best interests of the company and its shareholders.

Project managing the flotation process
Once a Nomad has agreed that a company is suitable for admission to AIM and a broker has agreed to raise the necessary funds, the Nomad's task is to bring together a full team of advisers, set a timetable, allocate responsibilities and ensure that all parties adhere to the programme that has been agreed.

Advising on regulatory matters
The Nomad will ensure that the client has appropriate systems in place to enable it to comply with AIM rules - for example, announcing certain dealings in shares on a timely basis - and will sometimes need to advise on the interpretation of those rules. The Nomad will also give guidance on the appropriate level of corporate governance for the company.

The Nomad and the broker
The Nomad's role is to provide general corporate finance advice, project manage the flotation and act as the company's regulator. The broker's principal responsibilities are to raise funds from its institutional clients and manage the 'aftermarket', publishing research where necessary and ensuring that there is both a healthy interest in the company's shares and sufficient stock to satisfy that demand.

The Nomad's client is the company and its dealings with the company are private. The broker's clients are its institutional investors and it is not privy to the confidential communications between the Nomad and the company. Where one firm (known as an "integrated house") plays both roles, there must be a clear separation of responsibilities and a 'Chinese wall' must be established between the two parts of that firm.

Assessing suitability
For a Nomad, the reputation and integrity of the market are paramount. A Nomad should only proceed with the flotation of a company if it is confident that the company will enhance the market's reputation and has a realistic chance of delivering real value to shareholders. In assessing a company's suitability, a Nomad will consider the following aspects:

Management - A company will be judged, above all, on the quality of its management. Some criteria are objective, or at least fairly obvious. As part of its procedures for determining whether a company has suitable management, the Nomad will conduct due diligence on the directors and sometimes on key managers.

Corporate governance - Many companies will lack an appropriate level of corporate governance at the outset. However, it is essential that there is a willingness on the part of the management to adopt the necessary procedures to bring the company up to the required level.

Business viability - A Nomad will consider the long-term viability of a business in the context of its past financial performance, products, customers and suppliers.

The investors' view
A Nomad must be confident that there is a realistic chance of raising the necessary funds at a valuation acceptable to the existing shareholders. The Nomad will be able to assess whether fundraising is likely to be successful through its knowledge of the market and its contact with brokers.

Working capital
A Nomad will only bring a company to market if it believes the company will be a long-term success, will deliver value to its investors and has sufficient working capital to achieve its objectives.

Nevertheless, the AIM rules specifically require that the AIM admission document contains a statement that the company has, in its directors' opinion, sufficient working capital for at least 12 months from the date of admission. Arguably, this is probably the single most important statement made in an admission document and such is the importance of this statement that reporting accountants will be specifically instructed to conduct detailed due diligence on the company's financial forecasts and confirm whether, in their opinion, the statement has been made after "due and careful enquiry".

Managing the flotation
The two key tasks in any AIM flotation are preparing an AIM admission document (often referred to as a prospectus if there is to be a fundraising) and arranging the fundraising itself. Fundraisings usually involve the offering of shares to institutions or to certain private investors, although a fundraising can also take place via an offer for subscription to the public. Whichever route is chosen, arranging the fundraising is the broker's responsibility.

Starting the flotation process
Once the company and its advisers have agreed to proceed with a flotation and after the key professionals have been appointed and their terms of engagement agreed, the Nomad will call all parties to attend a meeting to agree a timetable, which must be adhered to if the process is not to drift. Central to the Nomad's work and indeed to that of all the professional advisers, is the preparation of the AIM admission document.

Assembling the team
The four key advisers in any flotation are the Nomad and the broker, together with the company's solicitors and the reporting accountants.

Advising the company after flotation
A Nomad's responsibilities continue after admission and until such time as the company leaves the market.

A Nomad's principal ongoing duty is to advise its AIM company clients on their obligations under the AIM rules. Much of the work will involve advising on the need for announcements and on their form and content.

Considerations for overseas companies
If an overseas company wishes to be quoted on AIM in London, a Nomad will normally stipulate that the company's business must be international and not limited to its local market.

This is an extract from an article contributed by Colin Aaronson, Grant Thornton UK to "Professional Handbook - Joining AIM" published by the London Stock Exchange.

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