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The Alternative Investment Market - a victim of its own success?

The first of a two part look at the Growth of AIM by Keith Hatchick (I)

AIM is now two years old and has succeeded beyond all market expectations in popularity to both issuers and investors. It has no doubt been helped by the general optimism that has largely been a factor of the London stock market. But it is not just a bull marker that should take the credit: the time, care and diligence of the London Stock Exchange, the Nominated Advisers (Nomads), the Nominated Brokers and the member companies themselves have made the market into the success that it is.

There is, though, no room for complacency. Indeed some commentators still believe the jury is out considering its future. The LSE has recently completed its first review, changes have been made, both to the list of nomads and the Companies represented on the market. There has been comment in the financial press that the LSE has been too slow to take stock of the nomads and quoted companies and that more is required both in respect to speed and effect. Further changes and strict policing both by nomads of their client companies and by the Stock Exchange of the nomads should become an essential characteristic of the market if it is to continue succeed.

Nomads should he prepared to make sometimes harsh decisions before agreeing to take a company to the market. Chapters 16 and 17 of the Rules of the Stock Exchange are the minimum requirements as indeed are the legal provisions set out in the Financial Services Act, the Public Offer of Securities Regulations and the Companies Act.

The concern voiced by more than one nomad to me is that such policing is time consuming and expensive and this is incompatible with one of the underlying tenets of the market - that it should be a viable alternative for finance open to a medium sized company.

The founding fathers intended that the costs of bringing an issuer to the market should be substantially less than for a full listing and act as a viable alternative to other means of finance like venture capital. If the market is to succeed there is little room for pussyfooting. A balance needs to be sought between on the one hand making the marker a real alternative source of funding to medium sized companies and having reasonable safeguards for investors on the other.

Since it is a secondary market it should not be over- regulated - the standards of due diligence and disclosure should be less than for the a fully listed concern. Investors should not be protected to a degree which places the cost of entry beyond the scope of medium sized concerns. Nomads should not also have to act as nannies. It is only fair that investors are made aware of the risks of investment in this market and accept some appropriate responsibility.

If any lesson may be learned from the experience of the USM in the 1990s it is that if there is a place for a secondary market it must be less (but effectively) regulated and appeal to smaller companies than those on the Official List.