Revitalising AIM

The London Stock Exchange (LSE) has recently launched a consultation on the current AIM Rules through its discussion paper entitled “Shaping the Future of AIM,” (Discussion Paper). This initiative comes at a crucial time for AIM, particularly given the slowdown in the global IPO market in recent years and substantial reforms to the UK Listing Rules, which came into force last year, which narrow the regulatory differentiation between AIM and the Main Market. The LSE’s overarching goal of its proposed reforms is to ensure AIM remains a premier global growth market for entrepreneurial companies by allowing innovation whilst maintaining proportionate disclosure, and investor protection. Set out below is a summary of the key takeaways from the Discussion Paper and some initial views of our equity capital markets team.

Background

Since 2007, when AIM was at its peak, the number of AIM companies has decreased from 1,694 to 679. 2024/5 was a particularly bad year as the market shrunk by 61 companies. Many of these delisted due to cost burdens, regulatory challenges, and financial stress whilst several others were taken over and only 10 companies joined the market which was the lowest level since the financial crisis in 2008/9. AIM is not unique in this regard with the ASX and the TSX also experiencing low IPO volumes. 

The changes to the FCA’s regulation of companies admitted to the Main Market that was implemented has impacted this further with the gap between the requirements of the new Equity Shares (Commercial Company Category) (ESCC) and AIM narrowing significantly. This has caused several of the larger AIM companies to consider moving to the Main Market to benefit from the opportunity to be indexed with larger companies.

Therefore, AIM needs to differentiate itself from the Main Market and make it an attractive venue for growth companies from the UK and overseas which if successful should mean that AIM companies contribute significantly to the UK economy. For context, AIM companies already contribute significantly to the UK economy and a report by Grant Thornton confirmed that in 2023 AIM companies contributed £35.7 billion Gross Value Added (GVA) to UK GDP and directly supported more than 410,000 jobs. By comparison, the UK’s agriculture, forestry and fishing sector contributed £19.2 billion; advertising and market research contributed £21.6 billion; the motion picture, video, TV programme and broadcasting sector contributed £21.8 billion; and the arts entertainment and recreation sector contributed £31.0 billion. The importance of ensuring the AIM market operates successfully cannot be understated.

Key proposals

Increasing capital flow

The LSE has stated that its top priority is to increase the flow of capital into AIM and to ensure that capital comes from a diverse range of sources to maximise liquidity. Discussions around incentives for pension funds to increase their capital allocation into smaller companies have already taken place, and the LSE is looking for suggestions on other ways to increase long-term investment into AIM. Attracting capital from a range of investors, including institutional, retail, and international investors, is crucial to enhancing liquidity. Introducing tax incentives and benefits to encourage long-term investment is also on the table. For example, there could be a requirement that in order to obtain the tax benefits associated with a stocks and shares ISA the funds need to be invested into UK listed stocks and a reduction in the limit for a cash ISA to encourage investment in the UK stock market.  

Regulatory evolution

The LSE believes that evolving AIM’s regulatory model remains critical to AIM’s success and to do this it must provide the appropriate level of support for companies but also confidence to investors. The new FCA rules on the Public Offers and Admission to Trading regime (due to come into force in early 2026) will provide flexibility for AIM companies to enable retail participation at admission and on the market. The new rules will set out when an admission document will be required; however, the market operator will retain autonomy to determine the contents of its admission documents. The LSE is looking to further streamline the process for AIM companies to reduce the significant cost burden and unnecessary friction where there is duplicative work between nominated advisers, lawyers, and reporting accountants.

One of the key areas that the consultation process is focussed on is the role of the nominated adviser and how that should evolve. It is clear that the nominated adviser role is central to AIM and the regulatory framework but the LSE has identified that change is perhaps needed in order to keep costs and regulation proportionate. For example, the LSE has identified duplication in connection with company disclosure that is required by the UK Market Abuse Regime and the nominated adviser’s role in disclosure under AIM Rule 11. Our view is that lawyers should continue to advise on this technical area but with corporate finance input from the nominated adviser particularly on whether information is likely to have a significant effect on the price. In particular, the LSE has suggested a simplified approach for corporate governance as the existing codes are not always appropriate. They do not suggest a one size fits all approach but suggest that one option is for AIM to create an alternative option for issuers beyond the codes already available. We consider that the QCA Code is adequate provided issuers can comply or explain. In our view the creation of a specific AIM corporate governance code is unnecessary.

Simplification of the AIM rules

AIM admission document

The LSE is proposing to simplify the AIM admission document by offering an alternative simplified admission document. This will include labelling to signpost to investors the increased level of risk with a simplified form. There are also proposals to allow incorporation by reference where the information is in the public domain, which is commonly used in Main Market transactions to reduce the length of documents.

Working capital statements

The current working capital requirements for companies seeking admission to AIM are now more onerous than those for commercial companies listing on the Main Market following the implementation of the FCA changes, which allow ESSC companies to qualify their working capital statements. The LSE notes replicating the Main Market regime for AIM is one option; however, it will consider other options such as the current approach for applicants utilising the AIM Designated Market route – whereby the issuer’s directors confirm that they have ‘no reason to believe’ that the working capital available to it or its group will be insufficient for at least 12 months from the date of its admission. This could reduce the costs associated with preparing such a statement while providing sufficient disclosure and comfort to investors.

The LSE has also suggested an entirely different approach where there could be specific circumstances where no working capital statement would be required; where the burden of a working capital report might outweigh the value. For example:

• Research and development companies or mining and oil and gas exploration companies where the requirements for funding are inherent in the nature of the business and where the requirements and timing for future funding are disclosed.

• Investing companies where the AIM Rules require a minimum of £6 million cash to fundraise on admission and the investment strategy is disclosed.

• Companies whose financial statements for the past three years include ‘clean’ audit reports and were prepared on a going concern basis.

Reverse takeover rules

Currently, under AIM Rule 14, an acquisition is classified as a reverse takeover if: (i) there is a fundamental change of business, board, or voting control; or (ii) any of the class tests exceed 100%. At present, an admission document is required to be produced on a reverse takeover at significant cost to the issuer. The LSE is seeking feedback on whether this is necessary in all circumstances. The LSE is considering a more flexible approach that allows the specific impact on the company’s business to be taken into account in determining whether a new admission document is required. For example, where the company is making an acquisition that is larger than itself but is growing the business in line with its existing operations within the same industry/sector or with the same strategic direction such that there is no fundamental change of business. In such circumstances, an appropriate alternative to disclosure in an admission document could be to disclose information required by Schedule Four of the AIM Rules, such as a description of the assets, profits (or losses) attributable to those assets, details of the consideration, and the effect of the transaction on the company. This approach could allow issuers to make significant acquisitions without being put off by the cost of producing an admission document whilst also providing investors with relevant information on the transaction. We consider this to be an area where reform could have a significant impact and transactions which otherwise would not have proceeded (due to them triggering the need for an admission document) will increase which would hopefully enable growth and ambition amongst AIM companies.

Accepted accounting standards

The LSE has suggested introducing greater flexibility to recognise a wider set of local accounting standards than those already permitted under AIM Rule 19. This would reduce the cost of conversion to International Accounting Standards for prospective AIM companies and eliminate unnecessary complexity and expense related to the ongoing production of reports and accounts for existing AIM companies. It would also attract international growth companies to AIM, providing investors with a wider choice of investment opportunities. However, caution is likely needed here in order to ensure that the available alternative standards are limited in order to ensure that there is comparability to companies reporting in IAS.

Admission requirements for second lines of securities

The LSE acknowledges that there is limited benefit in requiring the publication of an admission document for the admission of a second line of securities when weighed against the cost and administrative burden of doing so. The suggestion is that the required disclosure be the rights of the second line of securities set out in the shareholder circular, which is sufficient and proportionate.

AIM designated market route

The intention of this route was to provide a fast-track and less onerous route to AIM for companies based on their existing home jurisdiction disclosures. However, in reality, the nominated adviser’s work is often equivalent to that undertaken for a standard AIM admission. It is proposed that certain areas of the nominated adviser’s work be removed or reduced given the existing legal and regulatory obligations the company will have been complying with in its home jurisdiction. For example, the LSE has suggested that the nominated adviser could place reliance on the company’s existing public market disclosures to provide an understanding of the company and its business, thereby limiting the level of due diligence it needs to undertake.

Dual-class share structures

Dual-class share structures align with the founder-led nature of growth companies, and as such, the LSE’s proposal that dual-class shares should be permitted to be admitted on AIM, replicating structures permitted on the Main Market, is welcomed.

Related party transactions

There are certain areas where the protections provided by AIM Rule 13 for related party transactions are unnecessary given other existing safeguards for shareholders. For example, where an employee share scheme has been approved by shareholders or where the granting of an indemnity to a director is permitted under Companies Act 2006, the requirement for an additional ‘fair and reasonable’ statement should not be necessary. These situations should be excluded from the requirements of AIM Rule 13. Additionally, director’s remuneration should be left to the company’s corporate governance arrangements rather than being captured by AIM Rule 13. These changes would create greater freedom for growth companies to attract non-executive directors who can be paid in equity (if deemed appropriate by the company’s remuneration committee), aligning with the approach of the QCA Code.

Class tests

The point at which disclosure is required for a substantial transaction for a Main Market company is now 25% (more than the current position for AIM companies), and LSE consider that growth companies should not be subject to a greater disclosure burden than is required for Main Market and so a similar trigger for disclosure would also be appropriate for AIM companies. The LSE also proposes removing the Profits test in line with the changes to the changes made to the Listing Rules for ESSC companies, given it regularly produces negative results. There is also a proposed change to the Gross Capital test to a pro-rated Gross Capital calculation to reflect the fact that a company is only acquiring a minority stake and therefore will not be consolidating or assuming responsibility for any of the target company’s liabilities (which can often lead to the test result exceeding 100%).

Conclusion

We welcome the proposed reforms to AIM as they promise to make it a more attractive platform for growth companies, especially in light of the recent changes to the Main Market. These reforms are crucial for ensuring AIM remains competitive and continues to support entrepreneurial ventures. However, to truly revitalise AIM and enhance its appeal, it is imperative to implement additional measures that increase capital flow. This includes introducing tax incentives and fostering a more encouraging environment for investment in UK stocks. By combining regulatory improvements with financial incentives, we can create a robust and dynamic market that not only attracts but also sustains high-growth companies, ultimately contributing to the broader UK economy.

Next steps

The consultation period for the Discussion Paper is open until 16 June 2025. The feedback received will inform specific proposals for changes to the AIM Rules, which will be subject to further consultation. As a key stakeholder in the future of AIM, the equity capital markets team at Hill Dickinson will be submitting a response to the LSE and we look forward to hopefully seeing meaningful change which can allow AIM to flourish once more.