AIM Report 2019

Market update / Fundraising update Market update / Fundraising update 12 13 Nomads In April 2018, the LSE introduced changes to further tighten up the rules for Nomads (those firms, typically comprising investment bankers, who have been approved by the LSE to manage the admission of new issues to AIM and who act as the effective regulator). This included new criteria for an entity seeking approval as a nominated adviser, requiring it to provide evidence that it: • is capable of being effectively supervised by the Exchange; • has appropriate financial and non-financial resources; • is able to comply with Rules 23 to 25 (which relate to its ability to discharge its ongoing obligations and maintenance of appropriate records); • has in place adequate risk management systems to ensure that it can identify, assess, manage, monitor and control risk appropriately. These changes, like those introduced in March 2018, are designed to increase the checks and balances applied to the companies that act as the gatekeepers to AIM listings. Nomads are the first line of defence in looking at the suitability of a company to be listed on AIM, so the tightening rules on these organisations should give further comfort to investors that AIM- quoted companies have been properly scrutinised ahead of being accepted onto the exchange. For those with lingering concerns about the light touch regulation of AIM in comparison to the main markets, some companies are looking to provide more transparency. Research published in February 2019 by the CFA Institute found fund managers have scaled back their spending on research in response to the new Markets in Financial Instruments II Directive (MiFID II). 4 This could be leading to poorer coverage of some sectors of the equity market, which in turn could lead to a higher cost of capital for smaller companies. As Investors Chronicle explained in relation to the findings: “Little wonder, then, that some... have taken the decision to voluntarily disclose information that falls outside of their statutory obligations. It’s all becoming very respectable.” 5 OTS Inheritance Tax Second Report On 5 July 2019, the Office of Tax Simplification (OTS) published its second and final report from its inheritance tax review. In particular, the report looked at Business Relief (BR) in some depth, including where it applies to AIM shares. BR was intended to remove the need for the sale or break up of family businesses to finance IHT payments. While acknowledging this, the OTS said: “However, in particular in relation to third party investors in AIM traded shares, BR is not necessary to prevent the business from being broken up or sold in order to fund the payment of Inheritance Tax. This raises a question about whether it is within the policy intent of BR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.” Despite this anomaly, there’s no specific recommendation on this topic and the OTS went on to highlight the fact that the government has stated its commitment to protecting the “important role that BR plays in supporting family owned businesses and growth investment in AIM and other growth markets. In correspondence and meetings, the OTS has heard evidence of its importance in meeting that objective.” The report also recommended that, for simplification, the BR trading test – whereby more than 50% of a company’s trading activity must be in BR-qualifying trades – could be aligned with the tests for gift holdover relief and entrepreneurs’ relief. This sees an 80:20 split of trading versus investment. Such a move would take away some of the versatility currently allowed to BR qualifying companies in terms of the activities they can trade in and the diversification they can bring to their business models. While it’s not unusual for Business Relief trading companies to be 100% dedicated to one qualifying trade, eroding these factors for the sake of administrative consistency could present an unnecessary threat to the methods available to small business to remain agile while also benefiting from BR’s original intentions. Some of the OTS’ recommendations could open up more structures to holding AIM shares in a BR compliant manner. It also requested clarification on when BR-qualifying assets need to be formally valued. Such valuations are generally much easier and cheaper for AIM-based BR investments than private shares as AIM shares have real time valuations freely available. A quiet future? The LSE has carried out its review into AIM, and made some changes to improve the market’s image, so we can now expect a quiet regulatory front for the foreseeable future, right? Don’t bet on it. For a start, the outcome of the OTS’s second report on IHT leaves open many questions for the government. Given its previous support for BR within AIM, it seems unlikely that the government would be keen to carry out another review into this area. While the OTS questioned whether AIM based BR investments are within the policy intent of BR, there are no recommendations in relation to them. This was in acknowledgement of the government’s strong recognition of the important role that such reliefs have in helping stimulate investment in British businesses. Indeed, a Treasury spokesperson told FT Adviser in September 2018 that they are “fully committed to supporting AIM”. 6 We now await the government publishing its response – but in the meantime the recommendations of this review could yet cause further uncertainty in the AIM market. Given that the new rules were introduced to improve AIM’s reputation, it is hard to argue that they have had the desired effect, in light of recent events. Since these new rules have come into force, some high-profile AIM companies have suffered headline-grabbing setbacks, such as the collapse of both Conviviality and Patisserie Valerie. In the case of the former, an aggressive acquisitions programme in the period following its arrival on AIM in 2013 saw it struggle to keep its focus on its core proposition. Industry experts have suggested it “massively overpaid” for at least one of its acquisitions, as well as suggesting that it failed to improve its offering to customers and ultimately suffered the consequences. 7 Patisserie Valerie, meanwhile, fell into administration in January 2019 after significant accounting issues. Regardless of the individual circumstances of these companies, these events led industry commentators to question whether further rule tightening might be necessary. However, the advisers and managers that we have spoken to accept that investment failures are the nature of equity markets and there is a point at which regulation can become stifling to growth. There are also ongoing Thematic Reviews of smaller listed and AIM-quoted companies from the Financial Reporting Council (FRC). Its report in the first quarter of 2019 highlighted five key areas it is focusing on: • Alternative Performance Measures (APMs) and strategic reports • Pension disclosures • Accounting policies (including critical judgements and estimates) • Cash flow statements • Tax disclosures Scrutiny from this perspective should be welcomed by investors, as these reviews are looking at the internal administration and accounting standards of AIM companies, again with the purpose of increasing the integrity of those organisations. Align BR trading test with that of gift holdover relief and entrepreneurs’ relief Open up more structures and trades to BR qualification Greater clarity on valuations of BR qualifying shares Key recommendations affecting AIM from OTS IHT review