Practical Implications for AIM of the implementation of the Prospectus Directive

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Practical Implications for AIM of the
implementation of the Prospectus Directive
February 2005
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Seminar outline

• Practical Points

• Presentation by the Exchange 45 mins
• Presentation by the UKLA on process 30 mins
• QA 30 mins

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Overview

• Why AIM became exchange regulated
• Impact of Prospectus Directive on AIM
• Replacing POS within AIM rules
• The revised AIM rules for 1 July 2005

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Overview

• Why AIM became exchange regulated
• Impact of Prospectus Directive on AIM
• Replacing POS within AIM rules
• The revised AIM rules for 1 July 2005

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Why AIM became an exchange regulated market
Financial Services Action Plan (FSAP)
Markets in Financial Instruments Directive
Transparency Directive
Corporate Governance Action Plan
Market Abuse Directive
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Prospectus Directive (PD)
Impacts all securities admitted to an EU
regulated market or where securities are offered
to the public
Prospectus Directive (2003/71/EC) (PD)
Implemented 1 July 2005
Applies to all companies, all markets, across
Europe
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Overview

• Why AIM became exchange regulated
• Impact of Prospectus Directive on AIM
• Replacing POS within AIM rules
• The revised AIM rules for 1 July 2005

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Impact of PD on AIM

• PD will require the publication of a prospectus
  in the following circumstances
• Where securities are admitted to an EU regulated
  market
• Where an offer is made to more than 100 persons
  and the aggregate value of the securities being
  offered is greater than 2.5m
• If you are doing an offer less than 2.5million
  you will need to ensure the total of the offers
  in a 12 month period does not exceed the limit
• The moment an offer breaches 2.5million a full
  prospectus will be required

In these situations, the prospectus will need to
be approved by UK Listing Authority
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Impact of PD on AIM
The obligation to publish a prospectus does not
apply to

• An offer of securities addressed solely to
  qualified investors and/or
• An offer of securities addressed to fewer than
  100 natural or legal persons per Member State,
  other than qualified investors and/or
• An offer of securities addressed to investors who
  acquire securities for a total consideration of
  at least 50,000 per investor, for each separate
  offer and/or
• An offer of securities whose denomination per
  unit amounts to at least 50,000

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Impact of PD on AIM
The obligation to publish a full PD-compliant
prospectus to be approved by UKLA will apply to
the following (where the limits are exceeded)

• Open offers
• Rights issues
• Takeovers where AIM paper is used as consideration

Another consequence of becoming exchange
regulated is the loss of the fast-track route for
those companies wishing to move from AIM to the
main market.
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• Why AIM became exchange regulated
• Impact of Prospectus Directive on AIM
• Replacing POS within the AIM rules
• The revised AIM rules for 1 July 2005

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Replacing POS within AIM rules

• POS has been the standard to which all AIM
  admission documents have been produced to date
• This has allowed the AIM rules to remain concise
  and straightforward
• However, on 30 June 2005, POS will be repealed
  and will cease to have legal effect from that
  time
• Requirement for the Exchange to find a
  replacement for POS within the AIM rules

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Replacing POS within AIM rules
The Exchange has identified three options to
replace POS as the standard for AIM admission
documents. These options have been evaluated
against the Exchanges objective of wishing to
maintain high regulatory standards whilst
ensuring flexibility both for advisers and AIM
companies
Option 1 - Adopt PD with carve-outs AIM-PD
(preferred option) Option 2 - Copy POS into AIM
rules Option 3 - Wait for possible POS 2 regime
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AIM-PD
Following initial consultation with advisers and
internal discussions over the last few months, we
believe that AIM-PD (covered in detail later) is
the best option for AIM for the following
reasons

• Keeps the AIM rules up to date and simple by
  continuing to make reference to the core standard
  across Europe
• Recognises that full PD is not appropriate for
  AIM companies
• One standard for advisers (AIM or main market)
• Consistency for investors
• Simplifies transfer of AIM companies to EU
  regulated markets

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Other options available to us
At this stage we have rejected the other 2
options available to us on the following basis

• Copy POS into AIM rules?
• AIM rules seen as outdated
• Rule book would become more difficult to manage
  and update
• Confusing for advisers
• Wait for possible POS 2 regime?
• Uncertainty about content?
• Lack of control?

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• Why AIM became exchange regulated
• Impact of Prospectus Directive on AIM
• Replacing POS within the AIM rules
• The revised AIM rules for 1 July 2005

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The revised AIM Rules for 1 July 2005

• Background to AIM-PD
• What constitutes a Prospectus under PD?
• Overview of AIM-PD
• How the proposed carve-outs were determined
• Changes to the AIM Rules
• Summary

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Background to AIM-PD
The option the Exchange is proposing with AIM-PD
is a standard which is

• Broadly equivalent to the current POS Regulations
• Embodies current market practice in certain areas
• Recognises that one size does not fit all
  ability to top up the information in an admission
  document where appropriate (ie at the NOMADs
  discretion).

This route not intended to

• Materially increase the cost of joining AIM by
  requiring significant additional due diligence
  (legal or financial)
• Raise the standard of information to that
  required by main market companies.

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What constitutes a Prospectus under PD?
Once implemented into UK law the competent
authority under the Prospectus Directive will be
the UKLA.
The FSA will set out the requirements for
producing a prospectus in a new publication
called the Prospectus Rules.
The Prospectus Rules prescribe the form and
content of a prospectus in the Annexes. The
Annexes cover the information required for a
prospectus for all types of issuer and all types
of securities.
For AIM companies the relevant Annexes will be

• Annex I - Minimum Disclosure Requirements for the
  Share Registration Document.

• Annex II - Pro forma financial information
  building block.

• Annex III- Minimum Disclosure Requirements for
  the Share Securities Note.

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What constitutes a Prospectus under the PD?
Annex I - Share Registration Document This is
designed to be a shelf registration document that
an issuer can produce annually, making any
subsequent issue of securities easier (as all the
due diligence about the issuer has been prepared).

• The share registration document will provide key
  information relating to the issuer, including
• Overview of issuer (business overview, key
  financials, organisational structure)
• Financial information re issuers assets and
  liabilities and financial position.

This document will have a lifespan of 12 months.
THE AIM RULES WILL NOT REQUIRE AN AIM COMPANY TO
FILE A SHARE REGISTRATION DOCUMENT
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What constitutes a Prospectus under the PD?
Annex II Pro Forma financial information Where
an issuer is reporting on the Historical
Financial information under Annex I and there is
a gross significant change there is a
requirement to present pro forma financial
information as set out in Annex II.
THIS WILL NOT BE MANDATORY UNDER AIM RULES

• Annex III Share Securities Note
• This will be required where an issuer decides to
  issue securities. The information required will
  set out the
• details of the securities to be offered /
  admitted to trading
• terms and condition of the offer
• admission to trading and dealing arrangements

MUCH OF THIS INFORMATION WILL NOT BE REQUIRED
UNDER AIM RULES
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Overview of AIM-PD
Under AIM-PD an AIM admission document would need
to comply with

• Certain parts of the information required by
  Annexes I-III of the Prospectus Rules.
• The additional disclosures required by Schedule
  Two

This will be the minimum standard of information
required.
However, a NOMAD will have the authority under
the AIM Rules to require an applicant to top-up
the disclosures in an admission document where
appropriate. As such the carve outs referred to
previously are at the nomads discretion.
The only instance where a company will be
required to produce a full PD compliant admission
document is where legally they are required to
produce a prospectus.
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Overview of AIM-PD
An AIM admission document will be a composite of
ANNEXES I III.
An AIM admission document will only be required
to include the information highlighted in blue.
Information highlighted in red need only be
included at the NOMADs discretion.
Information required by ANNEX II need only be
included at the NOMADs discretion.
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ANNEX I SHARE REGISTRATION DOCUMENT

1. Persons Responsible
2. Statutory Auditors
3. Selected Financial Information
4. Risk Factors
5. Information about the issuer
6. Business Overview (apart from
   sub-sections 6.2 and 6.3 until 1 Jan 2007)
7. Organizational structure
8. Property, plants and equipment (apart
   from sub-section 8.1)
9. Operating and Financial Review
10. Capital resources
11. Research and Development, Patents and
    Licences
12. Trend Information
13. Profits Forecasts or Estimates
14. Administrative, management and
    supervisory bodies and senior management
15. Remuneration and benefits
16. Board Practices (apart from sub-section
    16.3)
17. Employees (sub-section 17.2 applies to
    directors only)
18. Major shareholders
19. Related party transactions

Key Blue mandatory information Red carved
out / nomads discretion
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ANNEX III SHARE REGISTRATION DOCUMENT
ANNEX II PRO FORMA FINANCIAL INFORMATION

• All the information required under Annex II will
  be at the nomads discretion.

Key Blue mandatory information Red carved
out / nomads discretion

1. Persons Responsible (already covered under
   Annex I)
2. Risk Factors (already covered under Annex I)
3. Key Information (apart from sub-sections 3.1
   to 3.3)
4. Information concerning the securities to be
   offered / admitted to trading
5. Terms and conditions of the Offer
6. Admission to trading and dealing arrangements
7. Selling securities holders
8. Expense of issue / offer
9. Dilution
10. Additional information

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How the proposed carve-outs were determined
When assessing the viability of AIMPD as an
option the Exchange compared the requirements of
PD against the existing POS Regulations. Four
main conclusions were drawn

• A majority of the PD requirements were broadly
  equivalent to the POS Regulations
• 2. Some PD requirements were of a higher
  standard and not appropriate for small growth
  companies
• 3. Some PD requirements were of a higher
  standard but appropriate for small growth
  companies
• 4. Some PD requirements were of a lower
  standard to the requirements of Schedule Two.

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(1) Broadly equivalent to POS Regulations and
mandatory
The following sections of Annex I-III have been
deemed as EQUIVALENT to the POS Regulations and
are therefore mandatory under AIM-PD. ANNEX
I Persons Responsible (Section 1) Statutory
Auditors (Section 2) Information about the issuer
(Section 5) Business Overview (Section 6) (apart
from sub-sections 6.2 and 6.3 until 1 January
2007) Organizational structure (Section
7) Property, plants and equipment (Section 8)
(apart from sub-section 8.1) Trend Information
(Section 12) Board Practices (Section 16) (apart
from sub-section 16.3) Major shareholders
(Section 18) Financial information concerning the
issuers assets and liabilities, financial
position etc (Section 20 apart from
subsection 20.2 Pro Forma financial
information) ANNEX III Key Information (Section
3) (apart from sub-sections 3.1 to
3.3) Information concerning the securities to be
offered / admitted to trading (Section 4) Expense
of issue / offer (Section 8) Dilution (Section
9) Additional information
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Historical Financial Information (PD Annex I
Section 20)
PD Requirement Three years audited financial statements (including audit report), or such shorter period that the issuer has been in existence. IFRS as the accounting standard for EU incorporated issuers (where applicable). National accounting standards for third country issuers Pro-forma financial information where there is a substantial gross change in the financial statements

• AIM - PD proposals
• Makes clear that the historical financial
  information can be presented in the form of an
  accountants report.
• Continues to allow UK GAAP for domestic companies
  until 1 January 2007
• National accounting standards for third country
  issuers remain until 1 January 2007
• Pro-forma financial information requirement
  carved-out.

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Historical Financial Information (PD Annex I
Section 20)
PD Requirement

• Age of financial information
• If the document is dated more than nine months
  after the end of the last audited financial year,
• it must contain interim financial information,
  which may be unaudited, covering at least the
  first
• 6 months of the financial year.
• The last year of audited financial information
  may not be older than
• 18 months from the date of the registration
  document if the issuer includes audited interim
• financial information in the document or
• 15 months from the date of the registration
  document if the issuer includes unaudited
• interim financial information in the document.

Equivalent to POS Regulations
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(2) Higher standard than POS Regulations and
carved out
The following sections of Annex I-III have been
deemed as a HIGHER STANDARD than the POS
Regulations and therefore carved out of the
mandatory requirements of AIM-PD. ANNEX I
Selected Financial Information (Section 3)
Operating and Financial Review (Section 9)
Capital Resources (Section 10) Research
Development, Patents and Licences (Section 11)
Remuneration and Benefits (Section 15)
Pro Forma Financial Information (Section 20.2)
Documents on Display (Section 24) ANNEX III
(in its entirety) ANNEX III Key
Information (Section 3) - Capitalisation
and Indebtedness - Interest of natural
and legal persons involved in the issue/offer
Terms and Conditions of the Offer (Section 5)
Admission to Trading Dealing
Arrangements (Section 6)
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(3) Higher standard than POS Regulations but
mandatory
The following sections of Annex I-III have been deemed as a HIGHER STANDARD than the POS Regulations (but often industry practice) but are mandatory under AIM-PD. ANNEX I Risk Factors (Section 4) Employees (Section 17) Related Party Transactions (Section 19) Additional information (Section 21) (Re Share Capital, Memorandum Articles of Association) Material contracts (Section 22) Third party information and statements by experts (where included) (Section 23) ANNEX III Selling Securities Holders (Section 7)
Most of the information will be available as part
of the standard financial and legal due
diligence, incurring no or little extra cost.
Even though these represent a higher standard
they are often industry best practice or
desirable for investor protection and therefore
mandatory under AIM-PD.
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(4) Lower standard than AIM Schedule Two
The following sections of Annex I-III represent areas which overlap with the additional disclosures required in an AIM admission document under Schedule Two ANNEX I Profits Forecasts or Estimates (where included) (Section 13) Administrative, management and supervisory bodies and senior management (Section 14) ANNEX III Key information (Section 7) - Working capital statement
In the circumstances that the PD overlaps with
additional disclosure required under Schedule
Two, it is proposed to maintain the existing
standards
Schedule Two requires a higher standard than PD
in relation to (a) profits forecasts or
estimates (b) directors disclosures and (c)
working capital statements.
Where the AIM admission document is also a
prospectus the issuer must ensure that is also to
complies with the higher standard of Schedule Two.
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(a) Profits forecasts or estimates (PD Annex I -
Section 18)
PD Requirement If an issuer chooses to include a profit forecast/estimate the registration document must contain A statement setting out the principal assumptions upon which the issuer has based its forecast, or estimate, clearly distinguishing between assumptions under the issuers control and those that are not. The assumptions must be readily understandable by investors, be specific and precise. A report prepared by independent accountants or auditors stating that the forecast or estimate has been compiled on the basis consistent with the accounting policies of the issuer.
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(a) Profits forecasts or estimates (AIM Rules
Schedule Two)
AIM Rules Schedule Two requirement Where the admission document contains a profit forecast, estimate or projection there must be a statement by its directors that such forecast, estimate or projection has been made after due and careful enquiry a statement of the principal assumptions for each factor which could have a material effect on the achievement of the forecast, estimate or projection. The assumptions must be readily understandable by investors and be specific and precise confirmation from the nominated adviser to the applicant that it has satisfied itself that the forecast, estimate or projection has been made after due and careful enquiry by the directors of the applicant
Maintain EXISTING AIM Rule requirements
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(b) Directors disclosures (PD Annex I - Section
14 )
PD Requirement a) the names of all companies and partnerships of which such person has been a member of the administrative, management or supervisory bodies or partner at any time in the previous five years, indicating whether or not the individual is still appointed. (Not including subsidiaries) (b) any convictions in relation to fraudulent offences for at least the previous five years (c) details of any bankruptcies, receiverships or liquidations with which a person described in (a) and (d) was associated for at least the previous five years (d) details of any official public incrimination and/or sanctions of such person by statutory or regulatory authorities (including professional bodies) and whether such person has ever been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of an issuer for at least the previous five years. If there is no such information to be disclosed, a statement to that effect is to be made.
AIM Rules Schedule Two (g) Equivalent five year
requirement re names of all companies /
partnerships. However, disclosures of (i)
convictions, (ii) bankruptcies, receiverships,
liquidations and (iii) public incriminations goes
back beyond five years.
Maintain EXISTING AIM Rule requirements
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(b) Directors definition (PD Annex I Section
14)
PD Requirement Names, business addresses and functions in the issuer of the following persons and an indication of the principal activities performed by them outside that issuer where these are significant with respect to that issuer members of the administrative, management or supervisory bodies b) partners with unlimited liability, in the case of a limited partnership with a share capital c) founders, if the issuer has been established for fewer than five years and d) any senior manager who is relevant to establishing that the issuer has the appropriate expertise and experience for the management of the issuer's business. The nature of any family relationship between any of those persons.
AIM Rules definition of director A person who
acts as a director whether or not officially
appointed to such position.
Maintain EXISTING AIM Rule requirements
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(c) Working capital requirement (PD Annex III -
Section 3 )
PD Requirement Working capital statement Statement by the issuer that, in its opinion, the working capital is sufficient for the issuers present requirements or, if not, how it proposes to provide the additional working capital needed. (Level III defines present requirements as a minimum of 12 months from the date of the prospectus)
AIM Rules Schedule Two (g) requirement A
statement by its directors that in their opinion
having made due and careful enquiry, the working
capital available to it and its group will be
sufficient for its present requirements, that is
for at least twelve months from the date of
admission of its securities
Maintain EXISTING AIM Rule requirements
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Changes to the AIM Rule book
Under AIM-PD the following changes are necessary
to the AIM Rules

• Rule 4 Sets out when the Exchange can allow an
  applicant to omit information (where information
  of minor importance or where seriously
  detrimental to applicant and not likely to
  mislead investors). Maintain rule for non-PD only.

• Rule 25 Allows an exemption under POS
  Regulations from producing an admission document
  required under Rule 24 where less than 10 of a
  class of securities are being admitted. This rule
  will be removed.

• Rule 26 Provides the same right to omit
  information for further admission documents as
  under Rule 4. Maintain rule for non-PD only.

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Changes to the AIM Rule book
Under AIM-PD the following changes are necessary
to the AIM Rules
Schedule Two (a) states that information
equivalent to Annexes IIII is required for an
admission document whether or not it is a PD
prospectus.
(b) states that where not a PD prospectus,
certain types of information need only be
included at the nominated advisers
discretion. Lists the proposed carve outs from
Annexes I-III
(d)(iv) amends slightly the requirements for a
profits forecast where made.
(i) Deletes this paragraph, replacing the
requirement with the major shareholders provision
under Annex I Section 18.
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Summary

• The consultation deadline date is Friday 4th
  March.
• Two key questions
• Is AIM-PD the right approach given the other
  options available?
• If AIM-PD is the right approach are the
  carve-outs as proposed set at the right level?