A float on a public stock exchange is one of the key goals of any ambitious entrepreneur. It’s a way of raising money or collateral for future growth and of bolstering your own reward for building up the business. A stock market quote can provide a starting price for eventual trade sale negotiations. It can also help provide your key employees with worthwhile incentives.
AIM, the junior partner of the London Stock Exchange (LSE), has established itself as the preferred route for younger companies wanting to go public. In its 28 years of existence, it has raised some £130bn for 3,988 companies of all shapes and sizes, as of January 2022. In 2021, AIM delivered over half of European market funding.
For an ambitious growth company, AIM offers several attractive benefits. To list on AIM, as opposed to the Official List, you do not have to show a three-year profits record and there is no minimum number of shares which you must cede to public investors.
A company seeking to float on the Official List must provide a prospectus, including significant detail about your business, its history, finances and prospects, and the reasons and detailed terms of the share offer, which is pre-vetted and approved by the UKLA. This document is expensive and arduous to produce and must be in line with the European Union’s Prospectus Directive.
By contrast, provided you are seeking to tap fewer than 100 shareholders with an AIM float — say, several institutional investors and some known rich individuals — you need only produce a simpler and much less costly ‘AIM Admission Document’. Unlike the LSE, where your business will be checked and monitored at all times, AIM admission documents are simply vetted by the FCA.
Floating on AIM used to be significantly cheaper than the main LSE in terms of commissions and fees, though regulatory tightening has reduced the difference. Most participants say the overall bill works out at around £500,000 while core running costs come in at a minimum of £200,000 per year (actual costs are likely to be much higher than this).
There are several vital steps to take before listing your company and liaising with investors:
- Prepare yourself for the switch from a private to a public company. Even if you are only releasing a small minority of shares and will remain firmly in control, lawyers, accountants, bankers and brokers will critically review the business and you must be prepared to answer questions from them and the press, as well as outside investors. Discretion is key – you must not reveal ‘price-sensitive’ information to a few friends or make forecasts you cannot achieve.
- You should ensure your board is as impressive as possible, which may mean recruiting a non-executive director with City credibility. Similarly, you need the most formidable advisory team you can muster.
- You can only seek to float on AIM if you have a NOMAD, usually a broking or financial group, which has been authorised by the AIM authorities. The NOMAD project manages the admission of new issues to AIM and acts as the effective regulator. The key role of a NOMAD is to assess the level of investor interest in your company and to advise on the pricing of shares and investment opportunities.
- You will also need a broker, whose commission is likely to be the largest single item of expense in the flotation process. The broker must market your company’s shares for the float and also keep the stock market informed of relevant developments thereafter and maintain a continuing dialogue after flotation. The same firm can act as both nominated adviser and broker to your company, but need not do so.
- Before listing, your appointed broker is likely to complete a ‘test the water campaign’ which will go out to institutional investors to confirm the appropriateness of the company for listing. This will help to assess whether they will be interested in buying shares in the flotation.
- Before you can float, you must produce a detailed, long-form report, based partly on your business plan. This will detail your company’s history, structure, operations, corporate governance and past and expected trading results. For this you will need a reporting accountant, whose responsibility will be to the NOMAD. This accountant, distinct from your own auditor, will be involved in carrying out the ‘due diligence’, checking the statements and information in the report, a task which will also need the services of a lawyer. This due diligence process can vary in complexity depending on the nature of your business.
- As a public company, you will need a registrar to keep your shareholder list up to date for dividend payment and other purposes. The registrar can act as a useful conduit of information between you and your shareholders. This role can take on key importance if corporate manoeuvres, such as takeovers or mergers, are afoot. You should also dedicate at least one senior person to liaise with your advisers.
- Institutional investors have moved their average market cap size up since MifiD 2 and the liquidity issues around the Woodford fund became an issue. Therefore, a company should also consider targeting a more diversified shareholder base for post IPO liquidity. By widening the pool of investors you pitch your initial offering to, you are likely to see less volatility in your share price. Companies such as PrimaryBid can give individuals access to one-off company fundraisings and IPOs on the same terms as institutional investors.
- In July 2018, new IPO rules came into effect which respond to buy-side demands for the production of independent, or unconnected, research, while respecting the value that certain market participants place on connected research. As a result, companies should consider using independent research to provide estimated share price valuations, in-depth analysis of the company’s workings and to unlock any hidden value within the business.
- An intention to float announcement is usually the first announcement made to the public by an issuer of its proposed IPO. While issuing an ITF isn’t a legal requirement, it has become a well-established market practice in the UK. The ITF notifies the market about the company’s proposed IPO and provides information about the issuer’s business as well as about the timing and rationale for the listing and equity offering in advance of the publication of the prospectus.
Choosing your team
Selecting advisers can be a difficult process. The lawyers and accountants who have worked for your private company may not be appropriate for the public company scene.
You will naturally want advisers with a good track record on AIM, who understand your business sector and with whom you can develop a good working relationship. A large firm clearly inspires confidence, but it must see you as important and not neglect you.
Timing and pricing
Clearly, float timing is critical; when a business is performing well but an injection of cash could take it further. The stock market has its own momentum, driven by interest rates, overall corporate trends, the health and mood of key investors and external factors, such as oil prices or war scares. In a raging bull market, indifferent, badly run or even dishonest companies can sometimes raise millions. In a bear market, thoroughly sound, well-run businesses can fail to raise a penny.
You may have to go with a significantly lower valuation than you think is fair or postpone your float plans, or even seek another route altogether. Most advisers agree you should not try to take the last penny out of the market. If you leave scope for your shares to rise after your float, the market will like you. That could make it easier to raise money later and to fight off unwelcome takeover bids. Raising money privately before you float, at a big discount to your eventual float price, is also becoming increasingly popular. You get the money and the backers hope for a quick ‘uplift’ in value — but it can backfire.
But a final word of caution – if you give too much away to the pre-float investors, you could upset the investors supporting the float itself, especially if they don’t agree to holding their shares for a minimum period.
Should you float your business on AIM?
This depends on the size of your business and what your goals are. AIM is still closer to the spirit of entrepreneurs and has fewer restrictions which is more appealing to newer businesses. You’ll need to have advisors to help you through the process as well as a couple of non-executive directors. There are further questions to be asked if you’re looking to sell the business too. Find out more by reading Should I float on AIM?
Neil Shah is director of research at Edison Group.