Practical Implications for AIM of the
implementation of the Prospectus
Directive February 2005
February 2005
Seminar outline
Practical Points
• Presentation by the Exchange 45 mins
• Presentation by the UKLA on process
30 mins
• Q&A 30 mins
February 2005
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
February 2005
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
February 2005
Why AIM became an “exchange regulated market”
Transparency Directive
Market Abuse
Directive
Markets in Financial
Instruments
Directive
Corporate Governanc
e Action Plan
Financial Services Action Plan (FSAP)
February 2005
Prospectus Directive (“PD”)
Prospectus Directive
(2003/71/EC)
(“PD”)
Implemented
1 July 2005
Applies to all companies, all markets, across Europe
Impacts all securities
admitted to an EU regulated
market or where securities are offered to the
public
February 2005
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
February 2005
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
February 2005
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
February 2005
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.
February 2005
•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
February 2005
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
February 2005
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 Exchange’s 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
February 2005
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
February 2005
Other options available to us
At this stage we have rejected the other 2 options available to us on the following basis:
1. Copy POS into AIM rules? AIM rules seen as outdated Rule book would become more difficult to manage
and update Confusing for advisers
2. Wait for possible “POS 2” regime? Uncertainty about content? Lack of control?
February 2005
•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
February 2005
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
February 2005
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.
February 2005
What constitutes a Prospectus under PD?
Once implemented into UK law the competent authority under the Prospectus Directive will be the UKLA.
• Annex I - Minimum Disclosure Requirements for the Share Registration Document.
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 II - Pro forma financial information building block.
• Annex III- Minimum Disclosure Requirements for the Share Securities Note.
February 2005
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).
This document will have a lifespan of 12 months.
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 issuer’s assets and liabilities and financial position.
THE AIM RULES WILL NOT REQUIRE AN AIM COMPANY TO FILE A SHARE REGISTRATION DOCUMENT
February 2005
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 arrangementsMUCH OF THIS INFORMATION WILL NOT BE REQUIRED UNDER
AIM RULES
What constitutes a Prospectus under the PD?
February 2005
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
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.
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 nomad’s discretion.
This will be the minimum standard of information required.
February 2005
Overview of AIM-PD
An AIM admission document will be a composite of ANNEXES I – III.
Information highlighted in red need only be included at the NOMAD’s discretion.
An AIM admission document will only be required to include the information highlighted in blue.
Information required by ANNEX II need only be included at the NOMAD’s discretion.
February 2005
Key:Blue – mandatory informationRed – carved out / nomads discretion
ANNEX I – SHARE REGISTRATION DOCUMENT
1. Persons Responsible2. Statutory Auditors3. Selected Financial Information4. Risk Factors5. Information about the issuer6. Business Overview (apart from sub-sections 6.2 and 6.3 until 1 Jan 2007) 7. Organizational structure8. Property, plants and equipment (apart from sub-section 8.1)9. Operating and Financial Review10. Capital resources11. Research and Development, Patents and Licences12. Trend Information13. Profits Forecasts or Estimates14. Administrative, management and supervisory bodies and senior management15. Remuneration and benefits16. Board Practices (apart from sub-section 16.3)17. Employees (sub-section 17.2 applies to directors only)18. Major shareholders19. Related party transactions20. Financial information concerning the issuer’s assets and liabilities, financial
position etc21. Additional information22. Material contracts23. Third party information and statements by experts24. Documents on display25. Information on holdings
February 2005
Key:Blue – mandatory informationRed – carved out / nomads discretion
ANNEX III – SHARE REGISTRATION DOCUMENT
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 trading5. Terms and conditions of the Offer6. Admission to trading and dealing arrangements7. Selling securities holders8. Expense of issue / offer9. Dilution10. Additional information
All the information required under Annex II will be at the nomad’s discretion.
ANNEX II – PRO FORMA FINANCIAL INFORMATION
February 2005
How the proposed carve-outs were determined
When assessing the viability of AIM–PD as an option the Exchange compared the requirements of PD against the existing POS Regulations.
Four main conclusions were drawn:
1. 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.
February 2005
(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 IPersons 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 issuer’s assets and liabilities, financial
position etc (Section 20 – apart from subsection 20.2 Pro Forma financial information)
ANNEX IIIKey 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
February 2005
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
Historical Financial Information (PD Annex I – Section 20)
AIM - PD proposals • Makes clear that the historical financial information can be presented in the form of
an accountant’s 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.
February 2005
PD Requirement
Historical Financial Information (PD Annex I – Section 20)
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:
(a) 18 months from the date of the registration document if the issuer includes audited interimfinancial information in the document; or
(b) 15 months from the date of the registration document if the issuer includes unaudited interim financial information in the document.
Equivalent to POS Regulations
February 2005
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)
(2) Higher standard than POS Regulations and carved out
February 2005
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)
Even though these represent a higher standard they are often industry best practice or desirable for investor protection and therefore mandatory under AIM-PD.
Most of the information will be available as part of the standard financial and legal due diligence, incurring no or little extra cost.
(3) Higher standard than POS Regulations but mandatory
February 2005
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
Schedule Two requires a higher standard than PD in relation to:
(a) profits forecasts or estimates
(b) directors disclosures and
(c) working capital statements.
In the circumstances that the PD overlaps with additional disclosure required under Schedule Two, it is proposed to maintain the existing standards
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.
(4) Lower standard than AIM Schedule Two
February 2005
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.
(a) Profits forecasts or estimates (PD Annex I - Section 18)
February 2005
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;
(a) Profits forecasts or estimates (AIM Rules Schedule Two)
Maintain EXISTING AIM Rule requirements
February 2005
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.
(b) Directors disclosures (PD Annex I - Section 14 )
Maintain EXISTING AIM Rule requirements
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.
February 2005
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:
a) 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.
Maintain EXISTING AIM Rule requirements
(b) ‘Directors’ definition (PD Annex I – Section 14)
AIM Rules definition of director:
A person who acts as a director whether or not officially appointed to such position.
February 2005
PD Requirement
Working capital statement
Statement by the issuer that, in its opinion, the working capital is sufficient for the issuer’s 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)
(c) Working capital requirement (PD Annex III - Section 3 )
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
February 2005
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 26: Provides the same right to omit information for further admission documents as under Rule 4. 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.
February 2005
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 I–III 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 adviser’s 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.
February 2005
Summary
The consultation deadline date is Friday 4th March.
Two key questions:
1. Is AIM-PD the right approach given the other options available?
2. If AIM-PD is the right approach are the carve-outs as proposed set at the right level?
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