the U.S. increased centralized securities regulation through legislation such
as the Sarbanes-Oxley Act, the London Stock Exchange’s Alternative Investment
Market (AIM) implemented an approach that provides regulatory flexibility and
relies heavily on the private sector to provide oversight of firms. Explicit
listing, regulatory and disclosure requirements on the AIM are limited
relative to other major markets. Moreover, the rules that do exist provide flexibility
and are open to interpretation. The AIM entrusts primary oversight to private
entities (Nominated Advisors or Nomads) who are chosen by the firms to serve
the roles of gatekeepers, regulators and advisers.
the U.S., the AIM drew attention because of its success in attracting new
listings relative to the NYSE and NASDAQ. For example, in 2006 firms raised
more capital through initial public offerings on the AIM than on the NASDAQ
($16.3 billion versus $12.8 billion). Moreover, some U.S. firms chose direct
AIM listings, thereby bypassing the U.S. capital markets. Not surprisingly, the
AIM’s regulatory structure and success generates heated discussion about the
optimal level of regulation, the role of public versus private oversight, and
the effect of regulation on competition among capital markets.
AIM’s regulatory structure can be cost effective for listing firms in several
ways. First, in terms of direct costs, the Nomad can relax disclosure, auditing
and governance standards. Second, indirect costs can be lowered because public
disclosure of proprietary information can be limited. In theory, public
disclosure can be replaced by private disclosure to the Nomads who publicly
attest to firm quality.
AIM’s lack of a formal regulatory structure means that the effectiveness of
oversight hinges on the role of the Nomad. The Nomad relationship is
complicated by the fact that the Nomad is hired and paid by the listing firm.
Furthermore, the requirements for admission as a Nomad are quite light. Hence,
it is unclear how much oversight is provided in practice. As noted by Taylor
(2009), “in Aim’s 14-year existence, only four companies quoted on the market
have been publicly censured, with just one fined. And only one nominated
adviser to an Aim company has been fined and publicly censured.” Nevertheless,
Nomads include major commercial banks (e.g., Citigroup, Credit Suisse,
Deutsche Bank, and ING), major investment banks (e.g., Merrill Lynch, Morgan
Stanley, and Goldman Sachs) and affiliates of major audit firms (e.g.,
PricewaterhouseCoopers, Deloitte and KPMG), so reputational concerns may, for
at least some Nomads, provide incentives for greater oversight.
effectiveness of the AIM’s regulatory structure is an empirical question. Given
its lower levels of mandated regulation and disclosures, the AIM might attract
unscrupulous managers of low-quality firms. On the other hand, given that the
Nomad’s and the LSE’s reputations are potentially at stake, the AIM might
attract high-quality small firms for whom the costs associated with standardized
disclosure are prohibitive. Understanding the types of firms listing on the
AIM and their performance post-listing is important, given that the AIM is
designed to serve individual investors. Unlike Rule 144a or venture capital
offerings in the U.S., which are limited to “sophisticated investors” and
institutions, the AIM is designed to provide access to retail investors.
Moreover, up until 2008, the U.K. tax code encouraged retail investment in the
AIM by providing tax advantages with respect to capital gains relative to shares
traded on other U.K. exchanges.
Gerakos, Lang and Maffett (2011), my co-authors and I compare AIM firms to
several benchmark samples to assess the performance of firms that self-select
into an AIM listing. Our main comparison is with firms listing on traditionally
regulated exchanges and quotation bureaus (the NASDAQ and OTC Bulletin Board
[OTCBB] in the U.S. and the LSE Main Market in the U.K.). We include a range of
comparison venues to ensure that results are not driven by particular types of
firms or economic environments. We control for a range of factors including
size, leverage, growth opportunities, industry and year.
our results suggest the AIM’s relaxed regulatory environment limits its
ability to screen firms relative to traditionally regulated exchanges—AIM
firms perform poorly on almost every dimension. AIM firm post-listing returns
significantly underperform post-listing returns on other markets. Moreover,
liquidity in AIM-traded shares tends to be low, and the information asymmetry
component of the bid-ask spread tends to be large, suggesting investors perceive
substantial information asymmetries for AIM firms. Furthermore, even
controlling for other potential determinants of delisting, AIM firms are more
likely to fail.
AIM firms perform poorly on average, it might be the case that the market
provides access to an unusually large pool of “high-flier” stocks. In
particular, some commentators assert that the AIM provides small investors
with the opportunity to gain access to high performance firms that might
otherwise be available only to venture capitalists. We therefore assess
whether the AIM has an unusually large number of firms that double in price
over the two years following the IPO. Again, the results are disappointing. If
anything, the AIM has fewer firms with extreme positive returns.
next compare AIM firms to firms quoted on the “Pink Sheets.” Pink Sheets firms
are not required to be SEC registrants, are limited in terms of permitted
capital raising and share ownership, and are viewed as “among the riskiest
investments” by the SEC. This analysis addresses the question of whether the
AIM regulatory environment screens firms relative to what is largely an
unregulated market. Again, results are disappointing. AIM firms are more like
Pink Sheets firms than firms that trade on regulated exchanges and, if
anything, underperform the typical Pink Sheets firm. Finally, we compare U.S.
firms that pursued direct listings on AIM to similar U.S. firms that listed on
either NASDAQ or the OTC Bulletin Board. Once again, the U.S. firms that listed
directly on AIM underperform similar SEC regulated firms in terms of
buy-and-hold returns, liquidity and survival.
SEC has been put under pressure because of the number of firms apparently
bypassing U.S. markets by listing on the AIM. A reasonable question is what has
been the experience of such firms. While it is difficult to judge whether
regulatory structures should be changed, firms attracted by the AIM’s regulatory
structure tend to underperform relative to similar firms on more traditionally
regulated exchanges and are characterized by significant informational
asymmetries. Furthermore, the AIM provides a unique setting in which to examine
the potential effects of private regulation in practice. Although private
regulation might be optimal in some cases, our results suggest that it has had
a limited screening role as applied in the case of the AIM.
1.Gerakos, J., Lang, M.,
Maffett, M., 2011. Listing Choices and Self-Regulation: The Experience of the
AIM. Unpublished working paper, University of Chicago Booth School of Business..
2. Taylor, P., 2009.
Astaire’s Public Punishment is a Warning to Others. The Telegraph, June 28.