AIM Field Guide by DLAPiper

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									Joining AIM
A field guide for potential US applicants to the Alternative Investment Market of the London Stock Exchange

Introduction
The Alternative Investment Market (AIM) of the London Stock Exchange is the world's premier market for fast-growing companies. The number of companies trading on AIM as of December 31, 2005 was 1,399, and the amount of new money raised during 2005 was £8.9 billion ($15.6 billion) for both IPOs and further issues. In 2005, there were 335 IPOs on AIM, 19 of them US companies. DLA Piper is one of the leading legal services advisers to AIM companies. We have a good relationship with the London Stock Exchange and the professional advisers specializing in AIM companies. We are the only leading adviser with a large successful practice in the US representing venture-financed companies as well as a London-based AIM team with extensive experience in UK and US securities law and IPOs in particular. We are uniquely positioned to provide fully integrated US and UK execution for an AIM offering. The purpose of this guide is to provide an overview of the public offering process in the UK and to deal with many questions most frequently asked by US companies contemplating admission to AIM. If you have any queries about this guide, or for further information generally, please call our UK switchboard +44 8700 111 111. Our UK based team includes: Alex Tamlyn E: alex.tamlyn@dlapiper.com Mark Taylor E: mark.taylor@dlapiper.com Charles Severs E: charles.severs@dlapiper.com Robert Bishop E: robert.bishop@dlapiper.com Kate Francis E: kate.francis@dlapiper.com Elizabeth Walters E: elizabeth.walters@dlapiper.com Stephen Devlin E: stephen.devlin@dlapiper.com Charles Cook E: charles.cook@dlapiper.com Tom Heylen E: tom.heylen@dlapiper.com Catherine Simister E: catherine.simister@dlapiper.com Jonathan Watkins E: jonathan.watkins@dlapiper.com US Qualified lawyers Nancy Spangler E: nancy.spangler@dlapiper.com Edwin Martin E: edwin.martin@dlapiper.com

DLA Piper is a global legal services organization with 3,100 lawyers located in 22 countries and 59 offices including 22 offices in the United States.

Contents
Section A general overview of AIM 1. Does the company need to be a particular size or have a particular number or value of shares in the hands of the public? What is the process for admission to trade on AIM? How long will it take for an AIM IPO to complete? What advisors will I need and how much will the transaction cost? Does the company have to be of a certain type or adopt a particular structure or charter? Is there any restriction on sales of shares by existing shareholders for a period of time after trading commences? What potential liabilities will the directors be exposed to in connection with the proposed admission to trading on AIM? Are there any rules governing the composition of the board of directors of an AIM company? What ongoing reporting requirements and continuing obligations will be required of an AIM company and its directors? Page number 4 4

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10. What are the US securities law implications for a listing on AIM?

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A general overview of AIM • Regulated by the London Stock Exchange, providing a more flexible regulatory environment • No minimum revenue requirement • No minimum amount of shares to be in public hands • In most cases, no prior shareholder approval required for transactions • Admission documents not pre-vetted by Exchange or UKLA but by nominated advisor • Nominated advisor required at all times
Source: AIM Rules, www.londonstockexchange.com

1. Does the company need to be a particular size or have a particular number or value of shares in the hands of the public?
• There is no minimum market capitalization or size requirement for listing on AIM. • There is no minimum trading price per share for an AIM listing. • There is no requirement to have a minimum number of shares in public hands. However, a small "free float" may have an impact on liquidity in the company's shares. • There is no requirement for the company to have a history of revenue or profitability and, accordingly, AIM can be a suitable home for early stage or growth companies.

2. What is the process for admission to trade on AIM?
• The basic requirement is publication in the UK of an admission document which will also be used as the offering document. There is no requirement to obtain approval of an admission document by the London Stock Exchange (LSE). • In addition, the company's nominated advisor (NOMAD) must confirm to the LSE the suitability of a company and its securities to be admitted to AIM. • The AIM rules determine the contents of an admission document. In particular, the relevant documents will need to contain audited historical financial statements for the last three financial years (or fewer, if the company does not have a threeyear history). The financial statements can be prepared in accordance with US GAAP UK GAAP or IFRS. There is no requirement to present the figures in , , pounds sterling. Starting January 1, 2007, the financial statements will need to be prepared in accordance with IFRS.

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• At least 10 days before the expected date of admission to AIM, the company must provide the LSE with the information specified in Schedule 1 to the AIM rules (this includes details of the number and type of shares, significant shareholders, directors and proposed directors, and the names and addresses of the NOMAD and the nominated broker). • The admission document must be published at least three days before admission and the applicant must pay the AIM fees (an admission fee of £4,180 (about $7,650), together with an annual fee of £4,180 pro-rated) and submit an electronic copy of the document to the LSE together with a completed application form, the NOMAD's declaration, and a letter from the company's broker confirming its appointment. There is no requirement to file an admission document, but the document must be available publicly, free of charge, for at least one month from the admission of the applicant's securities to AIM. • Admission to AIM becomes effective when the LSE issues a notice to that effect. • Almost all relevant IPOs on AIM have been placements to institutions or the kinds of investors that would be accredited investors in the US. If in fact a broader offering were to be made and shares were offered to the public, a prospectus would be required. Such a prospectus would generally require additional information and would need to be approved by the Financial Services Authority (FSA) before it is published. When shares are being offered to the public, copies of the prospectus (once it has been approved by the FSA) must be made available to the public at a UK address, or electronically on the company's web site, from the time the offer of shares to which the prospectus relates is first made until the offer closes. The approved prospectus must also be filed with the FSA before it is published.

Is an IPO right for this company?

Consider objectives of key stakeholders Is timetable realistic? Are funds to be raised how much?

Are accounting systems and controls adequate?

Now, later, or never?

Is listing the right/only option?

Is management team structure appropriate for quoted company? Are up-to-date audited financial statements available?

Restructuring requirements?

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3. How long will it take for an AIM IPO to complete?
• The actual AIM IPO process will generally take three to four months from the organizational meeting. However, the period is often extended because it takes so much time to prepare financial statements and make and execute decisions on such issues as capital structure, charter revision, and the like. The actual offering period may vary for a number of reasons, including the decision in some cases to place a portion of the offering as a private placement in the US. • The timetable will generally be longer if a prospectus (as opposed to an admission document) is required. This is largely because the prospectus must be vetted and approved by the FSA prior to it being published.

4. What advisors will I need and how much will the transaction cost?

The Advisory Team Nominated Advisor and Broker Company Lawyers

Registar

Key AIM Advisors
NOMAD Lawyers

Financial PR

Reporting Accountants

• Nominated Advisor: The NOMAD plays a key role in the admission of a company's shares to trading on AIM and in guiding and advising on the company's ongoing obligations after admission. It is the company's key point of contact with the LSE. Most of the NOMAD's roles and responsibilities are set out in the AIM rules. An AIM company must retain the services of a NOMAD at all times. If it terminates the service of its NOMAD it must notify the market immediately and appoint a new NOMAD within one month. Failure to appoint a new NOMAD will result in suspension of trading in the company's shares. NOMADs generally charge a corporate finance fee of £75,000 to £300,000 (about $137,000 to $550,000) and an annual fee of £25,000 to £35,000 (about $45,000 to $65,000) for continued services.

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• Broker: A broker is in most cases the same firm as the NOMAD. This is typically the firm that handles the raising of new money and works with the company to assure there is a proper market in the company's shares. An AIM company must retain the services of a broker at all times. For the raising of new money, the cost is usually calculated as a percentage of new money raised, typically between 3 and 5 percent of the amount of the new money, depending on the nature of the obligations assumed by the broker (and inclusive of sub-underwriting commissions). In addition, the company will be expected to pay the fees of counsel for the NOMAD/broker. • Reporting Accountants: They are distinct from the company's auditors. Their principal function is to review the company's financial results and reporting processes and report any areas of concern to the NOMAD, primarily by way of a long form report which will include a detailed review of the business and assets of the company. They also report on the financial information in the administration document. • Legal counsel: A US company will need both UK and US counsel. The use of a single firm or close coordination between the two is crucial to ensuring a smooth offering and listing. UK counsel will advise on the UK regulatory aspects of the process, including ensuring that the admission document is properly prepared. As well as advising on US securities and corporate law aspects, US counsel will be required to undertake a legal review of the company's affairs and prepare and deliver a due diligence report to the company and the NOMAD. • Financial PR Consultants: They generate positive press interest and publicity and monitor the content and wording of any public statements. The usual cost for engaging these advisors ranges in aggregate from £500,000 (about $894,000) to £900,000 (about $1.6 million), in addition to the percentage fee charged by the broker.

5. Does the company have to be of a certain type or adopt a particular structure or charter?
• In order to list on AIM, a US company will need to be a corporation, rather than an LLC or partnership. • As is typical with a newly listed company in the US markets, an AIM company generally will have one class of stock. It is possible to have other classes of stock. At present, two or three US companies listed on AIM have outstanding preferred stock. • All the shares of a particular class must be admitted to trading on AIM. • The shares must be free of contractual or charter restrictions on transfer. Shares of overseas companies cannot be transferred directly through CREST (the UK electronic transfer system). However, depository interest programs exist in order to enable shareholders of such companies to hold securities which can be transferred electronically. • Because of the requirements of US securities law, most shares of US companies traded on AIM are subject to restriction on transfer (see Section 10 below). To date, this has generally been accomplished through certificated (rather than electronic) transfer. Electronic transfer systems may be adopted which can handle demonstrated compliance with these requirements.

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• The US companies that have listed on AIM have generally, in cooperation with their NOMAD and legal advisors, considered a number of charter revisions to bring governance and shareholder rights closer to those expected of a UK company. While these revisions are not required as a matter of law, some or all have been adopted in most cases. Two are particularly common: • A requirement that a party acquiring 30 percent or more of the company's shares make a cash offer for the rest of the shares. • Limitations on the ability of the board of directors to issue more than a particular percentage of the outstanding stock without preemptive rights unless certain requirements are met.

6. Is there any restriction on sales of shares by existing shareholders for a period of time after trading commences?
• When the main activity of a company applying for admission to trading on AIM is a business which has not been independent and had revenue for at least two years, the company must ensure that all "related parties" agree not to dispose of any interest in the company's shares for one year from the date of admission. "Related parties" in this context means (i) any director of the company or any of its subsidiaries, sisters, or parent; or (ii) any substantial shareholder who holds, directly or indirectly, 10 percent or more of any class of shares to be admitted to AIM; or (iii) applicable employees who are employees of the company, its subsidiaries, or parent who, together with their family members, directly or indirectly hold 0.5 percent or more of a class of shares to be admitted to AIM. • The NOMAD will usually wish to restrict, even if not required by law, the transfer of shares in the company by directors and major shareholders for a period of time after admission in order to help maintain an orderly market in the company's shares. The restriction typically is for a period of 12 to 24 months. A NOMAD will particularly want such restrictions in an underwritten offering.

7. What potential liabilities will the directors be exposed to in connection with the proposed admission to trading on AIM?
• Where an admission document is published under the AIM rules, the company seeking admission must ensure that the admission document contains all information which it reasonably considers necessary to enable investors to form a full understanding of (i) the assets and liabilities, financial position, profits and losses, and prospects of the company; (ii) the rights attaching to the securities; and (iii) any other matter contained in the admission document. • Liability may arise under the Financial Services and Markets Act (FSMA) for false or misleading statements, and under the Theft Act, in tort for fraudulent misrepresentation or negligent misstatement if either an admission document or a prospectus is published. • If a company is issuing shares as part of the listing, the directors will incur liability under the placing or underwriting agreement as they will give warranties (subject to customary limitations in terms of time and amount) to the NOMAD relating to the admission document and the company's business generally.

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• In addition, where a prospectus is required, if that is false or misleading, the directors, the company, and any other persons (such as the NOMAD or other professional advisors) responsible for the prospectus are liable to pay compensation to any person who has acquired the shares to which the prospectus relates and who has suffered loss in respect of them as a result of any untrue or misleading statement in, or any omission from, the prospectus. • In addition, for a US company the antifraud provisions of the US securities laws (Rule 10b-5) will apply in the same way they would for a customary private placement in the US.

8. Are there any rules governing the composition of the board of directors of an AIM company?
There is no formal code on corporate governance which applies to companies trading on AIM. However, there are UK best practices views, reflected in the Corporate Governance Guidelines for AIM published by the Quoted Companies Alliance in 2005. In cases where these guidelines differ from US requirements and their existing governance, US companies have generally considered which, if any, to adopt in consultation with their NOMAD and legal advisers. Some of these UK best practices are: • The responsibilities of the board and management should be clearly divided, and the roles of the chairman and chief executive should be held by different individuals; • There should be a balance on the board between executives and non-executives (at least two of whom should be independent), the intention being that no one individual or small group of individuals can dominate the board's decision making; • The board should be of sufficient size that the balance of skills and experience is appropriate for the business of the company; • Compensation for directors should be sufficient to attract, retain, and motivate directors of the quality necessary to run the company. It is recommended that directors' compensation be structured in such a way that rewards are linked to corporate and individual performance; and • Directors' contracts should be terminable on notice of no longer than 12 months. If the director materially breaches or causes the company to materially breach AIM rules, the contract should also provide for the director to leave the board of the company. • An AIM company will often include in its annual report details of each individual director's benefits and compensation. Many companies have discussions with their institutional shareholders before any significant changes to directors' remuneration are made.

9. What ongoing reporting requirements and continuing obligations will be required of an AIM company and its directors?
In addition to always having a NOMAD and a broker, the company must keep the market informed of the progress of its business and other relevant matters by announcing without delay:

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• any new developments not in the public arena which relate to a change in its financial condition, sphere of activity, or business performance, which, if made public, would be likely to lead to a substantial movement in the company's share price; • any dealings by directors in its shares; • any changes to its significant shareholders; • the resignation, dismissal, or appointment of any director; • any decision to declare a dividend; • any material change between actual performance and any publicly announced forecasts; • changes to its fiscal year and registered office; • reasons for the dismissal or appointment of its NOMAD or broker; • reasons for the application for admission or cancellation of the trading of its securities on AIM; and • substantial transactions and reverse takeovers or fundamental disposals where shareholder approval is required. In addition, an AIM company must: • prepare and publish a half-yearly report within three months after the relevant half-year period; • prepare and publish annual financial statements within six months of the financial period to which they relate; and • ensure that directors and employers who hold 0.5 percent of the company's shares do not deal in the company's shares within blackout periods (i.e., the two months preceding the publication of the company's annual results or the announcement of its half-yearly results). The company is subject to a general disclosure obligation whereby the LSE may require a company to provide it with such information, in such form and within such limit as the LSE considers appropriate, and also to publish such information. An AIM company is also required to announce certain events without delay and may need in particular to respond to movements in its share price. It is important, therefore, that someone within the company, who is based in the UK, acts as the point of contact with the AIM team and the NOMAD to ensure that the company is able to meet its ongoing obligations. It is also important that the company establish procedures to ensure that directors and employees do not deal in securities when they are prohibited from doing so.

10. What are the US securities law implications for a listing on AIM?
US securities law has implications for a listing on AIM in three areas: (i) the application of the Securities Act of 1933 (the 33 Act); (ii) consequences related to the requirement to register under the Securities Exchange Act of 1934 (the 34 Act) which brings the Sarbanes Oxley Act into effect; and (iii) the potential liability of the company and directors under US securities laws. The 33 Act requires registration with the Securities and Exchange Commission (SEC) of offers and sales of securities (including resales of issued securities) in the absence of an exemption provided for in the 33 Act or in regulations promulgated

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thereunder by the SEC. The US registration process is often expensive. Issuers will generally wish to avoid it unless the size and structure of the offering justify a registered offering into the US. AIM offerings are typically not of such size; they generally comprise institutional placings within the EU and other jurisdictions where local laws offer a safe harbor for offerings to a limited number of investors. For US-based companies that have not done a public offering in the US, the principal regulations that offer relevant exemption from registration for an AIM offering made solely within the EU and subsequent resales are Regulation S and, in the case of resales, Rule 144. Regulation S makes clear that offers and sales of securities which take place outside the US are not subject to the registration provisions of the US securities laws so long as its provisions are complied with. Rule 144 is a safe harbor which allows the resale of securities which have not been registered, in limited circumstances. An AIM IPO can include a private placement to investors within the US; this placement is exempt from registration pursuant to the provisions of Section 4(2) of the 33 Act and Regulation D, promulgated by the SEC. Securities issued in the AIM offering and the private placement will be "restricted securities." The following is a general summary of the impact of these rules for the original issuance (whether at the time of the IPO or a secondary issue) and subsequent transfers of shares: • The sale and issuance of shares outside the US to non-US investors in the IPO, whether from the issuer or from Affiliates, will be exempt under Regulation S from registration so long as relevant requirements are met. • Regulation S and Rule 144 require appropriate legends on stock certificates to assure compliance with applicable post offering restrictions. Accordingly, until the periods for which legends are required have expired, certificate-less trading is not possible for these shares, so shares will need to be materialized. • For most shareholders after the AIM IPO, resales can generally be made under Regulation S so long as a sale does not (a) involve an offer or sale, to the knowledge of the seller or anyone acting on his behalf (broker), to a buyer in the US; or (b) involve "directed selling efforts" in the US by the seller or anyone acting on his behalf. In addition, the seller must not be a dealer or distributor of the shares. It is to be expected that a very high percentage of AIM transactions will satisfy these criteria. • In addition, sales may be made to US buyers if an exemption is available (under Rule 144A, for example). • By virtue of the 33 Act and Rule 144, Affiliates always have restrictions on resales of their securities. (There is an exemption based on available information and manner of sale and quantity of shares sold, but it may not be available when the company is not public in the US.) Affiliates can sell outside the US under Regulation S, but are treated as an issuer when doing so. As a result, the legend requirements, time periods, and processes are identical to those for the initially placed shares, but the time periods (both for Regulation S and Rule 144) will run from the date of sale of the particular shares by the Affiliate. • For shares that have been held for two years or more by shareholders who are not Affiliates, resales of the shares may be made in any manner in the US, on AIM, or otherwise in reliance upon the exemption from registration provided in Rule 144(k). In such cases, there are no legend requirements or restrictions on subsequent transfers.

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An Affiliate is defined in Rule 405 as "a person that directly or indirectly through one or more Intermediaries, controls or is controlled by, or is under common control with, the person specified." In general, major shareholders, board members, and officers are often deemed Affiliates, but this is a judgment call normally based on an opinion of counsel to the issuer. It is suggested that shareholders holding 10 percent or more be treated as "major" for these purposes. Regulations S treats an officer or director who may be deemed an Affiliate solely because the person is an officer or director not to be an Affiliate for its provisions. The second implication of US securities law relates to the impact of the 34 Act. As long as the company does not have more than 500 holders of record (whether or not they are located in the US), the issuer will not be subject to the requirements of the 34 Act, including the periodic filing, certification, and accounting requirements resulting from registration under the 34 Act. A person or nominee who is identified as the owner of securities on an issuer's record of security holders (for example, a custodian of an account) is a "holder of record." The third aspect is exposure to liability. Any material misstatement in the disclosure documents for an offering on AIM could result in liability in a private action under Rule 10(b)-5 promulgated under the 34 Act. This liability, in unusual circumstances, could extend to directors. It should be thought about as analogous to the exposure to liability in a normal private placement to investors in the United States.

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Notes:

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Our Track Record
There is more than one reason to talk to DLA Piper. Here they are:

December 2005

December 2005

October 2005

£58,000,000 International Marketing and Sales Group plc IPO AIM

£26,000,000 BNS Telecom Group plc IPO AIM

£17,708,000 Datong Electronics plc IPO AIM

August 2005

June 2005

June 2005

£16,737,000 Research Now plc IPO AIM

£35,052,000 Bango Group plc IPO AIM

£23,017,000 Endace ltd IPO AIM

June 2005

April 2005

April 2005

£18,200,000 Renova Energy plc IPO AIM

£40,000,000 GSH Group plc IPO AIM

£32,200,000 Zetar plc Readmission AIM

March 2005

March 2005

February 2005

£24,000,000 Fonebak plc IPO AIM

£44,000,000 Shed Productions plc IPO AIM

£78,400,000 Carter & Carter Group plc IPO Main

February 2005

December 2004

December 2004

£44,345,000 Alternative Networks plc IPO AIM

£16,660,000 Staffline Recruitment Group plc IPO AIM

£38,417,000 Pure Wafer plc IPO AIM

We have advised on more AIM IPOs - acting for the issuer or the nominated broker - than any other legal advisor in the UK. In addition, we have listed many other companies on the Main Market in the UK, and on Nasdaq, NYSE, Euronext, and the Vienna and Budapest stock exchanges. We believe no other law firm in the world offers a more comprehensive, integrated, and cost-effective service to mid-market and growth companies seeking admission to international capital markets.

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December 2004

December 2004

November 2004

£20,219,000 Sanderson Group plc IPO AIM

£25,968,000 Goals Soccer Centres plc IPO AIM

£239,000,000 Enterprise plc IPO Main

October 2004

August 2004

July 2004

£34,926,000 Orca Interactive ltd IPO AIM

£48,450,000 Spice Holdings plc IPO AIM

£37,000,000 Synergy Healthcare plc IPO - Reverse takeover AIM

July 2004

June 2004

May 2004

£55,427,114 NCC Group plc IPO AIM

£22,017,000 Biofuels plc IPO AIM

£52,778,000 Local Radio Company plc IPO AIM

April 2004

April 2004

April 2004

£184,000,000 Dignity plc IPO Main

£33,318,000 Attentiv Systems Group plc IPO AIM

£21,689,000 Robinson plc IPO AIM

Our lawyers are locally trained and are conversant with the cultural and business practices of all our jurisdictions. We can provide support for the full range of legal issues and challenges faced by businesses as they develop, whether organically or through mergers and acquisitions and public/private financing. The transition from private to public ownership is demanding and it is vital to have advisers with a strong track record. DLA Piper's experienced partners and lawyers are well placed to make the transition as seamless as possible.

Talk to one of our capital market practitioners today. DLA Piper UK switchboard: +44 8700 111 111.

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Published by DLA Piper Rudnick Gray Cary US LLP 401 B Street, Suite 1700, San Diego, California 92101-4297, USA Copyright © 2006 DLA Piper Rudnick Gray Cary US LLP Circular 230 Notice: In accordance with Treasury Regulations which became applicable to all tax practitioners as of June 20, 2005, please note that any tax advice given herein (and in any attachments) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This publication is intended to provide clients with information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising. A list of DLA Piper’s offices across the US, in Europe and Asia can be found at www.dlapiper.com.

DLAPRGC 9469/05.06


								
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