1 AIM RULES - DEPOSITARY RECEIPTS, IAS, PROPOSED AIM RULES FOR COMPANIES AND AIM RULES FOR NOMADS

Over the past few months there have been a number of changes to the AIM Rules and a consultation period has started regarding a fundamental overhaul of the AIM Rules to introduce a new rule book for Nominated Advisers. This article examines the following changes:

1.1 Listing of Depositary Receipts on AIM
1.2 International Accounting Standards
1.3 Proposed changes to the AIM Rules for Companies
1.4 Proposed AIM Rules for NOMADs

1.1 Listing of Depositary Receipts on AIM
On 2 June 2006, the London Stock Exchange plc (the "Exchange") circulated a notice to AIM Nominated Advisers ("Nomads") regarding the admission of depositary receipts as AIM securities (the "Notice"). The Exchange is of the view that the use of depositary receipts as AIM securities is to be permitted only if it is not possible to admit the underlying equity securities of the company in question. If depositary receipts are to be admitted, there are conditions to be observed and these are set out in the Notice.

The Exchange intends to issue guidance or changes to the AIM Rules in relation to this area during the course of the year. In the meantime, the Notice is to operate as a statement of best practice that the Exchange expects Nomads to adhere to from the date of the Notice.
The Exchange considers that the underlying securities of a company should be admitted to AIM wherever possible. Depositary receipts are only to be admitted as AIM securities where a company is incorporated in a jurisdiction which prohibits or unduly restricts the offering or admission of securities outside that country. Where this is the case, the following conditions are to be observed for the admission of depositary receipts to AIM:

1.1.1 AIM Rules
The AIM Rules are to apply not only to the depositary receipts but also to the underlying securities of the company.

1.1.2 Admission Document Disclosures
The admission document for the company admitting the depositary receipts is to contain additional information which is set out in Annex X to the Prospectus Rules:

(a) information about the issuer of the depositary receipts, as well as details of costs payable to the depositary (section 26);
(b) information about the underlying shares (section 27) (replacing sections 4, 7 and 9 of Annex III);
(c) information regarding the depositary receipts (section 28) (except for 28.6 and 28.7 which will not be applicable given the requirement set out in 4.4 below, and 28.10 which will not be applicable given the requirement for free transferability of AIM securities set out in Rule 32); and
(d) details of any additional risk factors material to the securities being offered (section 31.3).

1.1.3 Depositaries
There are a number of conditions specific to the depositary which are required to be adhered to:
(a) The depositary is to be one of the main providers and the choice of depositary is to be discussed with AIM Regulation;
(b) AIM is to be notified of any change in depositary, or material change to its terms, including costs;
(c) An agreement should be put in place between the company and the depositary, however, the depositary should not be subject to obligations in respect of the depositary receipts except as is necessary to protect the depositary holders' rights in relation to the underlying securities;
(d) The depositary is to hold on trust (or equivalent), for the sole benefit of depositary holders, all rights relating to the underlying securities. All rights due to holders of the underlying securities, such as voting and dividend rights, are to be passed on to the depositary receipt holders on a per share basis;
(e) The depositary is not permitted to make payment to or subsidise the costs of the company, the Nomad or any other advisers. All costs of the depositary are to be paid by the company (and not the depositary receipt holders). These costs are also required to be charged on a periodic basis rather than in relation to trading volumes or other variables.

1.1.4 Electronic Settlement
The depositary receipts admitted must also be eligible for electronic settlement with effect from admission in the normal way.

The Exchange takes the view that AIM is a market for equity securities. It also considers the Main Market and Professional Securities Market already provide successful product offering for depositary receipt issuers. The admission of depositary receipts is therefore to be limited only to situations where it is not possible to admit the underlying securities. Any admission of depositary receipts is also to be undertaken only in accordance with the conditions listed in the Notice.

1.2 International Accounting Standards
On 22 August 2006 the Exchange published AIM Notice 22 confirming final changes to the AIM Rules relating to acceptable accounting standards. The Exchange had previously issued AIM Notice 15 (December 2005) relating to proposed changes of acceptable accounting standards for AIM companies.

AIM Notice 15 confirmed the mandating of International Accounting Standards (IAS) for accounting periods commencing on or after 1 January 2007 for AIM companies that are incorporated in an EEA member state and that prepare consolidated financial statements.
In relation to companies incorporated in non-EEA countries, the Exchange proposed to change the AIM Rules with the effect of harmonising the accounting standards to be used both on admission to AIM and on an ongoing basis.

The latest Notice includes a number of amendments but generally preserves the rules proposed by the Exchange in December 2005.

The Exchange published revised AIM Rules with Notice 22 which came into force immediately.

1.2.1 Key Changes
The Exchange confirmed in AIM Notice 22 that:
(a) Both the Isle of Man and Channel Islands will be treated as EEA countries for the purposes of AIM Rule accounting standard requirements; and
(b) In relation to companies incorporated in non-EEA countries, Japanese GAAP has not been adopted.

1.2.2 EEA countries
The requirements for companies incorporated in EEA countries, the Isle of Man and the Channel Islands in respect of accounting periods commencing on or after 1 January 2007 are:

(a) An EEA company that is a parent company which prepares consolidated financial statements at the end of the relevant financial period, must prepare and present that consolidated financial information in accordance with IAS;

(b) An EEA company that is not a parent company at the end of the relevant financial period may prepare and present its financial statements either in accordance with IAS or in accordance with the accounting and company legislation and regulations that are applicable to that company due to its country of incorporation.

It is anticipated that the first set of results that will be impacted by this rule change will be half yearly reports to 30 June 2007 for companies with a December year end.

1.2.3 Non-EEA countries
On admission and when preparing both its half-yearly report and its annual report, a non-EEA incorporated company may use one of the following accounting standards (without reconciliation to IAS):

(a) IAS;
(b) US GAAP;
(c) Canadian GAAP; or
(d) Australian IFRS (as issued by the Australian Accounting Standards Board).

1.2.4 Transitional Provisions
In relation to accounting periods starting prior to 1 January 2007 AIM companies are allowed to comply with the current rules, i.e. prepare the required accounts in accordance with UK or US GAAP.

AIM Notice 22 also emphasises that accounting standard changes should only be made with prior approval of AIM Regulation to ensure that companies do not swap between standards on a frequent basis.

1.2.5 AIM Notice 23 - The European Commission Proposals
The Exchange subsequently released AIM Notice 23 on 31 August 2006 clarifying its position in relation to the European Commission's proposals regarding 'equivalence' of accounting standards for third country issuers who use accounting standards in a form other than International Financial Reporting Standards (IFRS). The Commission's proposals have the effect of moving the date of determination of equivalence of local GAAPs with IFRS until 2009.

The Exchange states that it will continue to closely monitor the European Commission's proposals and review the accounting standards acceptable to AIM as these develop. Consequently a wider range of GAAPs may be permissible in future on AIM, at least until the end of any further transitional period in 2009.

A copy of AIM Notices 22 and 23 are available at: http://www.londonstockexchange.com/en-gb/products/companyservices/ourmarkets/aim_new/For+AIM+Advisers/aimnotices.htm

1.3 Proposed changes to AIM Rules for companies
On 2 October 2006 the London Stock Exchange ("LSE") published a consultation document under AIM Notice 24 covering a number of changes that the LSE proposes to make to the AIM Rules. The consultation addresses the following proposed changes, namely the introduction of a new rulebook for nominated advisers; the AIM Rules for Nominated Advisers, changes to the AIM Rules for Companies and amendments to the AIM Disciplinary Procedures and Appeals Handbook.

Aside from the consequential amendments as a result of the introduction of the AIM Rules for Nominated Advisers, for companies the key changes are as follows:

1.3.1 an enhanced disclosure requirement of key information on an AIM company's website;
1.3.2 enhanced disclosure requirement in a 10 day announcement;
1.3.3 guidance re Reverse Takeovers; and
1.3.4 changes to the Disciplinary Procedures and Appeals Handbook relating to penalties for breach.

A copy of the Charles Russell note examining these changes in more detail can be found at:
http://www.cr-law.co.uk/resources/pdf/AIM_Rules_for_companies.pdf

The LSE are inviting AIM companies to respond and comment on the proposed changes to the consultation document on the AIM Rules for Companies and the AIM Disciplinary Procedures and Appeals Handbook. The consultation period closes on 1 December 2006 and the LSE are proposing to implement the new rules in early 2007.

A copy of the AIM Rules for Companies Consultation Document (under AIM Notice 24) can be found at:
http://www.londonstockexchange.com/NR/rdonlyres/00786C80-2353-4F8C-85E9-FDE46E16743C/0/AIMRulesforCompaniesAIM24changesMARKEDUP.pdf

http://www.londonstockexchange.co.uk/NR/rdonlyres/E3D5049B-570D-49DB-90B7-AD510182AF66/0/DisciplinaryProceduresandappealshandbook_markup20060.pdf

The LSE have invited Nomads, AIM companies and other market practitioners to provide feedback on the proposals in this consultation paper, and request that any questions or queries should be sent on or before 1 December 2006 to aimnotices@londonstockexchange.com.

1.4 Proposed AIM Rules for NOMADs
The 2 October 2006 consultation document under AIM Notice 24 also covers a number of changes that the LSE proposes to make to the AIM Rules by introducing the AIM Rules for Nominated Advisers.

The AIM Rules for Nomads largely codifies the existing obligations on Nomads contained in the Nomad Adviser Eligibility Criteria (April 2005) issued by the LSE, and additionally, lays out the responsibilities imposed on Nomads by the LSE and obligations a Nomad owes to the LSE. The LSE expects that most Nomads will already be acting in accordance with the new rules. The structure of the AIM Rules for Nomads is as follows:

1.4.1 Part One of the AIM Rules for Nomads sets out the Nomad eligibility criteria and approval process;
1.4.2 Part Two deals with the obligations of a Nomad; and
1.4.3 Part Three concerns review and discipline of a Nomad.
1.4.4 Schedule One to the AIM Rules for Nomads relates to a Nomad's independence in accordance with Rule 21 of the AIM Rules for Nomads; and
1.4.5 Schedule Two sets out the declaration required by the LSE from a Nomad relating to the appropriateness of a company for admission to AIM.
1.4.6 Schedule Three sets out a new set of responsibilities the purpose of which is to reflect good market practice, and these are considered in more detail in section 2 below.

Although many of the eligibility criteria, duties and responsibilities of a Nomad as laid out in the Nomad Adviser Eligibility Criteria (April 2005), will be codified in the new AIM Rules for Nomads, it appears that these Rules will additionally impose more onerous responsibilities on Nomads to ensure compliance by the Nomad and the AIM company with the AIM Rules, particularly with regard to the Nomads being required to keep a written record of the procedures and systems implemented by the company in order to satisfy itself of its and the AIM company's compliance with the AIM Rules. Consequently, it may be necessary for Nomads to set up certain procedures and systems themselves in order to maintain requisite and appropriate records to ensure compliance with the AIM Rules.

A copy of the Charles Russell note examining these changes in more detail can be found at:
http://www.cr-law.co.uk/resources/pdf/AIM_Rules_for_nominated_advisers.pdf

A copy of the AIM Rules for Companies Consultation Document (under AIM Notice 24) can be found at:

http://www.londonstockexchange.com/NR/rdonlyres/00786C80-2353-4F8C-85E9-FDE46E16743C/0/AIMRulesforCompaniesAIM24changesMARKEDUP.pdf

http://www.londonstockexchange.co.uk/NR/rdonlyres/E3D5049B-570D-49DB-90B7-AD510182AF66/0/DisciplinaryProceduresandappealshandbook_markup20060.pdf

The LSE have invited Nomads, AIM companies and other market practitioners to provide feedback on the proposals in this consultation paper, and request that any questions or queries should be sent on or before 1 December 2006 to aimnotices@londonstockexhange.com.aimnotices@londonstockexhange.com.

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Clive Hopewell or Alexander Keepin (London), Francis Rundall, Richard Norton, or Adrian Mayer (Cheltenham), Catherine Drew or Geoff Sparks (Guildford) or Peter Elliott (Oxford) on 0207 203 5000.

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