PREPARATION FOR MARKET ABUSE REGULATION
On 3 July 2016, the Market Abuse Regulation (MAR) will come into force. MAR is an EU regulation which is directly applicable across all member states. MAR includes disclosure obligations for issuers admitted to trading on regulated markets or MTFs, and accordingly, will apply to AIM.
This Inside AIM sets out information to support nominated advisers as they work with their clients to prepare them for the introduction of MAR and consequent changes to the AIM Rules. The contents of this Inside AIM are based on the assumption that the proposals set out in AIM Notice 44 are implemented.
We will continue to keep the operation of our rules under review.
Overview of MAR obligations
The key disclosure obligations in MAR relate to the disclosure of inside information and disclosure of deals by persons discharging managerial responsibilities (“PDMR”) and closely associated persons. MAR will also introduce mandatory close period rules.
AIM Rule 11
The purpose of AIM Rule 11 is to maintain a fair and orderly market in securities and to ensure that all users of the market have simultaneous access to the same information in order to make investment decisions. The disclosure obligation in respect of inside information under Article 17 of MAR protects investors from market abuse (see recital 49 of MAR).
Whilst there is clearly overlap in respect of both sets of obligations, they should be considered separately. In particular, we note that “inside information” has a specific and technical definition (given its context) whereas consideration of AIM Rule 11 by an AIM company (with the guidance of its nomad) is a principles based consideration in the context of the maintenance of a fair and orderly market. Therefore, the separate disclosure tests and guidance to AIM Rule 11 must be complied with.
Importantly, compliance with MAR does not mean that an AIM company will have satisfied its obligations under the AIM Rules, just as compliance with the AIM Rules does not mean that an AIM company will have satisfied its obligations under MAR. An AIM company must comply with the AIM Rules and MAR at all times.
For example, the guidance to AIM Rule 11 which sets an expectation that an AIM company should keep impending developments confidential under the AIM Rules would not restrict an AIM company from making such a disclosure if required under Article 17 of MAR. Equally, the ability to delay the publication of inside information under MAR would not override the disclosure obligation contained in the AIM Rules. In this regard an AIM company must consider whether it is able to delay the information pursuant to the guidance to AIM Rule 11.
An AIM company should continue to consider its AIM Rules disclosure obligations in conjunction with the advice and guidance of its nominated adviser pursuant to AIM Rule 31. It will not be a defence to a breach of the AIM Rules that the AIM company had received legal advice that it was MAR compliant. In this regard, we do not expect a different approach by AIM companies and nominated advisers to compliance with AIM Rule 11 post MAR. The AIM Rules are principles based and accordingly, as is the case currently, the consideration of AIM Rule 11 disclosure obligations should not be overly narrow or technical. We consider this approach to compliance with AIM Rules 11 and 31 is fundamental to ensuring market integrity. Failure by an AIM company to comply with AIM Rule 11 or to seek the advice and guidance of its nominated adviser (and take that guidance into account) pursuant to AIM Rule 31, will be regarded as a serious breach of the AIM Rules and may result in the London Stock Exchange taking disciplinary action in addition to our powers to suspend or cancel an admission.
Collaboration with FCA
FCA is the competent authority for MAR in the UK and its powers are contained in Article 23. Therefore, whilst FCA will have powers to intervene as competent authority and will be responsible for the investigation and enforcement of breaches of MAR, we intend to work closely with the FCA to co-ordinate our approach to obtaining any necessary information from AIM companies whilst minimising duplication of activities.
It is important for the effective overall operation of the market that real time monitoring and management of the market continues to be undertaken by London Stock Exchange, as market operator. In practice, where there is a query as to whether an AIM company should make a disclosure, we will continue to liaise with the AIM company’s nominated adviser regarding its AIM Rules obligations and will provide the FCA with information about these discussions, where relevant to MAR. It is open to the FCA to consider an AIM company’s compliance with MAR at any time.
For the avoidance of doubt, we will not be able to opine on MAR obligations/compliance. Any guidance provided by AIM Regulation in respect of disclosure will only be in relation to an AIM company’s obligations under the AIM Rules.
Article 19 of MAR (PDMR transactions) contains notification requirements which will apply to issuers, PDMRs and persons closely associated with them. Article 19 will also include mandatory close period rules. Given the scope of MAR, duplicate obligations will be removed from the AIM Rules. However, we consider it is important for the integrity of the market that AIM companies have in place systems and controls to manage these obligations. We therefore have proposed to amend AIM Rule 21 to require all AIM companies to have a dealing policy and to require nominated advisers to consider this as part of their responsibilities.
We do not intend to prescribe the detailed content of the dealing policy but we have in AIM Notice 44 set out the minimum provisions that we would expect to be included in the policy. We expect AIM companies and nominated advisers to consider the design and implementation of the policy in a meaningful way, to ensure it is capable of working in practice, taking into account the nominated adviser’s knowledge of the company and its management. This obligation will be separate to an AIM company’s compliance with Article 19. Accordingly, an AIM company’s compliance with MAR will not mean it will have automatically satisfied its obligations under AIM Rule 21.
Following implementation of MAR, all AIM companies will be required to maintain a list of all those persons working for them that have access to inside information. The FCA, as competent authority for MAR in the UK will be responsible for enforcing compliance with this provision. Accordingly, AIM companies will need to implement systems and controls to comply with these obligations.
Although MAR includes provisions for issuers on SME Growth Markets to draw up a list only when requested by the regulator, the SME Growth Market regime will not into come into force until MiFID II is implemented in January 2018. AIM is currently not a SME Growth Market, so AIM companies will therefore be required to comply with Article 18.
Date of publication: 29 April 2016
Market Abuse Regulation
On 3 July 2016, the Market Abuse Regulation ("MAR") will come into force. MAR is an EU Regulation which has direct effect across all EEA member states and will supersede the existing Market Abuse Directive.
MAR disclosure obligations will apply to financial instruments admitted to all multilateral trading facilities, as well as regulated markets. Accordingly, these obligations will apply to all issuers admitted to European growth markets including AIM.
The key disclosure obligations in MAR relate to the disclosure of inside information and disclosure of deals by persons discharging managerial responsibilities and closely associated persons. MAR will also introduce mandatory close period rules.
This article sets out our preliminary thoughts on how we expect MAR obligations to sit alongside the disclosure obligations in the AIM Rules for Companies ("AIM Rules").
AIM Disclosure Rules
The disclosure obligations under MAR will be within the remit of Financial Conduct Authority ("FCA") as the UK competent authority and we have been working closely with the FCA to co-ordinate our approach to the implementation of MAR for AIM companies.
We have given consideration to whether it remains appropriate to retain the disclosure provisions contained within AIM Rule 11 following the implementation of MAR. On balance, we consider that retaining a disclosure rule in the AIM Rules is important to the integrity of AIM and the maintenance of an orderly market. We also consider that the disclosure requirement in AIM Rule 11 (as currently drafted or with minor amendments) will continue to reinforce our expectations of AIM companies to provide equality of information on a timely basis, allowing investors to make informed investment decisions.
Retaining AIM Rule 11, should not materially change a company’s approach to disclosure compared to existing market practice. Although we appreciate that retaining the AIM disclosure rules will mean that AIM companies will have obligations to both AIM Regulation and the FCA, we will work closely with FCA to minimise any duplication. For example, in respect of real time disclosure, it is currently envisaged that in the first instance AIM Regulation will continue to have discussions with nominated advisers and will co-ordinate with the FCA as necessary.
Whilst we consider that the above approach will mitigate the need for an AIM company to engage separately with two regulators in most situations, it should be noted that only the FCA, as the competent authority under MAR, will be able to opine on MAR compliance and will retain the right to engage directly with an AIM company if necessary.
The AIM Rules already sit alongside wider regulatory and legal obligations owed by an AIM company as described at AIM's Regulatory Landscape.
Although we have already sought views from various market participants, we will undertake a market consultation if changes to the AIM Rules are required. In the meantime, we would welcome further feedback from market participants which should be addressed to firstname.lastname@example.org.
Date of publication: 28 October 2015
AIM company disclosures relating to equity financing products
This Inside AIM article relates to AIM company disclosures arising from equity financing products that involve AIM securities and in which AIM companies or their directors may have an interest. By way of illustration only, these products include:
Given the importance of ensuring correct disclosures to the orderly operation of the market, it should be noted that London Stock Exchange has required correction of notifications that had incorrectly disclosed the terms of such equity financing arrangements.
Complexity and Non Standard Terms
Some of these equity financing products may, by their nature, be complex. AIM companies and their nominated advisers should carefully evaluate the structure of, and any non-standard terms contained within, such facilities when considering disclosure requirements to ensure that the information provided is sufficient to give a proper understanding to investors. This may involve providing more detail than would ordinarily be the case for more commonly used forms of financing and in all cases should properly reflect the substance of the transaction.
As an example, depending on the nature of the product, the AIM company and its nominated adviser should consider whether in respect of company equity financing facilities, the circumstances of a draw-down request (and the notice of such) gives rise to an AIM Rules disclosure obligation in its own right, pursuant to AIM Rules 10 and 11 and not just the actual draw down itself. Matters which may be relevant to such consideration could include:
Disclosure of Directors Share Dealings
In addition to equity financing arrangements available to AIM companies, products are available to directors of public companies to enable them to use their own holding in the AIM company as a means of personal financing by way of, for example, share sale and repurchase agreements.
In order to comply with the AIM Rules, it is important that AIM companies carefully evaluate the consequences of these agreements, most particularly in relation to the requirements on the AIM company to correctly and fully disclose directors’ dealings under the AIM Rules.
The definition of a “deal” under the AIM Rules is, of course, very broad and encompasses almost any action a director might take in relation to his interest in his holding of securities in that AIM company. Accordingly, the nature of any director’s dealings arrangements should be clearly and fully disclosed, most usually at the time that a transfer of an interest in the shares becomes binding (whether that transfer occurs now or in the future).
Further, care should be taken when using terminology to describe the nature of the arrangement to ensure appropriate and sufficient disclosure. For example, share sale and repurchase agreements are distinct from secured loans/share pledges in a number of key areas (in particular, in relation to the point at which an interest in shares is transferred). The transfer of voting rights is also an important consideration that may require disclosure.
After the initial disclosure of any equity financing arrangements, AIM companies should make appropriate updates, for example, where there are changes to director’s previously stated intentions or if a director does not meet a margin call that results in that director’s holding in the AIM company changing including, for example, losing rights under the relevant agreement.
Systems and Controls for Disclosure
In respect of directors’ personal deals, given that an AIM company is often not a party to these equity financing arrangements, an AIM company’s agreements with its directors should ensure that it can obtain from directors all information that the AIM company will need in order to comply with its director dealing notification requirements under AIM Rule 17 where a director enters into arrangements relating to his or her AIM company holding. This is an important element of the requirements of AIM Rule 31.
Consideration should also be given to who within the AIM company is best placed to be involved in the preparation of notifications to the market where key executive directors, or a number of directors, are involved in equity financing arrangements. London Stock Exchange would expect, as part of an AIM company’s AIM Rule 31 processes, that appropriate independence is exercised in the preparation of a notification.
AIM companies are advised to consult with their nominated adviser at the earliest opportunity about the proper disclosure of these types of arrangements. Nominated advisers should consult with AIM Regulation if they are in any doubt as to the disclosure requirements.
Date of publication: 24 September 2015
Regulation S, Category 3 securities
Due to certain restrictions under US securities laws, equity securities issued by US companies and other companies that do not qualify as "foreign private issuers" under US securities laws were historically not eligible for electronic settlement in the CREST system operated by Euroclear UK & Ireland ("EUI"). Such securities were generally settled in certificated form and flagged as Regulation S, Category 3 securities in the trading system ("Regulation S, Category 3 securities").
The introduction of the EU Regulation on Central Securities Depositories (Article 3(2)) requires transactions in transferable securities that take place on a trading venue (such as AIM) to be recorded in book entry form in a CSD (i.e. settled electronically). Accordingly, the Exchange has been working with EUI and other relevant parties for a resolution that will allow such securities to be able to be settled electronically.
The Exchange welcomed the publication by EUI on 11 May 2015 of its whitebook relating to its proposed "Euroclear UK & Ireland: Regulation S Category 3 Settlement Service". The service provides issuers of Regulation S, Category 3 securities with an electronic settlement service through CREST.
We expect all existing Regulation S, Category 3 securities to be eligible for electronic settlement by no later than 1 September 2015. We have updated the Rules of the London Stock Exchange for member firms (rule 1550) and accompanying guidance to the rule, which relates to all member firms trading Regulation S, Category 3 securities. For further details see Stock Exchange Notice N17/15 published on 7 August 2015.
New AIM applicants that propose to issue Regulation S, Category 3 securities are reminded to request a derogation from Rule 32 of the AIM Rules (transferability of shares) prior to admission and clearly disclose on the AIM Application form whether they are Regulation S, Category 3 securities, as they will be identified as such on the trading system with the letters "REG S". It should be noted that derogations from Rule 36 of the AIM Rules will no longer be available for such securities.
Further background can also be found in AIM Notice 41 published on 7 August 2015.
Date of publication: 7 August 2015
Consideration of free float
AIM is an international market for growth companies covering a broad range of sectors with a wide range of market capitalisations. Given this, the AIM Rules take a principles based approach to ensure that they are relevant to the needs of such companies.
A company’s free float is an important qualitative assessment, which can have a significant impact on the ability of the company to attract investors and the functioning of the secondary market. Whilst we do not prescribe levels of free float, the issue of free float is something that we consider an important factor in the work a nominated adviser undertakes when bringing an applicant to market. Sufficient free float is fundamental to the orderly trading and liquidity of the securities once admitted to AIM, which is inextricably linked to the company’s appropriateness to be admitted to AIM.
Nominated advisers will be aware that we often ask them to provide us with details about the factors they have considered in relation to free float when seeking to bring a company to AIM. As a consequence, this is an area where we thought it would be helpful to clarify some of the factors we often discuss with nominated advisers, including the following:
Date of publication: 1 June 2015
Pursuant to AIM Rule 31, AIM companies are required to have in place sufficient systems, procedures and controls to enable them to comply with the AIM Rules. This is an area which the nominated adviser is also required to consider.
Such consideration involves, for example, the review of financial policies and procedures documentation prepared by the company (in conjunction with its reporting accountants). Nominated advisers should approach this consideration in a meaningful way, which would go beyond merely a review of the relevant documents to include an assessment of whether those policies are capable of working in practice, taking into account the nominated adviser’s knowledge of the company and its management.
The Exchange also notes that such systems, procedures and controls must be in place by the time of admission.
Date of publication: 1 June 2015
AIM Notices are issued periodically, and contain information on AIM regulatory and administrative matters.
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