AIM A BRIEF GUIDE

Freeth Cartwright LLP

WARNING
This brief guide is intended to be a basic summary for directors of companies incorporated in England and Wales which are considering admission to AIM, of some of the legislation, rules and regulations which are applicable. This brief guide is not intended to be an authoritative and comprehensive guide to AIM or any other legislation or regulations applicable to companies admitted to AIM or considering admission to AIM. For that, professional advice should be obtained in each and every case.

Freeth Cartwright LLP August 2011

NCF/6/10752131

1.

ADVISERS 1.1. The company will first have to appoint advisers with the necessary skills and experience. A personal rapport between management and its advisers is important. 1.2. Under the AIM Rules for Companies (AIM Rules) the company is required to appoint and retain a Nominated Adviser (otherwise known as a Nomad). It is the Nominated Advisers responsibility to manage the flotation and to advise on matters such as the suitability of the company to be admitted to AIM, the timetable for the float, the structure and composition of the companys board and (together with the broker) the pricing of its shares. In addition to its responsibilities to the company the Nominated Adviser also owes obligations to the London Stock Exchange (the Stock Exchange). For example, the Nominated Advisor is required to confirm certain matters to the Stock Exchange under Schedule 2 of the AIM Rules for Nominated Advisors (Nomad Rules) including that: the directors have received satisfactory advice and guidance as to the nature of their obligations to ensure compliance with the AIM Rules on an ongoing basis; to the best of the Nominated Advisers knowledge and belief, having made due and careful enquiry, all relevant requirements of the AIM Rules and the Nomad Rules have been complied with; and the Nominated Adviser is satisfied that the company, and the securities which are the subject of the application, are appropriate to be admitted to AIM. Under the Nomad Rules, the Nominated Adviser will, therefore, want to ensure that it is aware of all relevant issues in relation to the company and its admission.

The Nominated Adviser also has ongoing responsibilities to both the company and the London Stock Exchange including the following: it must be available at all times to advise and guide the directors of the company to ensure compliance with the AIM Rules; the provision to the London Stock Exchange of such information as it may require; it must satisfy itself that the company has sufficient procedures in place to comply with the AIM Rules for example the release of unpublished price sensitive information, and the regulation of Close Periods (see Chapters 5,6 and 7) 1.3. The role of the Nominated Broker is to manage the relationship between the company and the market, including potential investors. This includes assessing demand for the companys shares, marketing the shares to investors and keeping the company informed of market conditions. Nominated Brokers specialise in specific sectors and this may well influence the companys choice of broker. Often the Nominated Adviser and the Nominated Broker are one and the same organisation. 1.4. The Reporting Accountants function is to review the companys financial record and to produce the Long Form Report, the Short Form Report (which will be included in the Admission Document) and the Working Capital Report. 1.5. Solicitors will be appointed to both the company and the Nominated Adviser. The companys solicitors will advise the company on all aspects of the flotation including pre-flotation restructuring, carrying out due diligence on the company and verifying the Admission Document. The Nominated Advisers solicitors will advise on legal agreements between the company and the Nominated Adviser and will also help in preparing the Admission Document. 1.6. The company will need to appoint financial PR advisers, both to generate positive publicity in relation to the flotation and to assist in raising awareness of the company and to promote the liquidity of the companys shares after admission. 1.7. The company will also need to appoint registrars and printers.

1.8.

The company will enter into engagement letters with its advisers. The main role of these are to set out the scope of services which each of the advisers are to provide, the fees payable to the advisers and any limitations on their liability or indemnities which the company is to provide.

2.

ADMISSION DOCUMENT 2.1. Introduction If a Market is to run successfully, it is vital that investors have all material information available to them both when the company comes to the Market and afterwards. The process of coming to the Market can, at times, be something of a grind. This is because of the amount of due diligence required to ensure that the Market has all the material information which investors need to be able to make a decision as to whether or not to invest in the company. This information is contained in what is known as the Admission Document. The AIM Rules detail what the Admission Document must contain. In the case of most admissions to AIM, all that is required is an Admission Document. In the case of companies listed on AIM Designated Markets eg the Official List, NYSE, Nasdaq, Euronext etc a detailed pre-admission announcement 20 clear days before the expected admission date must be made but no Admission Document is required. In some cases (Open Offers or Rights Issues for example) a full prospectus, pre-vetted by the Financial Services Authority (FSA), is required. The principle requirement of the AIM Rules is that the Admission Document must comply with the Prospectus Rules (except for a number of significant specified provisions) which came into force in the UK on 1 July 2005 and replaced the Public Offers of Securities Regulations 1995. The Prospectus Rules (as modified for AIM) set out certain specific requirements, including: 2.1.1. financial information (to which the AIM Rules add a requirement for a working capital statement and certain additional requirements where the Admission Document includes profit forecasts, estimates or projections);

2.1.2. 2.1.3. 2.1.4. 2.1.5. 2.1.6. 2.2.

details of shares to be offered; details of directors (to which the AIM Rules add certain additional requirements); details of the expenses of the flotation; general details about the company and a business overview; what the money raised is to be used for.

Responsibilities for the Admission Document The Prospectus Rules (as modified for AIM) require those responsible for the Admission Document (usually the directors) to be named and to declare that they have taken all reasonable care to ensure that the information contained in the part of the prospectus for which they are responsible is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import. The AIM Rules (Schedule 2 paragraph (k)) require the applicant company to disclose (apart from the specified information) any other information which it reasonably considers necessary to enable investors to form a full understanding of: 2.2.1. the assets and liabilities, financial position, profits and losses and prospects of the applicant and its securities for which admission is being sought; 2.2.2. 2.2.3. the rights attaching to those securities; and any other matter contained in the Admission Document.

Sections 397(1) and 397(2) of the Financial Services and Markets Act 2000 (FSMA) impose criminal liability in respect of: misleading or deceptive statements, promises or forecasts dishonestly or recklessly made; concealment of material facts (dishonestly or recklessly) for the purpose of inducing someone to make or refrain from taking an investment; and behaviour which creates a false market (s397(3) FSMA) punishable by up to 7 years in prison and/or a fine. Criminal liability may also be incurred under section 19 of the Theft Act 1968 or the Fraud Act 2006.

It is an offence, under s398 FSMA to give the Financial Services Authority (FSA) false or misleading information. Under s400 FSMA if an offence is committed by a company under FSMA and is shown to have been committed with the consent or connivance of an officer of the company or is attributable to his/her neglect, that officer is liable as well. Civil liability may be incurred for false or misleading statements or omissions under section 90 FSMA; misrepresentation (Misrepresentation Act 1967); negligent or fraudulent mis-statement or deceit (tortious remedies); Dissemination, Misleading Behaviour or Market Distortion under the Market Abuse regime contained in section 118 of FSMA (see paragraph 6.3) or breach of directors duties. contractual warranties contained in the Placing Agreement. Compensation is payable to anybody who may suffer loss ie, principally investors. So who may be responsible? The answer is the company, its directors and anybody else who authorises the contents of any particular part of a Prospectus. A typical example of the latter is the auditors of the company in connection with the Accountants Report. Liability may also be

incurred to the Nomad and institutions with whom shares have been placed under the

A rigorous due diligence and verification exercise is in the interests of all parties to the transaction; the Nominated Advisers whose credibility depends on bringing to the Market companies who are going to survive and prosper on it; the investors and the people whose funds they manage and, last but not least, the companies themselves and their directors who may incur personal liability if the Admission Document is materially wrong. Verification is the painstaking and laborious process whereby each statement in the Admission Document is checked to ensure that it is true, accurate and not misleading. The justification for each such statement is then recorded in Verification Notes. The process is usually conducted by the companys solicitors and reviewed by the Nominated Advisers solicitors.

3.

INSURANCE What is a directors potential liability? And is there any way a director can seek to protect himself? A claim might materialise or trouble may arise with a regulatory authority (for example, a licencing or planning authority), which might have a significant impact on the companys trading prospects. If somewhere within the companys organisation somebody knows something about these potential problems, the directors may have a potential liability if the Admission Document says nothing about it. If the shares reduce in value as a result, the investor (quite possibly an institution) will have a claim for its loss. Two types of cover are available:3.1. Directors and Officers Liability Insurance This policy is taken out by a company to protect its directors from claims for negligence. It is not geared specifically to flotations. Directors may well find, therefore, that the sum insured comes nowhere near to matching the funds raised on flotation (and hence the potential loss). The cover is used only to protect the directors. However, cover can now also be obtained for the company as well. Directors and Officers Liability Insurance (which has to be renewed from year to year) is usually available through the companys insurance brokers. 3.2. Prospectus Liability Insurance This policy is specifically geared to Prospectuses and the Admission Document. It covers both the company and its directors. Cover usually lasts for six years (the period during which claims can be brought) and payment is usually by a one-off premium payment. Since premiums are usually expensive,

it is relatively uncommon to purchase cover. Prospectus Liability Insurance is usually only available through specialist underwriters in the City. The terms of each policy and the application forms should be looked at by the companys solicitors. One application form for Prospectus Liability Insurance which we have seen sought to exclude liability for negligence ie the very liability which the directors are seeking to protect themselves from. On negotiation, the insurers were prepared to amend the clause concerned, so that pure negligence was not excluded. The deliberate withholding of information, however, will not be covered.

4.

SHARE OPTIONS Public companies need to hire the best talent they can. Share option and incentive schemes are a vital ingredient of any executive director's salary and benefits package and are also used by many public companies to reward and incentivise some or all of their other staff. In the case of high technology companies in particular, share option and incentive schemes are a key part of a companys strategy to retain key staff in a highly mobile industry.

The following is a summary only of the various schemes available and specific advice should be taken if you wish to implement any one of them: 4.1. Enterprise Management Incentives Share Option Schemes (EMI) This is a highly flexible scheme which gives major tax benefits, so where it can be used it is very popular. Key features include: No income tax or national insurance liability on the exercise of the options provided that certain conditions are satisfied. A high level of flexibility for example, the option price can be the nominal value of a share even if this is lower than market value. The shares are subject to Capital Gains Tax (CGT) rather than income tax. CGT is due only when the shares are sold, and applies

to the growth in value of the shares from the date the option is granted. This is a major benefit over other types of share option plan, since it means that the increase in value in the shares after the option is granted is subject to tax at the CGT tax rate (28% at present) rather than the normal 40% or 50% income tax higher rate. The companys gross assets must not exceed 30,000,000. The total value of shares in respect of which there are unexercised qualifying options must not exceed 3,000,000. An employee may not hold unexercised options in respect of shares with a total value of more than 120,000 at the time the options were granted. The option must be for fully paid non-redeemable ordinary shares. The option must be capable of being exercised within 10 years from the date it is granted, and must be non-transferable. Applies only to Qualifying Companies that is, a company carrying on a qualifying trade which would exclude, for example, property development and dealing, banking, hotels, nursing and residential homes, and financial activities.

4.2.

Approved CSOP Schemes. These are company share option plans which are approved by HM Revenue & Customs (HMRC). These schemes are more restrictive and have fewer tax benefits than EMI schemes, so they only tend to be used by companies that do not qualify for EMI, or where the maximum EMI limits have been reached. At the date the options are granted, the maximum value of shares covered must not exceed 30,000 per employee. The option price must be market value at the date the option is granted. They are only available to executive directors and employees, and will not be available to anyone with more than 25% of the issued share capital. There will be no income tax if the option is exercised no earlier than 3 years and no later than 10 years after the date the option is granted. There may be CGT on the eventual sale of the shares.

4.3.

Unapproved Option Schemes. These do not offer any major tax benefits, but the lack of tax benefits does mean that there is more flexibility than in the HMRC Approved CSOP and EMI Schemes. In common with Approved CSOP and EMI Schemes, there is no income tax on the date that the option is granted. However, when the options are exercised, income tax is payable on the difference between the exercise price under the option scheme and the market value on the date the option is exercised. This means that whether or not an executive or employee decides to hold on to his/her shares, there is income tax and national insurance to pay if the value of the shares exceeds the exercise price under the option scheme. The income tax and national insurance contributions (NIC) will also be subject to the PAYE system. There may also be CGT on an eventual disposal. In contrast to Unapproved Schemes, the Share Incentive Plan and the Enterprise Management Incentives Scheme offer the opportunity to reward employees without the adverse tax and national insurance consequences of Unapproved Schemes. The ability to offer free or cheap shares and better tax and national insurance regimes are also significant improvements on the SAYE Schemes and Approved CSOP Schemes.

4.4.

The Share Incentive Plan This plan must (basically) be open to all employees on equal terms, unlike all the schemes listed previously. Free Shares employers can give up to 3,000 worth of free shares each year to employees free of tax and national insurance. Partnership Shares employees can authorise employers to deduct up to 1,500 each year of their pre-tax weekly or monthly salary to buy shares, meaning that employees effectively save the income tax and NIC on the amounts deducted.

Matching Shares employers can give employees up to 2 free shares for each partnership share the employee buys. The employer can choose which of these elements of the Share Incentive Plan it wishes to implement - it may be all 3 elements or any combination of them. Other main features of the Share Incentive Plan: The plan is operated through a trust. Trustees hold the shares for employees until they are taken out of the plan or sold. Employers will have greater flexibility to use free shares to reward employees for reaching performance targets (personal, team or divisional performance can be rewarded). The tax treatment of free, matching and partnership shares is aligned so that the plan is simpler to operate and easier to communicate. Employees who keep their shares in the plan for 5 years pay no income tax or NIC on those shares. Employees who take their shares out of the plan after 3 years will pay income tax and NIC on no more than the initial value of the shares any increase in the value of their shares while they are in the plan will be free of income tax and NIC. Employees who take their shares out of the plan in less than 3 years will pay income tax and NIC on the value of the shares when they cease to be held in the plan. Employees will not pay any tax on dividends paid on shares in the plan provided those dividends are used (up to an annual limit of 1,500 per employee in each tax year) to acquire additional shares in the company. Free and matching shares must be held in the plan for at least 3 years (but no more than 5 years). Partnership shares can be withdrawn from the plan at any time but employees doing so may incur an income tax and national insurance charge (see above).

The plan can provide for free and matching shares to be forfeited if employees leave the plan within 3 years of the award, unless the employee leaves for certain specified reasons such as redundancy or retirement. Matching shares may also be subject to forfeiture if the corresponding partnership shares are withdrawn within 3 years of purchase. Shares have to be transferred to employees when they leave their job. If that transfer is within 5 years of the date of the award of the shares, there may be an income tax and national insurance charge (see above) unless the employee leaves for certain specified reasons such as redundancy, retirement, death or disability. CGT - if the shares are kept in the plan until they are sold, employees will not be liable to such CGT. If the shares are taken out of the plan there will be no CGT charge at the time of withdrawal. If the shares are later sold there will be a chargeable gain equal to the increase in value after the shares were withdrawn from the plan. 4.5. SAYE Linked Share Option Schemes. Again this scheme must be open to all employees with no preference to directors or senior employees. Contributions up to 250 per month are paid under a SAYE (save as you earn) contract with a building society or a bank. The contributions are usually deducted from pay. At the end of the plan period, the contributions can be used to buy shares at the option price set at the beginning. Although the employee does not get tax relief on the contributions paid, he/she gets the benefit of tax-free interest and bonuses at the end of the SAYE contract. The scheme enables an option to be granted now to acquire shares at a price which is not less than 80% of the market value of the shares at the time the option is granted. The proceeds of the linked SAYE contract are used to purchase the shares at the option price. When the option is exercised in approved circumstances, there is no income tax charge on the excess of the market value over the price paid. On a disposal CGT may be payable (subject to taper and other reliefs which may be available).

4.6.

Share Incentive Guidelines The Association of British Insurers and the National Association of Pension Funds and the Stock Exchange have issued joint non-statutory guidelines (which are not binding). In essence, the guidelines are as follows:No more than 10% of the issued share capital of a company should be subject to option or other incentive schemes within any 10-year period. Options should only be exercised if performance targets are hit. Performance targets should be clearly linked to the achievement of challenging and stretching financial performance in the context of prospects for the company and the prevailing economic environment. No more than 5% of the issued share capital of a company should be available to executive directors on a discretionary basis. In the case of small companies that can be increased up to 10% provided that the total market value of the capital utilised for the scheme at the time of grant does not exceed 1,000,000.

5.

CORPORATE GOVERNANCE 5.1. Unlike the Official List it is not compulsory for AIM companies to comply with corporate governance codes of practice. Nevertheless, if a company wants to raise money on AIM, investors will expect the company to comply with corporate governance guidelines based on the UK Corporate Governance Code. The Quoted Companies Alliance (QCA) has devised a set of corporate governance codes of practice based on the UK Corporate Governance Code but specifically adapted for smaller companies. It is more than likely that the Nominated Adviser or the Nominated Broker will require compliance with at least some of these codes of practice (QCA Guidelines). What are these guidelines and what are they likely to mean, in practice, for a company coming to AIM?

5.2.

The QCA Guidelines are a series of statements of principle supported by examples of what may constitute good corporate governance. However, it is left to each individual company to implement its own corporate governance structure and to explain to its shareholders why it has done so. Whilst there are likely to be a number of features which are common to all smaller quoted companies, nevertheless, it is open to a company to depart from the norm as long as it has good reason for doing so and can explain its reasons for doing so to its shareholders. This is particularly so in relation to the independence of non-executive directors.

5.3.

The QCA Guidelines are as follows: The QCAs view is that the purpose of corporate governance is to create and maintain a flexible, efficient and effective framework for entrepreneurial management that delivers growth in shareholder value over the longer term. To achieve this, 12 essential guidelines have been identified that represent good practice and need to be considered: 5.3.1. Flexible, efficient and effective management: Structure and Process The company should put in place the most appropriate governance methods, based on its corporate culture, size and business complexity. There should be clarity on how it intends to fulfil its objectives and, as the company evolves, so should its governance. Responsibility and accountability It should be clear where responsibility lies for the management of the company and for the achievement of key tasks. The board has a collective responsibility for the long-term success of the company and the roles of the chairman and the chief executive should not be exercised by the same individual. Board balance and size The board must not be so large as to prevent efficient operation. A company should have at least two independent non-executive directors (one of whom may be the chairman provided he or she

was deemed independent at the time of appointment) and the board should not be dominated by one person or a group of people. Board skills and capabilities The board must have an appropriate balance of functional and sector skills and experience available to it in order to make key decisions and plan for the future. The board should be supported by committees (audit, remuneration and nomination) that have the necessary character, skills and knowledge to discharge their duties and responsibilities effectively. Performance and development The board should periodically review its performance, its committees performance and that of individual board members. This review should lead to updates of induction, evaluation and succession plans. Ineffective directors (both executive and nonexecutive) must be identified and either helped to become effective, or replaced. future business needs. periodically refreshed. Information and support The whole board and its committees should be provided with the best possible information (accurate, sufficient, timely and clear) so that they can constructively challenge recommendations made to them before making their decisions. Cost effective and value added There is a cost to achieving efficient and effective governance; however, this should be offset by increases in value in the company. There should be a clear understanding between boards and shareholders of how this value has been added. This will normally involve the publication of key performance indicators, Non-executive directors should be provided with access to external advice when necessary. The board should ensure that it has Membership of the board should be available the skills and experience necessary for its present and

which align with strategy and feedback through regular meetings between shareholders and directors. 5.3.2. Entrepreneurial management: Vision and strategy There should be a shared vision of what the company is trying to achieve and over what period, as well as an understanding of what is required to achieve this ambition. This vision and direction must be well communicated, both internally and externally. Risk management and internal control The board is responsible for maintaining a sound system of risk management and internal control. It should define and

communicate the companys risk appetite, and how it manages its key risks, while maintaining an appropriate balance between risk management and entrepreneurship. Remuneration policy should help the company to meets its objectives whilst encouraging behaviour that is consistent with the agreed risk profile of the company. 5.3.3. Delivering growth in shareholder value over the longer term: Shareholders needs and objectives: A dialogue should exist between the shareholders and the board so that the board understands shareholders needs and objectives and their views on the companys performance. Vested interests should not be able to act in a manner contrary to the common good of all shareholders. Investor relations and communications: A communication and reporting framework should exist between the board and all shareholders, such that shareholders views are communicated to the board and shareholders, in turn, understand the unique circumstances of, and any constraints on, the company. Stakeholder and social responsibilities: Good governance includes a response to the demands of corporate social responsibility (CSR). This will require the

management of social and environmental opportunities and risks. A proactive CSR policy as an integral part of the companys strategy can help create long-term value and reduce risk for shareholders and other stakeholders. 5.4. So what is this likely to mean in practice? 5.4.1. 5.4.2. 5.4.3. The company will probably need a minimum of two non-executive directors. The Chairman will probably be a non-executive director. There is a likely to be a formal schedule of matters specifically reserved for the boards decision and a statement of which types of decisions are to be taken by the board and which are to be delegated to management. 5.4.4. The establishment of an Audit Committee which will have responsibility (amongst other things) for monitoring the integrity of the companys financial statements and announcements; reviewing internal controls and satisfying itself that the companys approach to risk and its management of risk conforms with the risk appetite determined by the board. 5.4.5. The establishment of a Remuneration Committee to set the remuneration of executive directors. Remuneration needs to be aligned to performance. The Remuneration Committee also needs to explain carefully in the annual report why they have chosen the remuneration structure adopted. 5.4.6. 5.4.7. 5.4.8. The establishment of a Nominations Committee to handle appointments to the board. The periodic review by the board of its own performance and the performance of its committees. The board should review all material internal controls and risk management systems annually. 5.4.9. A company may need to publish a corporate governance statement annually describing how it achieves good corporate governance. The report can appear on the companys website or in the annual

report and accounts. The QCA Guidelines contain a number of Minimum Disclosures such as:5.4.9.1. the identity of the chairman, chief executive and chairman and members of the audit, nomination and remuneration committees; 5.4.9.2. 5.4.9.3. 5.4.9.4. any performance evaluation procedures a company applies; attendance at board meetings; an explanation as to how, if the auditor provides significant non-audit services, auditor objectivity and independence is safeguarded; 5.4.9.5. 5.4.9.6. a summary of how the evaluation procedures have evolved from the previous year; the results of the evaluation and action taken or planned as a result. 5.4.10. Additional information which should be made available to shareholders on the companys website include: 5.4.10.1. the terms and conditions of appointment of nonexecutive directors 5.4.10.2. 5.4.10.3. 5.4.10.4. 5.4.11. the terms of reference of the Audit, Remuneration and Nomination Committees; a description of the chairmans and chief executives roles; the annual report and other governance related material, including notices of general meetings. Regular ongoing dialogue between the Company and its shareholders. 5.5. The NAPF Guidelines In April 2007 the National Association of Pension Funds (NAPF) published its Corporate Governance Policy and Voting Guidelines for AIM Companies. The guidelines are intended to provide guidance on the issues which the NAPF

believes are of key importance and are intended to supplement the QCA Guidelines which the NAPF say are generally accepted as setting appropriate standards for smaller companies. 5.6. The Stewardship Code The UK Stewardship Code was issued by the Financial Reporting Council in July 2010 and represents part of the investment industrys response to the weaknesses identified in the aftermath of the financial crisis. The Stewardship Code aims to enhance the quality of engagement between institutional investors and companies to help improve long term returns to shareholders and the efficient exercise of governance responsibilities. Engagement includes pursuing purposeful dialogue on strategy, performance and the management of risk, as well as on issues that are the immediate subject of votes at general meetings. The core principles of the Code are as follows: 5.6.1. Institutional Investors should: publically disclose their policy on how they will discharge their stewardship responsibilities; have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publically disclosed; monitor their investee companies; establish clear guidelines on where and how they will escalate their activities as a result of protecting and enhancing shareholder value; be willing to act collectively with other investors where appropriate; have a clear policy on voting and disclosure of voting activity; report periodically on their stewardship and voting activities.

6.

DEALINGS IN SHARES BY DIRECTORS 6.1. Rule 21 Of The Aim Rules 6.1.1. All companies admitted to AIM must comply with Rule 21 of the AIM Rules relating to share dealings of directors and applicable

employees. Rule 21 does not impose criminal sanctions. However, if there is an infringement of Rule 21, it is quite likely that there has also been an infringement of Part V of the Criminal Justice Act 1993 (CJA 1993) (and hence a potential criminal liability) or a civil liability under section 118 of the FSMA (see paragraphs 6.2 and 6.3). Rule 21 applies to directors and applicable employees. In the case of the latter, this means any employee who, on account of his/her office or employment, is likely to be in possession of unpublished price sensitive information or any employee who (together with his/her family) holds more than 0.5% of the companys shares. The term unpublished price sensitive information broadly means: information relating to the company which is specific (as opposed to general); has not been made available to the public; and if it were made public would be likely to have a significant effect on the price or value of the companys securities. For this purpose, it is assumed that any transaction which has to be notified to a Regulatory Information Service (RIS) (see paragraph 10) is price sensitive for example, details of directors joining or leaving the Board, the resignation of the Nominated

Advisor/Nominated Broker, details of grants of and dealings in options by directors (and those connected with them), and details of substantial transactions outside the ordinary course of business (see paragraph 7). 6.1.2. Rule 21 of the AIM Rules require: 6.1.2.1. AIM companies to ensure that directors and applicable employees do not deal in securities

during a close period. For an AIM company, a close period is: 6.1.2.1.1. 2 months immediately preceding the announcement of the annual results or, if shorter, the period from the relevant financial year end up 6.1.2.1.2. to the time of the announcement; and in the case of companies reporting on a half yearly basis, the period of 2 months immediately preceding the announcement of the half yearly results or, if shorter, the period from the end of the relevant financial period up to the time of the announcement; or for a company reporting on a quarterly basis, the period of 1 month immediately preceding the

announcement of the quarterly results or, if shorter, the period from the relevant financial period end to and including the time of the announcement; 6.1.2.2. for dealings outside a close period, that a director must not deal in any securities when he/she is in possession of unpublished price-sensitive information or where the proposed dealing would take place at a time when it is reasonably probable that an announcement of unpublished price-sensitive information will be required. 6.2. INSIDER DEALING

6.2.1.

The Offences Section 52 of the CJA 1993 creates 3 insider dealing offences as follows: dealing; encouraging dealing; disclosing inside information, otherwise than in the proper performance of ones job. The offence of insider dealing under the CJA 1993 is committed if an individual who has information as an insider deals on a regulated market (which, for the purposes of the CJA 1993, includes AIM, as well as the Official List, and other UK and foreign exchanges) or through a professional intermediary (for example, a broker) in securities which are price affected securities in relation to the information. The offences of encouraging dealing and disclosing insider information are defined along similar lines. By section 56 CJA 1993 inside information is information which: is about the company or news which might affect the companys business profits; is not publicly available (that is, not readily available to those who trade in securities); if made public, would be likely to have a significant effect on the price of any securities (NB a person with inside information about one company may also be an insider in relation to another company. example); must be about particular securities, be specific and precise. Takeovers are a typical

The defences include: Where the accused shows that no profit or loss was expected from the dealing; Where, in the case of disclosure of inside information, there was no expectation that dealing would result; 6.2.2. Where the inside information made no difference to the insiders action ie he would have traded anyway. Penalties The maximum penalties are 7 years in prison and an unlimited fine.

6.3.

LIABILITY UNDER FSMA MARKET ABUSE 6.3.1. The intention of the market abuse regime is to punish behaviour which is damaging to markets but which is not caught by existing criminal offences. Imposing civil liability, it supplements rather than replaces the criminal regimes for market manipulation (contained in section 397 FSMA and described in paragraph 1 above) and insider dealing (under CJA 1993). Civil penalties which the Financial Services Authority (FSA) can impose include: 6.3.2. unlimited civil fine payment of compensation to victims. By section 118 FSMA, market abuse is behaviour (whether by 1 person alone or by 2 or more persons jointly or in concert) in respect of qualifying investments traded on a prescribed market. Requiring or encouraging others to engage in behaviour which amounts to market abuse is also caught by the regime. Market abuse is behaviour (that is, action or inaction) which:

6.3.2.1.

occurs

in relation

to qualifying investments

admitted (or in respect of which a request has been made for admission) to trading on a prescribed market (or in the case of the market abuse, insider dealing and the improper disclosure behaviours only, in relation to investments which are related investments s118(1)(a), FSMA) and 6.3.2.2. falls within any one or more of the seven types of behaviour set out in sections 118(2) to 118(8) of FSMA, that is: Insider dealing (section 118(2), FSMA). This occurs where an insider deals or attempts to deal in a qualifying or related investment on the basis of inside information relating to the investment in question; An example of market abuse insider dealing would be where a director of a listed company which has received a takeover offer buys shares in the company based on an expectation that the price will increase when the offer is announced. It would also cover the companys professional team and, possibly, a friend who buys shares in the company on the strength of the information given to him if that friend knows or could reasonably have been expected to know that it was inside information; Improper disclosure of inside information (also known as tipping off) (section 118 (3), FSMA). This occurs where an insider discloses inside information to another person otherwise than in the proper performance of his employment,

profession or duties. It includes behaviour which occurs in relation to related investments; An example of improper disclosure of inside information would be where a listed companys director tells a friend that the company is planning to take over a major competitor; Misuse of information (section 118(4), FSMA). This occurs where behaviour (not falling within the behaviours of market abuse, insider dealing or improper disclosure) is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would be, or would be likely to be, regarded by him as relevant when deciding the terms on which transactions in qualifying investments should be effected; and the behaviour is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market . The behaviour covered here is not limited to behaviour in relation to qualifying investments and extends to relevant products. This section will cease to have effect on and from 31 December 2011; An example of misuse of information would be where a listed companys director tells a friend about a takeover offer received by the company and that friend places a fixed odds bet with a bookmaker that the company will be the subject of a takeover offer within a week;

Manipulating

transactions

(section

118(5),

FSMA). This is where the behaviour consists of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market) which either give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments; or secure the price of one or more such investments at an abnormal or artificial level; An example of a manipulating transaction would be the sale or purchase of a qualifying investment trades); Manipulating devices (section 118(6), FSMA). This consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance; An example of manipulating devices would be where a person takes a long position in a qualifying investment and then disseminates misleading positive information about the investment so as to increase its price (pump and dump) or taking a short position in a qualifying investment and then disseminating misleading negative information about the qualifying investment with a view to driving down its price (trash and cash); Dissemination (section 118(7), FSMA). This consists of the dissemination of information by where there is no change in

beneficial ownership or market risk (wash

any means which gives, or is likely to give a false or misleading impression as to a qualifying investment by a person who knew or could reasonably be expected to have known that the information was false or misleading. There is no requirement for the person to profit from dissemination of information; An example of dissemination would be where a person posts information in a chat room which he knows to be false or misleading (see also section 2 on page 4); Misleading behaviour behaviour (not falling or market distortion

(section 118(8), FSMA). This occurs where the within manipulating devices or

transactions,

manipulating

dissemination) is either likely to give a regular user of the market a false or misleading impression as to the supply of, demand for or price or value of qualifying investments; or would be, or would be likely to be, regarded by a regular user of the market as behaviour that would distort, or would be likely to distort, the market in such an investment, and the behaviour is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market . The behaviour that is to be regarded as occurring in relation to qualifying investments for these purposes includes behaviour which occurs in relation to relevant products (section 118A(3), FSMA). This section

will cease to have effect on and from 31 December 2011 ; An example of misleading behaviour or market distortion would be the movement of physical commodity stocks or an empty cargo ship if it might create a misleading impression as to the supply of or demand for a commodity (see also section 2 on page 4); The prescribed markets include the London Stock Exchange (both the Official List and AIM), Virt-x Exchange Limited and PLUS). Qualifying investments include shares, bonds, debt instruments, warrants, futures, options, units in unit trusts and any other investment admitted to trading in the European Economic Area (EEA). A related investment is one whose price or value depends on the price or value of the qualifying investment. This would cover various financial instruments relating to the shares of the Company which are traded on AIM. An example of a relevant product is the fixed odds bet referred to under the heading Misuse of Information. . 6.3.3. The market abuse regime will not apply to an activity falling within what is called a safe harbour (or exception), namely: a safe harbour described in the Code of Market Conduct (this is a code which the FSA has prepared). For example, a person is not prevented from acquiring an equity stake in a company with a view to pursuing a takeover bid simply because he knows that he will be making a bid.

behaviour which conforms with a FSA Rule, which says that behaviour conforming with that rule is not a market abuse. For example, behaviour conforming with any of the rules of the Takeover Code relating to the timing, dissemination or availability, content and standard of care applicable to a disclosure, announcement, communication or release of information.

Also, it should be borne in mind that information which can be obtained by research or analysis is to be regarded as generally available (section 118c (8) FSMA).

7.

PROVISION OF INFORMATION AIM RULES Unlike the Official List with AIM, the emphasis is on the provision of information to shareholders, rather than on obtaining shareholders consent. Unlike Official List companies, there are no rules for AIM companies relating to the content of companies reports/accounts (other than compliance with UK, US or international accounting standards and transactions with related parties in certain circumstances). The on-going rules applicable to companies listed on AIM, therefore, are less burdensome than those set out in the UKLA Listing Rules for companies on the Official List. The civil and criminal liability regime described in paragraphs 2 and 6.3 will apply to any information which is misleading. 7.1. Annual Accounts (AIM Rule 19) An AIM Company must publish annual audited accounts which must be sent to its shareholders without delay and, in any event, not later than 6 months after the end of the financial year to which they relate. An AIM company incorporated in the EEA must prepare and present these accounts in

accordance with the International Accounting Standards (with one minor exception). An AIM company incorporated outside the EEA must present accounts in accordance with either: International Accounting Standards US GAAP Canadian GAAP Australian International Financial Reporting Standards Japanese GAAP

The accounts must disclose any transaction with a related party that exceeds 0.25% in any of the various tests used to determine the size of a transaction pursuant to various AIM Rules. The accounts must specify the identity of the related party and the consideration for the transaction. year. 7.2. Publication of documents sent to shareholders (AIM Rule 20) Any document provided by an AIM company to its shareholders must be notified to a RIS (see paragraph 11) and an electronic copy sent to the Stock Exchange. 7.3. General Disclosure of Price Sensitive Information Rule II An AIM company must notify a RIS immediately of any change in its sphere of activity, financial condition, the performance of its business or in the expectation of its performance which are not public knowledge and which could, if made public, "lead to a substantial movement in the price" of its shares that is, "price-sensitive information". There is a general exception for "impending developments or matters in the course of negotiation". Companies are able to release such information to their advisers, persons with whom they are negotiating and representatives of trade unions (during negotiations) (see Guidance Note to Rule ll). The AIM The accounts must also contain details of each directors remuneration earned during the financial

Company must be satisfied that the recipients are aware that they cannot trade in the Companys shares before the relevant information has been supplied to RIS. If the AIM Company becomes aware that a breach of confidence may have occurred it may have to make an announcement. Under Rule 10 a Company must take reasonable care to ensure that any information supplied to a RIS is not misleading, false or deceptive and does not omit anything likely to affect the impact of such information. 7.4. Specific Duty to Notify Information There are also a number of specific instances where a company is obliged to notify a RIS under AIM Rules 17 and 18. For example: 7.4.1. preparation of a half yearly report within 3 months of the end of the relevant period and sending a copy to a RIS. The half-yearly report must be presented and prepared in a form consistent with that for the annual accounts. 7.4.2. 7.4.3. deals by directors and/or their families with their holdings of shares. changes in holdings of significant shareholders. A significant shareholder is one holding 3% or more of any shares. AIM companies, which are incorporated and have their principal place of business in Great Britain, also have to comply with Chapter 5 of the Disclosure and Transparency Rules published by the Financial Services Authority in the FSA Handbook, which are not dissimilar to AIM Rule 17. 7.4.4. 7.4.5. 7.4.6. 7.4.7. 7.4.8. any decision to pay or make a dividend or any other distribution. any change in the accounting reference date. any change in its registered office. any change in its legal name. appointment, resignation or removal of directors.

7.5.

Disclosure of Corporate Transactions 7.5.1. Substantial transactions (AIM Rule 12)

A substantial transaction is a transaction that exceeds 10% in any of the various tests used to determine the size of a transaction pursuant to various AIM Rules. It does not include transactions of a revenue nature in the ordinary course of business and transactions to raise finance which dot not involve a change in the fixed assets of the AIM Company or its subsidiaries A RIS must be notified without delay as soon as the terms of any substantial transaction are agreed, disclosing certain information including, for example, the particulars of the transaction.

7.5.2.

Related party transaction (AIM Rule 13) A related party is: 7.5.2.1. 7.5.2.2. 7.5.2.3. a substantial shareholder (ie a shareholder with more than 10% of the Companys shares) ; or a director; or an associate of a substantial shareholder or of a director (for example the family of a director or a substantial shareholder) A related party transaction is a transaction with a related party that exceeds 5% in any of the various tests used to determine the size of a transaction pursuant to various AIM Rules.

A RIS must be notified without delay as soon as the terms of a transaction with a related party are agreed, disclosing certain information including, for example, the name of the related party in question and the particulars of the transaction; the nature and extent of their interest in the transaction and such other information as is necessary for investors to evaluate the effect of the transaction on the AIM Company. Such a notification must also include a statement that the companys directors consider the

terms of the transaction to be fair and reasonable insofar as their shareholders are concerned. This is following consultation between the company directors and their Nominated Adviser. Directors should also not lose sight of their obligation to notify their company of transactions in which they have an interest pursuant to the Companies Act 2006. In such instances, shareholder approval may be necessary. 7.5.3. Reverse take-over (AIM Rule 14) This is an acquisition in a 12-month period, which for a company would: 7.5.3.1. exceed 100% in any of the various tests used to determine the size of a transaction pursuant to various AIM Rules; or 7.5.3.2. result in a fundamental change in its business, board or voting control; or 7.5.3.3. in the case of an investing company (ie a company which invests in the securities of other companies): depart substantially from its investing strategy stated in its Admission Document; or where no Admission Document was produced on admission, depart substantially from its investing strategy stated in its pre-admission announcement or stated in its circular Any agreement which would effect a reverse take-over must be: conditional on its shareholders consent being given in a general meeting; notified to a RIS without delay, disclosing certain information including, for example, the particulars of the

transaction (with additional information being required insofar as it is with a related party); and accompanied by the publication of an Admission Document in respect of the proposed enlarged entity and convening a general meeting. Where shareholder approval is given for a reverse take-over, trading in a companys securities will be cancelled. If the enlarged entity seeks admission of its securities to AIM, it must make an application in the same manner as any other applicant applying for admission for the first time. 7.5.4. Disposal resulting in a fundamental change of business Rule 15) 7.5.4.1. This is any disposal by a company which, when aggregated with any other disposal(s) over the previous 12 months, exceeds 75% in any of the various tests used to determine the size of a transaction pursuant to various AIM Rules. 7.5.4.2. Such a disposal must be: conditional on its shareholders consent being given in a general meeting; notified to a RIS without delay, disclosing certain information including, for example, the (AIM

particulars of the transaction (with additional information being required insofar as it is with a related party); and accompanied by the publication of a circular containing certain information and convening a general meeting. 7.5.4.3. Where the effect of a proposed disposal is to divest a company of all, or substantially all, of its trading

business activities, that company will, upon disposal, be treated as and an investing circular company. The

notification

containing

certain

information convening a general meeting must state the companys investing strategy going forward. An investing company will then have to make an acquisition that constitutes a reverse takeover or implement its investing strategy within 12 months of having received its shareholders consent. Similar provisions apply to any other action taken by the AIM Company which do not amount to disposals resulting in a fundamental change of business per se but where the net result is the same.

8.

SANCTIONS 8.1. Disciplinary action against a company (AIM Rule 42) If the Stock Exchange considers that a company has contravened the AIM Rules, the Stock Exchange may: 8.1.1. 8.1.2. 8.1.3. 8.1.4. issue a warning notice fine the company; censure the company; publish the fact that the company has been fined or censured for contravening the AIM Rules; and / or 8.1.5. 8.2. cancel the admission of the companys securities

Precautionary Suspension (AIM Rule 40) The Stock Exchange may suspend the trading of AIM securities where: trading in those securities is not being conducted in an orderly manner; the Stock Exchange considers that an AIM company has failed to comply with the AIM Rules;

suspension is necessary for the protection of investors; or the integrity and reputation of AIM has been or may be impaired by dealings in those securities.

The Stock Exchange will cancel the admission of AIM securities where they have been suspended from trading for 6 months (AIM Rule 41).

9.

FURTHER FUNDRAISING 9.1. A further Admission Document will be required for an AIM Company only when it is: 9.1.1. required to issue a Prospectus under the Prospectus Rules for a further issue of AIM securities; or 9.1.2. 9.1.3. 9.2. 9.2.1. seeking admission for a new class of securities; or undertaking a reverse takeover. the offer is made to or directed at qualified investors only examples of qualified investors are investment banks and other financial institutions; 9.2.2. the offer is made to or directed at fewer than 150 persons other than qualified investors; 9.2.3. 9.3. 9.3.1. 9.3.2. 9.3.3. the offer is for less than 5.0m. If the offer is for less than 5m no prospectus is required; If the securities are placed with a variety of qualified investors no prospectus is required; If funds are raised via an open offer or rights issue an Admission Document which is also fully compliant with the Prospectus Rules may be necessary unless the offer is otherwise exempt under the Prospectus Rules (see 9.2.1 to 9.2.3 above); 9.3.4. If admission of a new class of securities is being sought, an Admission Document will be necessary irrespective of the exemptions in the Prospectus Rules. As to whether or not that

Under the Prospectus Rules no prospectus will be required if, for example:

Conclusions:

Admission Document also has to be a fully compliant prospectus under the Prospectus Rules, however, will depend on whether the exemptions apply. 9.4. AIM Companies should also be aware of the pre-emption rights of existing shareholders both under the Articles of Association and the Companies Act 2006. An extraordinary general meeting of the AIM Company may have to be called to disapply these rights in whole or in part. 9.5. The same standards and obligations apply to information contained in offer documents and circulars as to the original Admission Document (see para 2)

10.

TAXATION AND THE AIM COMPANY For taxation purposes, a company listed on AIM is treated as an unquoted company. This means that, for a number of tax purposes, an AIM company is treated in the same way as a private company. This has a number of benefits for AIM shareholders. 10.1. Inheritance Tax: Business Property Relief At present, business property relief of 100% is available for shareholdings in unquoted trading companies. Provided that a number of conditions are

satisfied, an AIM shareholder may be eligible for relief on the value of his/her shares in the company. 10.2. Capital Gains Tax: Hold-over Relief on Gifts. A gift of shares is treated as a disposal for CGT purposes and, potentially, attracts CGT unless both donor and recipient agree to hold-over the gain. The relief is only available for certain types of assets, including shares in AIM companies, assuming that they are trading companies for tax purposes. 10.3. Enterprise Investment Scheme ("EIS") AIM companies may qualify for EIS. Under this scheme, an individual may invest up to 500,000 in cash in each tax year in shares in EIS companies that is, unquoted trading companies carrying on a qualifying activity over a set period. Income tax relief is available at 20% on the cost of the investment

which must be by way of subscription into new ordinary shares of the relevant company. Capital gains made on disposal of an EIS company's shares when they are sold at least 3 years after the initial subscription, will be free of CGT. The amount that can be raised is unlimited but EIS is limited to companies with gross assets (before investment) of less than 7m before and no more than 8m after the investment. The amount invested in an EIS can also be used to defer (but not eliminate) CGT from the disposal of other assets (hold-over reinvestment relief). Stringent and wide ranging conditions must be satisfied by both the company and the investor both at the time of investment and afterwards. 10.4. Venture Capital Trusts ("VCTs") VCTs are companies quoted on the Stock Exchange, each of which will own and manage a portfolio of investments in unquoted trading companies. Subscriptions for shares in VCTs have major tax benefits. It is worth being aware that VCTs can invest in AIM shares. 10.5. Relief for Losses in Unquoted Shares in Trading Companies A subscriber for AIM ordinary shares in a qualifying trading company who incurs a loss on disposal of those shares may claim to set off that loss against his/her other income, for income tax purposes, instead of claiming a capital loss on the disposal. However, the relief is not available to a purchaser of the shares. It should be noted that all of the reliefs described above are subject to detailed rules as to which types of companies may qualify. For example, companies which hold or deal in property or investments are unlikely to qualify for some or all of the reliefs. Further, as in the case of an EIS for example, there may be a number of restrictions as to what type of investor can qualify. This is likely to exclude shareholders who are also directors of the companies in which they hold their shares. The rules relating to the obtaining of relief are complex and professional advice should be sought in each case.

11.

REGULATORY INFORMATION INFORMATION PROVIDER (SIP)

SERVICE

(RIS)

AND

SECONDARY

A RIS is also known as the Primary Information Provider, it is a service that receives regulatory information from listed companies and other entities (for example, AIM companies), processes that information and disseminates (circulates) it to the market via a SIP. Examples of SIPs are Reuters and Bloombergs. SIPs bundle together information provided by RISs into a single source of regulatory information. Listed companies may contact any one of the following seven approved RIS: BusinessWire Regulatory Disclosure FirstSight provided by Cision Announce provided by Hugin ASA News Release Express provided by Market Wire PR Newsire disclose provided by PR Newswire RNS provided by the London Stock Exchange MarCo provided by Tensid Ltd of Switzerland

2nd Floor West Point Cardinal Square 10 Nottingham Road Derby DE1 3QT DX: 729800 Derby 25 Tel: (01332) 361000 Fax: (01332) 546111

Cumberland Court 80 Mount Street Nottingham NG1 6HH DX: 10039 Nottingham 1

1 Colton Square Leicester LE1 1QH DX: 744170 Leicester 41

Tel: (0116) 201 4000 Tel: (0115) 936 9369 Fax: (0115) 936 9378 Fax: (0116) 201 4001

St James Building 3 Floor 61-95 Oxford Street Manchester M1 6FQ DX 745360 Manchester 76 Tel: 0845 634 2540
rd

1 Heddon Street Mayfair London W1B 4DB DX 37209 Piccadilly Tel: 0845 050 3200

3 Floor 75 Colmore Row Birmingham B3 2AP DX 13024 Birmingham 1 Tel: 0845 634 2575

rd

NCF/6/10752131/LJ