Business Analysis: Brokers sound alarm over US threat to AIM

London's stockbrokers are working on plans to launch an alternative to the junior Alternative Investment Market (AIM), should a new owner try to place curbs on what has made it such a success.

The brokers will either shift their business en masse to PlusMarkets, the former Ofex market, or set up a rival to AIM if Nasdaq tries to impose unwanted changes to the way it is run.

Nasdaq made a big noise about being "committed" to the junior market when it first put takeover proposals to the London Stock Exchange. But Bob Greifeld, the chief executive of the US exchange, caused alarm with his comments at the Boston College Chief Executives Club when he appeared to disparage the light regulatory framework governing AIM.

He complained that one of the unintended consequences of the Sarbanes-Oxley governance reforms in the US was "a global race to the bottom with respect to regulatory standards" among competitors who are picking up business Nasdaq might otherwise have cornered. Mr Greifeld said he was aware of the appeal of markets like AIM, but said the answer was to maintain "high standards".

The Prime Minister Tony Blair may be preparing to introduce a law to protect the London market from the possibility of US ownership bringing US regulations in the Queen's Speech this week.

But as AIM's owner, Nasdaq could run the market as it sees fit, and Mr Greifeld's comments have prompted brokers to formulate contingency plans should he seek to tinker with AIM's regulatory framework, or treat it with benign neglect by using it as a glorified feeder market.

Bringing AIM companies to market and advising them once there is a lucrative business for many of London's smaller brokers (and some larger ones). So far this year, 371 companies have joined AIM and £11.7bn has been raised.

That has generated fees in the region of £850m or so for brokers, accountants, lawyers, PR consultants and anyone else involved in advising companies on flotations.

Given this, it is no wonder brokers are concerned about what a Nasdaq takeover of the LSE might mean, and to have plans in place for an alternative should the worst happen.

The first option being discussed would be for brokers to withdraw their business from AIM and set up a rival, possibly with the help of any stock exchange executives who find themselves surplus to requirements.

The other would be to transfer their business to PlusMarkets, the rebranded and recapitalised Ofex run by Simon Brickles, who just happens to be the former head of AIM.

Andy Stewart, the chief executive of Cenkos Securities, says Cenkos became a major shareholder in Plus for this very reason. "I'm the second largest shareholder with 13.5 per cent after Winterflood Securities. One of the reasons I bought the stock is in case something like this did happen," he says.

"Nasdaq is talking global, global, global and perhaps AIM wouldn't fit. Perhaps they would demerge it, perhaps they would let it have its independence, but one way or another we will have a second market in London."

Tim Linacre, the chief executive of Panmure Gordon, agrees. He says: "We have Plus. If someone tries to destroy the basis of AIM, all the brokers will get behind an alternative.

"Whenever people try to get in the way of commerce in London, the people here find a way around it. If the US walks in and tries to stop AIM, we will find another way. We will carry on."

Still, both men are alive to the regulatory issues faced by AIM, which has, fairly or not, acquired a reputation as something of a financial wild west where the only rule that applies is caveat emptor (let the buyer beware).

So was Mr Greifeld in fact shooting at an open goal?

The LSE is alive to the danger and AIM is consulting on changes to its rulebook, which will impose new requirements on Nomads, the brokers whose role is to guide and regulate AIM companies.

The rules will require them to undertake greater due diligence on prospective AIM companies, which must include site visits - crucial for overseas companies. Nomads will have to have expertise in a client company's sector while requirements will be imposed on how they advise firms after they have floated. Disclosure requirements on AIM companies are also to be ratcheted up, including a demand that admission documents are easily available.

A spokesman for the exchange said: "We think the current, light regulatory, model is appropriate for a growth market like AIM and has been a key factor behind its success.

"However, we felt that there were a number of incremental steps needed to adapt that model to a bigger and more international market, which is what AIM has become." The consultation closes in the first week of December and, barring last-minute glitches, the new rules will be adopted early in the new year.

AIM also recently launched a crackdown on cash shells, which have been particularly prone to abuse. The share prices of these companies, which often used to sit around for years without acquiring any operating businesses, are easy to manipulate.

Many wealthy individuals have used them as tax dodges. Buy in for a song, watch the shares soar after your name becomes attached, gift them to a charity and then claim income tax relief on a donation that quickly becomes all but worthless when your name has disappeared from the shareholder register.

Then there was the short-selling scandal at Azure Holdings, which resulted in the stockbroker Evolution Group being fined £500,000 for market abuse by the Financial Services Authority after it emerged it had sold two and a half times the issued share capital of the company.

Names such as Regal Petroleum also make investors shudder. It plunged in value when it emerged that much-hyped Greek oil reserves were dry. With an ever-increasing number of companies coming to AIM from the former Soviet Union, many fear it will be a matter of when, and not if, a major scandal occurs.

Simon Cawkwell, the short trader known as Evil Knievel, yesterday raised concerns about "low-quality" Chinese companies coming to AIM in a letter to the Stock Exchange chief executive Clara Furse and the FSA managing director Hector Sants.

But Mr Stewart says it is unfair to categorise AIM as a dumping ground. "It's the same as football hooligans when England play Germany. The vast majority of fans are decent, but it gets spoiled for everyone by the 3 per cent or so who are out to cause trouble."

Martin Graham, the head of AIM, says: "The statistics show the failure rates on AIM are not that dissimilar to those on the main market. While retail investors do get capital gains tax and inheritance tax relief, some 57 per cent of investors are now institutional. They know they are buying companies at the steepest stage of their growth curve and they know smaller company markets are higher risk."

Since AIM started in 1995, 1,296 UK companies and 286 international operations have floated, and the exchange's boast that it is the world's most successful growth market may be true.

Given the controversy that would be generated were Nasdaq to try and meddle, perhaps it would see the value in selling the business to the brokers. There might not be a need for an alternative to AIM at all.