AIM promises a roller-coaster for brave

The Stock Exchange is taking a big gamble in its latest attempt to launch a second-tier market

The Alternative Investment Market, the Stock Exchange's latest attempt to launch a successful second-tier stock market, promises to be the closest thing to a pure gamble that the authorities would risk putting their names to, and a veritable roller-coaster ride of dramatic success and abject failure for small shareholders.

Due to be launched on 19 June, the market replaces both the Unlisted Securities Market, which finally expires at the end of 1996, and Rule 4.2, a trading facility for occasionally dealt shares.

Although it is governed by the Stock Exchange, the rules for entry to the market are a great deal laxer than for its main market, a deliberate attempt to allow small companies without long trading records access to investment capital and an exit route for venture capitalists wanting to realise their profits.

The need to create a new market was twofold: changes in European securities law rendered the USM indistinct from the main market; meanwhile, Rule 4.2, a matched bargain facility, is not really a market at all, as investors are often left with highly-illiquid shares, discouraging investment.

AIM ought to provide a half-way house between the two, and in theory offers firms a cheap route to quotation.

Likely applicants will include regional companies, management buy-outs, former Business Expansion Scheme companies, even start-ups. Some companies have said they will transfer from the 4.2 market, although others are less keen.

How many will apply to join the market, however, remains unclear, especially because the life of Rule 4.2 has been extended until the end of September to allow companies more time to decide whether to transfer, seek a full listing or cease trading on a market.

Another potential drawback of AIM is a reluctance on the part of some brokers and investing institutions to become involved, a fact private investors would be wise to note.

The strength of criticism has prompted the Stock Exchange to tighten its original extremely lax rules. Companies must now appoint a nominated broker and adviser - they can be the same firm - to oversee the production of a prospectus, and must select them from a nominated list, published today (see box).

Respectable advisers feel they might be squeezed out of the business by firms prepared to run the risk of bringing companies to the market with only scant due diligence so they can offer a cut-price deal.

One sponsor has offered to get companies a quotation for an all-in price of pounds 50,000. Others say it is impossible to do a proper job for that price and warn that falling standards will result in companies simply using the market as a way of getting a quotation and not to raise fresh capital.

So what safeguards are there? The main support is supposed to be the presence of the nominated adviser. If that adviser resigns the shares will be suspended until a replacement is found. But in reality the market is unprotected even by the normal standards of equity investment.

There is no compensation scheme for investors who lose their money and the onus is quite clearly on them to make up their own minds about the risks involved.

Caveat emptor: there will undoubtedly be a fair share of complete failures. But the market should not be written off completely and pooled investments are likely to be created which will reduce some of the risks.

The attraction of the market is that it genuinely provides a chance to get in on the ground floor with the next Glaxo, and with the same advantageous tax treatment accorded unquoted investments. The odds of striking it rich might be slim, but probably a great deal higher than winning the lottery.

In sum, these companies are not going to be a sensible home for anything other than money investors can afford to lose. But some people will undoubtedly make a handsome profit from AIM.

AIM: Nominated advisers and brokers

Allied Provincial

Brown Shipley

Close Brothers

Credit Lyonnais Laing

English Trust

Gerrard Vivian Gray

Henderson Crosthwaite Corporate

Nabarro Wells and Co

NCB Stockbrokers

Peel Hunt

Shore Capital Stockbrokers

Williams de Broe

Brewin Dolphin Bell Lawrie

Charles Stanley

Collins Stewart

J&E Davy

Granville Davies

Greig Middleton

KPMG

Neill Clerk Capital

Panmure Gordon

Rowan Dartington

Smith and Williamson Securities

Wise Speke Ltd