Foot Soldiers in Practice

As my contribution to this first edition of Master Investor, I have decided to clarify some points concerning regulation of AIM. This is partly because it is not understood and partly because it is complex and unusual.

AIM is a division or franchise (as the LSE likes to promote it) of the London Stock Exchange. There have always been fully-listed companies on the “main list”. But AIM recognises that many companies that might apply for full listing have no chance of succeeding since they are too early in their development to offer a reasonable expectation of constancy of successful endeavour. They can be too small to allow proper internal audit procedures or they can be based on unproved products and services. AIM allows public exposure without sullying the main list.

There was a time when the LSE was a monopoly in practice and was therefore thought casually by many investors to be responsible for general standards that must be observed if listing is to be maintained. Understandably, as AIM emerged, many investors supposed that this tradition, if such it can be termed, would persist.

The brutal truth is quite otherwise: the entire basis of AIM is on commercial wisdom as the LSE sees it. For AIM now has well over 1,000 AIM-listed companies who each pay the AIM franchise managers well upwards of £10,000 per annum on average. So the AIM franchise managers have a direct and constant interest in maximising the number of companies quoted on AIM. They are not concerned to identify whether an AIM-quoted company is properly run or valued. The test is whether the company can reasonably be expected on the balance of the probabilities to bring AIM and, ultimately, the LSE into disrepute. If so, out it goes.

To this end the AIM franchise deputes quality control to a Nominated Adviser, which is also answerable to AIM and has a massive interest in fees generated from their AIM-listed clients and which also must resign from such a position if it seems to the Nomad that their client company is behaving improperly. One can readily see the scope for slippage of standards.

For instance, should an AIM-listed company issue an RNS, which it might do by way of offering information or must do in terms of compliance with disclosure rules, the Nomad must verify such a statement. There are of course many standards to apply: is the statement reasonable as regards being probably true? Does it concur with documentary evidence which a Nomad would reasonably accept as supportive of the proposition that the RNS is neither misleading nor reckless? This is a hard test for a non-specialist as regards the AIM-listed client’s business. But the Nomad must just do his best.

As far as I am aware, no investor has yet successfully sued a Nomad for the consequences of alleged failure to carry out these checks. However, there must remain the possibility of such an action and this would certainly keep a Nomad on its toes.

AIM works as a feature of the British economy for as long as investors are prepared to go on putting up hard cash whether when subscribing for new or when acquiring stock in the market. The day they tend to lose the will, AIM is finished.

So far this has not happened. But I expect that one day it will for a while. However, it will always return in one form or another since investors are addicted to taking risk. It’s just a question of when they will come out of their trenches and have a go.

A case in point

Last month I commented upon Gate Ventures (GATE) noting that it is grotesquely overvalued in relation to its probable worth. Indeed on 12th March Gate itself pointed out that they are mystified by the rise in the share price. It had been floated only a couple of days previously. But I think Gate are coming the raw prawn.

At the time of my snippet Gate stood at around 73p. On 20th March it excelled itself, touching 180p. When suddenly, late on in the day, Gate announced that they are still mystified by the rise given that the only investment contemplated by Gate is of the order of £300,000 at most and, in any event, not very exciting. Given that the initial subscriptions raised around £3m, there is still £2.7m to hand for lunch or lunches (this latter if you really want to make a point).

Ever in the service of the public, I had earlier written to AIM’s regulation department as follows: “Dear Sirs, You may be interested to know that GATE is a stock distribution fraud engineered by in effect a nil public float and an undisclosed concert party of all the initial subscribers. They lend their stock to others who sell into the strength generated by suckers coming through Far Eastern brokerage businesses which in turn place orders with London brokers. When the suckers want to sell they get the run around.

Even the mildest inspection will disclose that GATE is insanely overvalued at 170p. See the RNS of 12th March 2015.”

One cannot borrow stock. But one can marvel at man’s inhumanity to man.

Master Investor Conference

On Saturday 25th April Master Investor again hosts the annual show at The Exhibition Centre in Islington. I am sure that there will be many engaging speakers bringing their experience alive in public. I look forward to meeting you all.