SECURITIES REGULATION IN LOW-TIER LISTING VENUES: THE RISE OF THE ALTERNATIVE INVESTMENT MARKET

Fordham Journal of Corporate & Financial Law, 2008 by Mendoza, Jose Miguel

AIM, conceived by the LSE, embodies this novel approach to securities regulation. While the LSE's less stringent approach draws the attention of many large companies, AIM attracts the attention of small and mid-cap companies.25 In order to elude mandatory regulation, such as the European Union Directives, that increases transaction costs for listed firms, trading venues such as AIM are classified as exchange-regulated markets.26 AIM's model relies heavily on lower listing standards and lighter ongoing requirements for listed companies, paired with the so-called "Nominated Adviser," a private consultant that guides firms through their existence as listed companies.27 This alternative approach propelled AIM's rise as one of the world's fastest growing exchanges, as measured by the number of initial public offerings ("IPOs").28

AIM's thriving success led to an outbreak of similar trading venues across Europe.29 The Borsa Italiana sponsored the creation of Mercato Expandi in December 2003;30 the Irish Enterprise Exchange was created in April 2005;31 Euronext quickly followed suit, launching the Alternext venue.32 Even the Deutsche Börse emulates AIM with its "Entry Standard" segment, launched in October 2005.33 When the Nordic OMX introduced its First North tier, commentators proclaimed the start of a price war that could lead European securities markets into a regulatory race to the bottom.34 Adding to this wariness, the disastrous European experience with the now extinct "New Markets" still looms in the mind of policymakers and investors alike.35 Despite this ominous forecast, European low-cost market segments continue to flourish, even altering the course of international cross-listings.36

This Article focuses on AIM's regulatory model in order to explain the recent success of low-cost listing venues in international financial markets. Part I explains how AIM covers a funding gap for companies whose specific characteristics preclude them from listing in senior markets such as NASDAQ, the NYSE, or the LSE. In addition, it states that AIM's level of regulation is close to optimal-imposing low costs on firms but ensuring sufficient disclosure and transparency-given the type of companies that seek an AIM listing and the nature of its investor base. Part II traces the evolution of a regulatory dynamic that gave rise to the existing cost/benefit structure of stock exchanges. Part III analyzes AIM's regulatory model in an attempt to explain its recent success and its adequacy as a listing venue for certain types of firms. Part IV concludes that AIM's model is a legitimate success, although remaining flaws must be corrected for the platform to continue to be favored by small, high-growth firms.

II. THE EVOLUTION OF SECURITIES REGULATION

Financial markets have come a long way since Adam Smith espoused the free allocation of economic resources in market systems and the all-too-familiar invisible hand more than two centuries ago.37 Without neglecting the principle of laissez-faire that allowed sophisticated economies to prosper, regulators and policy-makers in advanced jurisdictions discovered long ago that some intervention was necessary if financial markets were to function properly.38 Although the level of governmental intervention varies across jurisdictions, existing rules and statutes focus primarily on the importance of timely and accurate disclosure of relevant information to the market and corporate governance structures.39