AIM was created eight years ago as a smaller companies market, to provide young and growing businesses with a means of raising capital and experiencing a public market in their securities. AIM now represents a third of all British quoted companies. More recently, the London Stock Exchange has been marketing AIM as a global market for emerging companies.

There are more than 720 companies trading on AIM with a total market capitalisation of more than £10bn and individual market capitalisations ranging from less than £2m to more than £550m. Of these, 55 are overseas companies, which have a combined market capitalisation in excess of £1.2bn.

AIM membership is available to companies from all sectors and from all over the world. There are no restrictions on the size of the company or its specific activities. There are no restrictions on the number of shareholders and no required trading track record.

In the past year, second markets in other countries have floundered and closed – the Neuer Markt in Germany being the most conspicuous. There are several reasons for AIM's survival. It was established long before the dotcom day-trading frenzy, its companies come from a broad base of market sectors and London has a long tradition as an international market, with institutional shareholders prepared to invest for the longer term.

Despite the relative lightness of AIM's regulatory regime compared to the main market, the nominated adviser (Nomad) system has helped preserve the quality of applicants and on-going supervision. An attraction for smaller companies is the ability to make further share issues and significant acquisitions and disposals without the need for costly public documentation that would be required if they had a listing on the main market. AIM is flexible while maintaining standards.

But will AIM survive and prosper? It has been facing two different but immediate threats to its future. One, the general state of world equity markets, is market-driven, the other is legal in the form of the European Union (EU) Prospectus Directive.

January 2003 found AIM in the depths of one of the worst bear markets for smaller companies, which marked the low point in the volume of shares traded on AIM. Liquidity has steadily improved since then and the value of transactions is three times those levels while the number of bargains is four times higher. This improvement is also apparent in the primary market.

AIM enjoyed a 50% increase in new admissions in the third quarter of 2003 and recently the market has experienced some of its largest fundraisings. The total money raised on AIM is now well in excess of £9bn. One hundred and thirteen companies have joined AIM this year and Nomads are said to be reporting strong pipelines for the New Year. As for every year of AIM's existence, there are more companies on the market than ever before.

The seventh annual AIM Survey by Baker Tilly, in conjunction with Faegre Benson Hobson Audley, published in May 2003, revealed that a growing number of companies listed on AIM (31% compared with 20% in the 2002 survey) expect to stay with the market for more than 10 years.

As part of its drive to attract international companies, in May 2003 the London Stock Exchange (LSE) introduced a fast-track admission route to AIM for companies with quotations on certain other markets.

Three overseas companies have taken this opportunity and more are expected in 2004. Companies already listed on nine overseas exchanges will be able to use their existing annual report and accounts as a basis for a complementary quotation on AIM. The exchange expects the new route to be a considerable boost to the market, making it easier and faster for smaller, overseas-listed companies to access institutional investors in London as well as the wider European capital market.

Simon Brickles, the outgoing head of AIM, has said that one reason for AIM's success is that it balances the needs of its investors and their companies, rather than stifling the businesses that it ought to serve with regulation. The AIM team believes investors should be given the information they need but without inflicting impediments to growth. These aims are in the best interests of investors and their companies.

The EU Prospectus Directive, which shortly comes into effect, will impose significant additional obligations that many view as more appropriate for larger companies. Earlier drafts of the Directive contained onerous and contentious obligations that would have been unattractive even for main market companies, such as mandatory shelf registration, which would have required every company to issue an annual updated prospectus, at an estimated cost of £100,000 a year.

This and many other unattractive restrictions have been negotiated out of the final draft. But by including AIM for the first time within the definition of a 'regulated market', the Directive still threatens AIM companies with increased regulatory burdens.

These include content requirements for prospectuses, very much like those required for the main market, the need for prospectuses to be approved by the 'competent authority' and the requirement to publish an annual information document.

While the LSE is determined not to remove a single safeguard that genuinely protects investors and believes that AIM must remain a market properly policed by the exchange, it wants to avoid additional burdens that the EU Directive would impose.

One choice is to take advantage of an option that the Directive has given the UK of leaving the system unchanged for a minimum of eight years. This is considered vital for AIM's continued success in delegating the supervisory and approval process for AIM admission documents to the Nomads.

Such a route would secure AIM's immediate future, but would not provide a permanent solution. Accordingly, the LSE has been considering whether 'in order to preserve its key differentiation' it should position AIM elsewhere within the
Directive's new framework, by changing its status to an unregulated market. The LSE is consulting with the Treasury, which is responsible for steering the necessary UK legislation through once the Directive comes into effect in the next few months, over the implications of such a change of status.

The LSE has canvassed the views of institutions and advisers and reports that they are broadly supportive of the proposal for AIM to become an unregulated market. One implication would be that new issues by AIM companies would have to be restricted to 'qualified investors' (broadly speaking, professional investors) and fewer than 100 other people. This is unlikely to be a significant fetter on future AIM fund raisings.

The future of AIM seems bright on the regulatory side. As for investor appetite, only time will tell.

Max Audley is head of corporate at Faegre Benson Hobson Audley and a member of the AIM advisory group.