The Alternative Investment Market: what you need to know as an investor

Whilst mainstream stock markets such as the London Stock Exchange are known worldwide, a range of smaller stock markets also exist that enable investors to buy and sell shares of smaller, often earlier-stage companies. The Alternative Investment Market (or AIM) is an example of one such sub-exchange. Launched in 1995 to replace the Unlisted Securities Market, AIM is a smaller branch of the London Stock Exchange.

At its launch date, the Alternative Investment Market represented only ten companies, valuing a total of £82 million. Since then, the number of AIM-traded stocks has grown rapidly, helping over 3,700 companies from around the world raise approximately £115 billion, on aggregate.

The FTSE Group maintains three real-time indexes for tracking movements on AIM: 

1. The FTSE AIM UK 50 Index (firms domestic to the UK only)
2. The FTSE AIM 100 Index (UK and international firms)
3. The FTSE AIM All-Share Index (UK and international firms)

AIM-listed companies can often achieve considerably higher levels of investment growth compared to more mature firms quoted on mainstream stock markets. This is primarily due to the early stage at which investors can support businesses with high growth potential, which can be enhanced further due to some AIM-quoted companies being eligible for valuable tax reliefs. Although, it must be noted that accessing companies at an earlier stage is often associated with elevated risk.

What type of investor is AIM suitable for?

AIM is a relatively high-risk marketplace, meaning that sophisticated investors and high-net-worth individuals (HNWIs) with a large appetite for risk may be attracted by the substantial return potential of investing into AIM-listed companies.

But, despite the level of experience with investing in high-risk opportunities, investors should note that due to the relatively small size of AIM-listed companies, as well as a comparative lack of market regulation, this can be a challenging market to navigate. This reiterates the need for investors to undertake thorough due diligence before investing into an AIM opportunity.

Examples of companies listed on AIM

Attracting companies that are aiming to raise finance, usually between £1 million and £50 million, AIM currently enables firms from 26 countries operating across 37 different sectors to source capital for expansion – providing investors with significant scope for portfolio diversification.

Since AIM was launched in 1995, it has facilitated a number of high-profile success stories, including asos.com, the globally renowned online fashion retailer, progressing to list on the London Stock Exchange in February 2022 and now qualifying for the FTSE 250 index.

Technology, finance and consumer services are some of the most widely represented sectors within AIM, and a number of well-known companies are currently listed on the exchange, such as:

• Jet2 plc - a British multinational travel group based in Leeds, specialising in low fare flights from its airline branch, Jet2.com, and package holiday deals from Jet2holidays.
• YouGov plc - an internet-based market research and data analytics company headquartered in the UK, with operations spanning Europe, North America, the Middle East and Asia-Pacific.
• Idox plc - a specialist software company built for both the public and private sector, aiming to simplify administration efforts and improve operational efficiency for clients. 
  
  
  

What is the degree of regulation within the Alternative Investment Market?

The process of a company listing on AIM follows a similar path to a traditional IPO but involves comparatively less stringent regulation. For example, there are no set requirements for market capitalisation or the number of shares issued.

AIM can be more accessible for smaller companies, due to presenting fewer barriers to entry than the London Stock Exchange. This can subsequently enable risk-seeking investors to access early-stage companies with high growth potential via AIM, helping to accelerate their expansion. As a result, AIM’s reduced regulation can provide the opportunity to benefit early-stage companies, their investors, local communities, and the wider economy.

However, reduced levels of regulation can sometimes lead to companies with questionable ethics and business practices floating on AIM. This further reinforces the need for investors to thoroughly understand the companies into which they are investing, ensuring the financial statements are sound and operations align with personal investment goals and values.

The role of Nominated Advisers

Nominated Advisers (also referred to as Nomads) act as one of the main regulatory forces within AIM. The responsibility of these corporate finance firms (who are approved for the role by the London Stock Exchange) is to guide a company through its AIM admission and through further obligations once AIM trading has begun. 

Companies that have decided to list on AIM are first required to appoint a Nominated Adviser to help them access the market and to provide a guarantee to shareholders that the operations of the company are acceptable, during both the initial share flotation process and during following periods.

However, Nominated Advisers can only help to mitigate the risk of reduced regulation within AIM to some extent, as one concern frequently raised about these firms is that they are responsible for ensuring regulatory compliance, but are also profiting from fees charged to the companies that they advise regarding regulatory compliance.

Whilst Nominated Advisers can provide support to AIM-listed companies – and some level of reassurance to investors – additional routes can also be pursued to further ensure that an early-stage company is fulfilling its regulatory requirements and pursuing a realistic path for growth. 

One of the most popular routes for doing so is investing into early-stage companies via a sophisticated co-investment platform or fund that researches and carefully selects opportunities for investors, based on a defined set of qualifying criteria, for example, often regarding legitimacy and growth potential.

What are the benefits of investing in AIM shares?

Experienced investors may be interested in AIM-listed companies due to the scope they can provide for tax benefits, as well as the opportunity to invest into companies at an early-stage, potentially offering superior financial returns. 

1. Stocks and Shares ISA eligibility

Some AIM shares can be included within a Stocks and Shares ISA. Individual Savings Accounts (ISAs) can enable individuals to allocate up to £20,000 annually across the full range of ISA products (including the Stocks and Shares ISA, IFISA, Cash ISA and Lifetime ISA). In turn, when AIM shares are held in a Stocks and Shares ISA (also known as an AIM ISA) investors can realise any dividends and returns free of income tax and capital gains tax (CGT).

Whilst ISAs can be beneficial for investors from an income tax and CGT perspective, some investors are not aware of the potential inheritance tax (IHT) implications of these products. Generally, ISAs lose their tax-free status upon their owner’s passing. This means that the beneficiary of the ISA may have to declare it in their tax return, possibly becoming liable to 40% inheritance tax.

However, as of August 2013, AIM shares have become eligible to be held within a Stocks and Shares ISA. This means that it is possible to pass on an ISA to any beneficiary completely IHT-free (provided that shares are held for at least two years and are still held upon passing). This is now a possibility because many companies listed on AIM qualify for Business Property Relief (BPR), which enables some businesses and shares to be passed on free of IHT.

2. Potential for EIS eligibility

Some companies floating on AIM may qualify to offer shares through the Enterprise Investment Scheme (EIS).

A tax-efficient investment scheme designed to incentivise private investment into unlisted early-stage companies, the EIS has attracted over £25 billion of private investment into more than 36,000 small and medium-sized enterprises (SMEs) since being introduced by the UK Government in 1994.

Whilst this scheme applies to young, unquoted companies, businesses listed on AIM are classed as being unquoted for EIS purposes. This enables some AIM stocks to qualify for the scheme, providing potential for investors to benefit from a host of tax advantages.

The EIS offers five main forms of tax relief for investors, including up to 30% income tax relief, capital gains tax (CGT) exemption, CGT deferral on other assets , 100% inheritance tax relief (provided that shares have been held for a minimum of two years and are still held at the time of the shareholder’s passing), and loss relief, which enables any potential losses to be offset against the investor’s income tax or CGT bill – should the opportunity not exit as planned.

Across the scheme, these tax benefits work together to minimise the overall risks and maximise any potential rewards associated with investing in early-stage companies. With some early-stage companies listed on AIM being eligible for the EIS, investors could support the growth of small companies, potentially target high investment returns, benefit from a range of tax reliefs and do so relatively easily, via AIM.

3. Tax relief via VCTs

Venture Capital Trusts (VCTs) are investment funds that pool investor capital to then invest into a portfolio of early-stage companies on the investors’ behalf. The value of the portfolio will then dictate investor share value. Specifically, AIM VCTs are funds that focus solely on VCT-qualifying companies listing new shares on AIM. 

As with all VCTs, investing into an AIM VCT can provide investors with up to 30% income tax relief and tax-free dividends, as long as shares are held for the minimum holding period of five years.

The main points of difference between the tax benefits offered by VCTs and the Enterprise Investment Scheme are that VCTs do not provide investors with the opportunity for inheritance tax relief, capital gains tax deferral, and loss relief that investing into an EIS-eligible company can provide.

4. Superior target returns

Whilst the potential to benefit from generous tax benefits can be useful for investors, the nature of the investment itself, irrespective of any tax benefits, is the most fundamental consideration. 

With many AIM-listed companies naturally being smaller and earlier-stage than many companies listed on mainstream stock exchanges, the potential for significant money-on-money returns compared to more mature equity routes can be desirable for investors.

Assessing the growth potential and business model of the AIM-listed company is a useful measure for prospective investors to take. This could signal whether superior target returns are likely to be achieved, which could subsequently build the foundation for tax-efficient wrappers to further enhance rewards. 

Though AIM-listed companies can display the potential to generate considerable investment growth due to their early-stage, with this comes equally considerable risk considerations. Subsequently, investors should perform adequate due diligence into any portfolio company or investment provider prior to parting with their capital.

5. Potential to generate positive impact

In addition to providing investors with the potential to receive significant tax benefits and considerable financial returns, AIM investments can provide much-needed growth capital to early-stage businesses, particularly those that prioritise long term ESG benefits.

A number of firms leading the way in renewable energy (such as EQTEC) are listed on AIM, potentially providing scope for investors to facilitate future environmental benefits, as well as positive social impact and economic growth, both driven by job creation.

What are the risks of investing in AIM shares?

Whilst AIM-listed companies could provide the potential to achieve considerable returns, investors should be keenly aware that investing into early-stage companies, whether via stocks trading on AIM or through venture capital schemes involving AIM-listed companies, can involve a number of additional risks, outside of the initial risk to capital.

1. Reduced regulation

As previously noted, the regulations associated with firms becoming listed on AIM are slightly less strict than for IPOs on larger stock markets. For instance, listing on the main FTSE market requires at least three years of audited financial records, however this is not part of the criteria for companies listing on AIM.

2. Lack of liquidity

In addition to AIM stocks often possessing inherently higher risk levels than conventional listed equities, they can also be harder to sell, making them potentially less liquid investments than those on the London Stock Exchange, for example.

Notably, whilst companies trading on major stock exchanges are required to have at least a quarter of their shares owned by public investors, AIM has no such requirement. 

The potential consequences of this can lead to reduced liquidity, because having no minimum proportion of publicly owned shares means that investors wishing to sell their shares may find few potential buyers. If the vast majority of shares are held by private and/or institutional investors, then public shareholders may face a challenge when aiming to sell.

Low levels of liquidity can also amplify volatility levels, mainly because investors may sometimes be required to sell their shares at a lower price than the true value of the asset in order to attract a buyer.

3. Limited access to company information

In addition to these risk considerations, shareholders in AIM-listed companies could receive substantially less information from the company they own shares in, due to reporting requirements being less onerous.

A summary of AIM

Overall, for experienced investors with a high tolerance for risk, investing into AIM stocks can offer the opportunity to access young firms from their early operations, most likely at a favourable stock price. Subsequently, investors could receive potentially superior returns – should the company be successful. 

Additionally, the scope for investors to benefit from a range of tax benefits could further help to maximise the potential benefits and help to counteract the elevated risk levels of investing in companies trading on AIM.

While many companies listed on AIM have prospered and eventually transferred to the London Stock Exchange, others have failed. There are noticeably higher rates of companies trading on AIM being delisted, especially compared to the delisting rate for its larger counterpart.

Ultimately, the suitability of AIM investments for an individual investor depends on investment growth goals, experience levels, and willingness to accept a certain degree of risk. Whilst this type of investment does hold a number of risk considerations, conducting thorough due diligence can help to mitigate certain risks, to some extent.

Other routes to support early-stage companies

Investing via AIM can provide investors with the potential to achieve considerable returns, facilitate the scaling up of some early-stage companies, and capitalise on significant tax-benefits. But, investors could further amplify these advantages by investing in unlisted companies via venture capital and private equity opportunities.

Some venture capital (VC) and private equity (PE) opportunities can provide investors with the ability to support young businesses that have not yet undertaken an IPO on any stock exchange – whether major or minor. This could provide investors with even greater return potential and improved scope for tax reliefs, especially considering that many of these companies can still be accessed by tax-efficient schemes, such as the EIS.

Beyond these more tangible growth and tax-related benefits, investing into unlisted companies can sometimes offer investors the opportunity to take on an advisory role, sharing relevant experience and expertise with the team behind the early-stage business. This may be of particular interest to experienced investors seeking a more active investment opportunity.

Whilst investing into unlisted VC and PE opportunities can potentially offer investors a host of elevated benefits when compared with AIM opportunities, it is important to note that such earlier-stage investments often involve higher risk levels. Subsequently, accessing opportunities via reputable investment platforms with a proven track record in facilitating such investments can be an effective process of mitigating some of the associated risks.

Ultimately, whether considering investing into AIM-listed companies or unlisted companies, it is of paramount importance to always conduct thorough due diligence, never invest more than you can afford to lose, and try to gain a solid grasp of the past, current, and anticipated market conditions relating to the investment opportunity under question.