Is the AIM market an unregulated mess?

The regulators need to do their jobs. Trust in the small cap market is collapsing, and with it, the long-term investing mindset.

At some point, someone has to say it. Enough is enough.

The FTSE AIM market may have bounced off its late October low — but the index has still nearly halved in value since September 2021 — and remains not particularly far from its pandemic mini-crash nadir.

Now of course, there are macroeconomic reasons for this. For instance, interest rates have risen to 5.25% amid CPI inflation that is still more than double the Bank of England’s official 2% target. The UK may yet enter a severe recession in 2024, and accordingly, money has leaked out of risk assets like a sieve.

In fact, AIM continues to lose listed companies, either to private equity due to fundamental under valuations, or because the zombie company of the day has gone bust. And to an extent, that is how the market is supposed to work; high risk, high reward investors are usually eyeing a buyout (often just before a corporate bankruptcy), but the problem is that companies leaving the index are not being replaced.

Yes, you can point the finger at the potential inheritance tax abolition, or else an overly expensive and relatively pointless administrative burden. But my view — and the private view of many analysts — is that the market has got to a point where the regulation simply is not being enforced.

And therefore, potential investors are deserting.

Is the trust gone?

Or in other words: is the market now unregulated? Trust in the RNS system, nominated advisors, and research is at an all-time low. And while there are plenty of investors prepared to take the high risks on offer in the small cap space in return for potentially lucrative rewards, they are not prepared to invest when there is no punishment for companies breaking the rules.

This is a difficult article to write — to start with, I’d rather not attract a lawsuit, so cannot name companies outright.

But let’s consider the fictional Dog Star Minerals. While it had moved to the Main Market when it was sold to a major (for example, Anglo American), the company spent several years lying to investors about its finances.

And when it was sold off for pennies on the dollar, security guards had to be on hand to protect directors from ‘credible threats,’ including CEO Jesus Forest who had sold a dream of a multi-decade asset that would generate billions of pounds of profit.

How about a more recent imaginary example? Imagine an oil and gas company — let’s say JPH — which described itself as the ‘jewel in the crown’ mere months before collapsing into administration and leaving shareholders with nothing.

Let’s consider the illusory WANdance. It made up — literally completely fabricated — over $100 million of bookings — and the CEO had only this to say after the stock collapsed: ‘I am sad to be leaving WANdance after 18 extremely enjoyable years. I remain a passionate supporter and significant shareholder of the Company.’

Maybe Downsea Resources? Another one. This phantastic business released an RNS stating that it had received an unsolicited, very preliminary approach at a huge premium — and four days later (after sucking investors in) it announced information that ‘cast significant doubt on the veracity of the Approach and identity of the potential offeror.’

In fact, this potential offeror had got in contact to say they had no connection to this approach whatsoever. In other words, it was completely made up.

Let’s think about Verticante Minerals. This imaginary company — viewed by many to be safe as houses — decided to casually announce that capex costs at its flagship mine would be rising by ‘at least 35%’ on a random day in October.

Apparently, one day capex costs were fine and the next they were possibly doubling. Shareholders saw their investment crash by 90%, but the entire management team are still being paid hundreds of thousands a year.

And then late last week, another company — let’s call them Blue Air Resources — posted a recent picture of its lithium on site bagged and ready to go. Except this picture was lifted from a random Japanese website and ostensibly taken at some point during the 1990s. And this wasn’t the first suspect photo — another the day before had been taken from an Indian website.

Before this incident, this particular company’s CEO was kicked out of a Telegram Group of investors and then complained about it on the official Twitter handle.

Regulator incompetence We’ve all been there. Your stock drops 20% — but there’s no news. Or it rises 30% — again no news. Then the next day (surprise, surprise) the 7am RNS drops, but clearly, some got the inside scoop long before others.

What does the FCA or LSEG do about the misleading (or just plain lying)? Nothing. It doesn’t care, and then when businesses fail to list on the market, they publicly wonder why. It costs hundreds of thousands of list on the AIM market — but there seem to be few advantages nowadays.

And this is creating a big problem for companies already on the market, because the lack of trust in long term fundamentals as a result of not being able to trust that companies will be held to their mistruths means that the regulators are creating an index where nobody is prepared to hold for the long term, instead trading up and down for a few percent each time.

This means that whenever a gamechanger RNS comes in, there might be a spike, but in 2023 it just ends up reversing to the mean.

The key problem is that the AIM market is regulated by Nominated Advisers — aka NOMADs — and they are usually paid in shares. The CEOs are also often paid in shares. Most marketing is paid in shares. And this creates an obvious problem of bias — though there seems to be no better way of regulating or providing research in the market.

And yes, of course companies need to promote their stock — that’s a key job. But more and more, it seems that companies are getting away with outright lying to investors.

And this investor has had enough.

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.