The issue

As we have reported on previously, the rules for the AIM market have recently been shaken up, with a new rulebook being introduced for nominated advisers and some changes being made to the AIM Rules for Companies. The main change for AIM companies is the requirement both to have a website and to post on it all core management and financial information. AIM companies are expected to implement the new requirements by 20 August 2007, and failure to comply could lead to fines and even expulsion from the market.

Under the new rules, investors will be able to find on an AIM company’s website various information including the admission document and any circulars or similar publications sent to shareholders within the past 12 months, the annual report and all regulatory news service announcements for the past 12 months. In this bulletin we focus on an issue that arises almost as a bi-product of the new Rule 26, even though it is an issue that has been around, and been relevant, for many AIM companies for a long time. This is the spectre of the complex and stringent US securities laws.

The risk

In order to conduct a public offering outside the US without triggering the onerous US registration requirements, the basic rule is that the offer must not be targeted at US persons. With the rise of the internet, it has become harder to fulfil this requirement – offering materials posted on a company website are immediately accessible to everyone all round the world. The new Rule 26 has brought this into sharper focus.

The question specifically is will the availability of information about non-US offerings on the internet because of the requirement to post the offering document on the company’s website require their registration under the US Securities Act of 1933 or the US Investment Company Act of 1940?

The solution

To date, the Securities and Exchange Commission (SEC) has not addressed the issue of Rule 26 directly; however in several no-action letters and previous releases, the SEC has provided some guidance on the effect that the internet might have on offshore offerings.

At a minimum, the posting of offering materials on the issuer's website without taking any measures to guard against sales to US persons transforms an otherwise non-US offering into a US offering.

However, the SEC has prescribed certain precautionary measures that can be implemented to ensure that offshore internet offers are not deemed targeted to persons in the US or to US persons, namely, non US-issuers must ensure that:

This is also an issue for a public offering outside the US by a US issuer, due to the strong likelihood that such securities will enter the US trading markets. Extra precautions will therefore need to be taken, such as password-type procedures to ensure that only non-US persons can obtain access to the offering materials on the website. With an ever-increasing number of US companies joining AIM, this could be very relevant.

There is also a risk of a private placement in the US (possibly conducted in conjunction with a public offering outside the US) being transformed into a public offering requiring registration in the US. Even more stringent measures would need to be taken in this case, such as keeping a record of investors who responded to the internet offering and precluding them from participating in the private placement even if they are otherwise qualified to do so.

Conclusion

As even the SEC accepts, the best precautions can be circumvented by a determined US investor, who for example responds falsely to questions of residence or uses offshore nominees in order to participate in offshore offerings. However, the advent of Rule 26 makes it even more vital that requisite procedures are put in place and followed to avoid falling foul of US securities law. What was a minefield will, from 20 August, become an even greater one. Perhaps this is why recent research has found that only six of the biggest 100 companies on AIM have websites that fully comply with Rule 26 – apparently one company does not have a website at all, while fewer than a third are more than halfway to meeting the full criteria which Inventis, who conducted the research, have identified as necessary for compliance.