Why retail investors need more protection from AIM’s cowboys


Brokers dealing on the Alternative Investment Market – known as AIM – come in for some heavy stick from their cousins at the City’s more blue-blooded institutions.

“AIM’s full of Essex barrow boys. Seen that film The Wolf of Wall Street? – no different,” the blue-chip boys and girls will tell you.

But the small-cap traders deserve credit for being genuine stock-pickers – finding the next Fever-Tree or Boohoo is harder work than sticking money on BP and watching its stock track the oil price over a five-year period.

Yet where AIM has always had a serious problem, since its inception in 1995, is in generating enough interest from investors – which makes it hard for small and medium-sized enterprises to gain access to cash.

Companies listed on a stock exchange primarily to raise money and grow. For blue-chip stocks on the main market, the easiest and quickest way to do this is by raising money by placing new shares. Well-known FTSE 100 stocks such as Anglo American or Rolls Royce have the luxury of tapping large financial institutions such as pension and equity funds for money instantly, and the process can happen overnight.

Link: What is waiting for you on today’s AIM Market – Will you survive?

But for relatively unknown companies on AIM, drumming up support for placing new shares can take weeks, leaving the process open to foul play.

AIM companies that have decided to raise money will usually approach their broker, who in turn will sound out well-known small-cap backers such as Hargreave Hale, Miton or Legal & General to see if they are interested in buying new shares.

If they show no interest, the broker has to turn to the retail investor market – 74-year-old Mrs Smith in Somerset, perhaps.

To approach the general public, a specialist retail broker must be brought in who could have 40,000 to 50,000 individuals on their books. The specialist will at this point suspect that the company is having trouble raising funds and ask for a heavy discount on the current share price by way of commission. If the shares are trading at 1.9p, the broker may ask for a discount price at 1.6p.

It is at this stage the placing can become murky, with sources in AIM accusing some brokers of peddling the new shares to retail investors at a price way above the 1.6p they paid for them.

Some will arrange to sell the new shares to Mrs Smith at 1.7p, 1.8p or even 1.9p. Fractions of pennies, perhaps — but multiply them by millions of shares and you’re soon talking hundreds of thousands of pounds in profit.

The brokers defend their actions on the grounds that this is their fee for bringing in investors and making the placing happen. The system also gives Mrs Smith direct access to more shares in a company that she wants to back and believe can grow, they say.

But some argue that the brokers are deliberately taking advantage of the public in order to line their own pockets.

One source at a well-known retail broker says: “Look, does the retail investor get as good a deal as the broker? No. But does Mrs Smith get her hands on more stock at a price that is affordable and without having to chase the offer price on the open market? Yes. Ultimately, the company gets its money and is recapitalised, the broker makes commission and Mrs Smith is given access to new stock.”

A good example of where shares were sold at above discount price took place on April 9 when Armadale Capital raised £963,500 through the placing of 58.3 million new shares at a price of 1.65p. On the day the placing was announced, 29.3 million shares were sold in the market at an average price of 1.79p.

While selling above the discount price may be the norm at the bottom end of the market, it does raise questions around best execution policies and how retail brokers earn their fees from placings.

Financiers are legally required to follow Mifid regulations, which state that brokers carrying out transactions on their clients’ behalf “must take  all reasonable steps to obtain  the best possible result, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of  the order”.

Many in the market say that brokers who sell to the public at a higher price than the discount at which they buy the stock are treading a thin line with Mifid’s best execution policy.

Andrew Monk, chief executive at VSA Capital, said: “Retail has always been important, and also a major source of funding, and so a practice grew up where larger brokers would place stock with the retail brokers. This is totally legal but it does mean that an element of control is lost down the chain and this can cause issues and an almost ‘underground world’ has grown up.”

Other tactics that are said to be used around placings include retail brokers deliberately shorting a company’s stock so that they can receive a better discount price.

This is done by approaching an individual who holds a heavy chunk of the stock and notifying them that a placing is coming up.

The holder will then sell some of their shares, knowing they can get their hands on a chunk of the stock at the cheaper price at a later date through the placing.

All this behaviour further damages a market which is periodly criticised for allegedly allowing cowboy tactics. It should have more respect for the end retail investor, who suffers from a vacuum of information.

Latest figures from the Office for National Statistics show that 29.7% of shares on AIM are owned by individuals, yet not enough is being done to protect them fully.

So far, the only broker to have action taken against it was Cornhill in January last year, when the London Stock Exchange fined the firm for mis-selling placing shares.

Cornhill was acting as a broker for New World Oil and Gas, which was seeking to raise funds through a placing of more than two billion shares — twice the amount of stock it already had in issue.

The placing needed approval by investors at the company’s general meeting before the shares were due to be issued in May 2015.

But Cornhill sold a “significant quantity” of placing shares to its private clients a month before the general meeting was scheduled to take place.

When shareholders did not approve the placing, Cornhill was unable to settle with investors for the shares it had sold in advance, leading to massive volatility in New World’s share price.

The London Stock Exchange fined Cornhill £210,000.

Encouraging risk and seeking capital so that companies can grow is everything that the junior market should be about, but some brokers need to rein in their behaviour so that retail investors are properly protected and informed the whole way through the process.

Original Source Link 

Image: (Matt Writtle)



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