Just under 30% of the companies that have been admitted to AIM this year have a
market cap of under £5m, many of them driven to the market by the need to raise
finance. Whilst a listing, can help companies achieve fund raising requirements, many
small companies do not generate sufficient awareness to ensure ongoing buy side
demand once their shares are quoted. Whilst employing a PR agency and ensuring
analyst coverage can help, both are expensive and time consuming and, consequently,
are not always viable.

Lack of buy side demand can lead to illiquidity in a company’s shares, which in turn
creates wide bid/offer spreads. Whilst liquidity amongst smaller company shares is
improving, thanks to increasing numbers of market makers, there remain a large
number of companies on AIM with spreads of over 15%. Wide spreads will deter the
savvier private investor, who will have to see a rise in the value of their holding in
excess of the spread before they can make a profit. Commenting on this, Graham
Spooner of The Share Centre’s Advice Team said, “We would always point out to
retail clients the disadvantages of buying a stock with a wide bid/offer spread.
Ironically, since institutional investors often ignore smaller companies, the private
investor is a valuable source of liquidity, so a ‘vicious circle’ can easily develop”.

By introducing a SIP, a company ensures monthly buy side demand, which can help
reduce spreads. Approximately 15% of the companies trading on AIM with a market
cap of between £2m and £20m, have a spread of over 10% and more than 50
employees. These companies could all introduce a SIP without incurring any
significant costs over the long term. Providing the Company uses a reasonably priced
administrator, and does not incur high set-up costs, a SIP for 50 staff where the
average amount saved by each member of staff is £50 a month will cover its costs
within 5 years through savings on employer’s National Insurance Contributions.

Add the SIP’s ability to increase liquidity to the fact that they are one of the most
flexible employee share plans available and the fact that they are not affected by the
recent introduction of FRS20 (International Financial Reporting Standard 2) which
requires quoted companies granting share options to estimate the fair value of those
options and to recognise that value as an expense, and the SIP looks like an
increasingly attractive option.