The Unlisted securities market (USM) is to close at the end of 1996.

When it first announced the closure of the USM, the Stock Exchange did not envisage the creation of any new market to replace it, but suggested that the smaller companies sector be developed on the official list.

This was met by an almost universal outcry that a second or alternative market to the USM was needed to provide smaller companies with access to capital, and which would have a much greater differentiation in terms of regulatory requirements and costs from the official list than the USM had towards the end of its life.Without a substitute for the USM, a company wishing to have some participation in the market would either have to seek admission to the official list or apply for its shares to be dealt in under r.4.2 of the Stock Exchange Rules.

R.

4.2 was first formulated to provide an occasional dealing facility in unquoted securities, but in the 12-month period ending 30 June 1994, 264 companies were having their securities traded, accounting for a total trading volume of £482.4 million.The argument for an alternative market to the official list has been won, and on 7 September 1994 the Stock Exchange published a consultative document setting out its proposals for a second market, to be called 'the alternative investment market' (AIM).

The purpose of the AIM, according to Michael Lawrence, chief executive of the Stock Exchange, is 'to provide an alternative source of capital and a trading platform for companies which are unable or unwilling to join the list for a variety of reasons.

The key is to find the appropriate level of regulation necessary to attract investors who are prepared to accept a higher level of risk.'The key features of the AIM are as follows.-- An applicant company need not have a sponsor.

The Stock Exchange sees this as one of the principal ways in which costs of admission to the AIM will be cheaper than the costs associated with admission to the official list.

Sponsors to companies seeking full listing are required to confirm that, having made due and careful enquiry, they are satisfied that the listing rules have been complied with.Applicant companies may still appoint a sponsor with the role of any sponsor, and any limit to its responsibilities stated in the relevant admission documentation.-- The responsibility for the completeness and accuracy of documents rests with the company's directors alone.-- Companies applying to join the AIM will be required to publish a document containing the information required by the Public Offers of Securities Regulations (currently contained in a consultative document issued by HM Treasury).

Where the admission is coupled with a simultaneous offering of securities to the public, a prospectus under those regulations will also be required.-- There are no minimum requirements with regard to market capitalisation, length of trading record or percentage of shares required to be in public hands.

At the present time, a full listing requires a minimum market capitalisation of £700,000, a three-year trading record and 25% of the issued shares of the relevant listed class being in public hands.-- There will be a requirement to announce price sensitive information promptly.-- Audited accounts will have to be published within six months of the year end and unaudited interim accounts within four months of the end of the half year.-- A code of dealing for directors no less stringent than the model code will have to be adopted.-- There are to be no requirements similar to those contained in chapter ten of the Yellow Book which divide transactions into various classes based on certain percentage criteria, with the amount of information to be disclosed being determined by the class into which a transaction falls.

Similarly, there are to be no specific requirements with regard to transactions with directors/substantial shareholders.

However, apart from the general requirement to publish price sensitive information, the Stock Exchange envisages that a company will be required to make an announcement of a transaction if, on the criteria adopted in chapter ten of the Yellow Book, the relevant percentage ratio is 10% or more.-- An applicant company will have to arrange for a member firm of the Stock Exchange to support trading in the company's securities.

In the absence of this, application to the AIM will be refused.-- The Stock Exchange hopes that the Revenue will treat securities traded on the AIM as unquoted securities, with the result that certain benefits to investors including capital gains tax reinvestment relief will be available.-- The Stock Exchange will maintain and supervise the AIM.Clearly, the proposals for the AIM involve less stringent requirements (both in respect of admission and ongoing obligations) than the requirements relating to a full listing.

Perhaps the most controversial relaxation is the absence of a need for a sponsor.

This raises concerns that investors - and certainly institutional investors - will be deterred from investing in companies not having a sponsor, since the existence of a sponsor (at least theoretically, given the recent McDonnell Douglas Information Systems and Aero Structure Hambles d-b-cles) provides some comfort that a certain amount of due diligence work has been carried out.The need for a second market is clear, and the question is whether the Stock Exchange in its AIM proposals has achieved the right balance between encouraging companies to come to the AIM and providing the necessary level of regulation for investors.

Some commentators feel that the risks - particularly without a sponsor - will be too great.

As the Daily Telegraph put it: 'It [the AIM] should have as its crest "caveat emptor", since it appears to fill the gap between investing in a buy-and-forget blue chip and putting the money on the 3.30pm at Kempton Park.'Whether the AIM is successful would seem to depend as much on prevailing market conditions as whether the Stock Exchange has achieved the right balance.

In this respect, one need only compare the current reports about institutional investors threatening to boycott new issues following recent flotation embarrassments with the enthusiasm for new issues a few months ago.