April 1st proved to be no joke for a batch of non-trading companies sometimes known as "cash shells" on London's Alternative Investment Market (AIM).

Trading in 38 small, under-used "cash shells" was suspended after new rules, which were introduced from midnight on Saturday, came into effect.

"This is AIM cleaning up its act," says David Williamson, head of mid-market services at Ernst & Young. He added that AIM, and the London Stock Exchange (LSE) that owns it, by forcing cash shells to make an acquisition are looking to protect their reputation around the world as a lightly-regulated market.

"It is walking a tightrope between the regulatory side and the quality side and just tweaking the rules," he said.

The LSE said that their worry was not about cash shells specifically, more that some of the smaller ones could be open to manipulation. "We felt that they were not fitting the type of profile for AIM," he said.

The junior market is trying to prevent itself from becoming a victim of its own success by attracting funding for start-ups that then fail to deliver on promises to investors. The Neuer Markt in Germany is often cited as an example of a start-up market that failed to protect its reputation.

Many investors became wary a year ago when there was a flurry of initial public offerings raising relatively small amounts but seeing wild fluctuations in their share price and have welcomed the rule changes.

For many, the experience of White Nile, the shell company set up by Phil Edmonds, former England cricketer, to look for oil reserves in the Sudan, raised concerns. Despite having few apparent assets apart from an initial £9 million (€12.9 million) of cash, stock in White Nile jumped 90 per cent from its issue price of 10p in a matter of days.

"There was a large speculative element to the market," one trader said. "A share whisper could send the shares shooting up, way beyond their intrinsic value. Then, if the rumoured deals fail to appear, you could get a lot of burnt fingers and the press would rightly pick up on those deals," he added.

For this reason, AIM last year unveiled plans to eliminate small inactive cash shells. Under the rule change, cash shells that raised less than £3 million on listing and had not completed a deal by the end of last month faced suspension for six months from yesterday, followed by delisting of the shares.

However, many of the shells suspended yesterday were not new arrivals to the City and many boast directors with long experience. - (Financial Times service)