Industry consultation and ASX’s response
The ASX has had a busy time of late, in issuing and revising a raft of contentious policies aimed at tightening the requirement for new listings and improving the standard of disclosure, particularly for resource companies. The most recent cab off the rank is Updating Admission Requirements for Listed Entities: Response to Consultation, released on 2 November 2016 in response to industry consultation on ASX’s proposed changes to the admission requirements and listing rules.
All practitioners active at the junior end of the market will be aware that ASX has been signalled its intent to “raise the bar” for new listings for some time now. But its initial proposals, released for consultation on 12 May 2016, triggered a considerable reaction from industry and advisers, including Gilbert + Tobin, who are actively involved in assisting clients with reverse takeovers, otherwise known as backdoor listings, and IPOs of smaller, early stage ventures. ASX’s fundamental policy position on backdoor listings – that applicants for listing should not be able to achieve via the back door what they couldn’t achieve via the front - is simple, and hard to criticise. In practice, however, the experience of many proponents was that ASX’s application of their policy to specific cases was becoming tougher, and also harder to predict. Similarly, at the margin, early stage ventures were beginning to find the path to market harder than they had experienced in the past.
In an effort to address these concerns head-on, ASX’s May 2016 consultation paper proposed a number of changes to the admission requirements for entities seeking entry to the official list.
The key proposals were:
- An increase the financial thresholds for listing for both ‘profits test’ and ‘assets test’ entities
- Introducing a requirement for three years’ audited accounts from entities applying under the "assets test"
- Introducing new minimum free float requirements
- Changing the spread rules
- Applying the same working capital requirements to all entities applying under the "assets test"
Combined, these changes would have had a significant dampening effect on capital raising by early stage ventures (especially technology and mining exploration entities), particularly via the backdoor listing market, which is a particularly important part of the corporate finance ecosystem in Western Australia. In May 2016 we provided an update on how the proposed changes would, if implemented, affect small-cap IPO candidates, miners and technology start-ups.
Gilbert + Tobin participated in an industry-led body which had the objective of advocating the interests of these sectors to the exchange. We are pleased to see that some, but not all, of the industry’s concerns, have been addressed in the revised guidance, which in some areas shows an attempt by the ASX to meet the industry half way.
Admission listing rule changes
The following listing admission rule changes show some compromise from the initial consultation paper:
- An increase in the ‘net tangible assets test’ from $3 million to $4 million, rather than the $5 million threshold proposed in the consultation paper
- An increase in the ‘market capitalisation test’ from $10 million to $15 million, rather than $20 million as proposed in the consultation paper
- A single tier spread test – with applicants now required to demonstrate 300 holders with parcels of $2,000 or more (compared to $5,000 under the original proposal)
- A reduction in the period for which audited accounts for a listed company or backdoor listing target are required – from 3 years in the consultation paper to 2 years
However, other proposals put forward by ASX in their consultation paper, including introducing a minimum 20% free float requirement and a $1.5 million working capital requirement for all entities admitted under the assets test, will be implemented without change from 19 December 2016.
Importantly, the revised guidance adopts what, in our view, is a more practical and sensible approach to one of its stricter measures – the suspension of an entity’s securities on the entity announcing a backdoor listing transaction. ASX has recently adopted this policy in pursuit of its market integrity objectives and since July 2016 ASX’s practice has been to suspend trading in the securities of acquirers until the re-compliance process is complete. Unsurprisingly, this was a particularly unpopular development.
As announced in its Response to Consultation, the ASX has effectively introduced a new regulatory regime for the announcement of backdoor listing transactions, providing listed companies with a choice: suspend trading in shares immediately, or sufficiently “cleanse” the market (by providing material information on the deal) to permit trading to continue.
The shopping list of mandatory disclosure if the entity chooses to cleanse the market is set out in new Annexure A to ASX’s Guidance Note 12, and includes:
- the parties to and terms of the transaction
- the target’s principal activities and business model, including risks
- the impact of the transaction on the entity’s capital and structure
- the identity of any person that will gain control of the entity under the transaction.
Additional requirements in the admissions process
There are some less publicised changes to the admissions process, which are included in a detailed update of ASX Guidance Note 1 and will presumably impact the smaller end of the listing market. These include:
- reserving the right to request a detailed description of the applicant’s due diligence process and a copy of the final due diligence report (which would need to be ready when the listing application is submitted, which is not practical under the “fast track” listing process); and
- an applicant that is incorporated, or which has its main business interests, in a foreign market may have a listing condition imposed requiring that 75% of the spread come from investors based in Australia.
We expect that, having had time to make submissions and prepare itself for these changes, the market will adapt very quickly to the new requirements. Some early stage entities exploring an IPO or backdoor listing will inevitably be unable to clear the new hurdles. But in some ways, toughening disclosure rules around the announcement of backdoor listings will simply bring forward much of the very same work that would need to be done in preparing a notice of meeting or prospectus required for re-compliance.
As always, careful planning and advice, and early engagement with the ASX will be the key to ensuring the process runs smoothly.