ASX proposes changes to admission requirements - tougher thresholds which will affect small cap IPO candidates and back-door listings

ASX yesterday released a consultation paper proposing changes to the admission requirements for entities seeking admission to the official list.

The suite of measures ASX is proposing is designed to “strengthen the ASX listing rules framework and maintain an appropriate balance between the interests of issuers and investors in promoting efficient capital raising, maintaining market integrity and providing a market that is internationally competitive”.

These changes will impact small-cap IPO candidates and start-ups as well as those looking to do backdoor listings, however, making it tougher for them.

The key proposals are:

  • Increase the financial thresholds for listing
  • Require audited accounts from entities applying under the "assets test"
  • Introduce a minimum free float requirements
  • Change the spread rules
  • Apply the same working capital requirements to all entities applying under the "assets test"

Effect on junior mining sector and back-door listings

If introduced, various measures proposed by ASX outlined below are likely to have a material impact on the Australian junior mining sector and the ability for small and micro-cap listed entities to re-emerge as a new business via a back-door listing, which are important features of the local market. If these measures are introduced, we expect to see a significant decline in the number of junior mining initial public offerings and back-door listing transactions.

The introduction of measures which aim to ensure a company does not list until it achieves the ‘right size’ sits uncomfortably with the life cycle of many mining companies which typically seek to evolve from early stage exploration through to production. Typically, initial public offering funding takes a junior mining company from an initial resource and/or scoping study before the entity seeks to raise further money to fund pre-feasibility studies and drilling out deposits to mining reserve status, following which further money is typically sought to be raised to complete bankable feasibility studies and to secure project funding.

In particular, the more onerous financial thresholds for listing and change to the spread test will be major hurdles for listing aspirants and back-door listing candidates to overcome.

ASX’s proposal to increase the ‘assets test’ thresholds to an NTA of at least $5 million is likely to have a significant impact on the ability of junior mining companies to proceed with a listing, as most junior mining companies seek to be admitted to the official list of ASX on the basis of the NTA test given that they are unlikely to have generated any substantial profits.

Increasing the spread parcel size will disenfranchise small shareholders and impact most heavily on back-door listings, since the listed company participant typically has a low valuation, meaning a low parcel value for most of its shareholders. A larger parcel size will mean there are fewer qualifying shareholders to contribute towards spread.

ASX’s proposal to introduce a new requirement for entities seeking admission under the assets test to produce audited accounts for the last 3 full financial years may also present practical difficulties in relation to back-door listings, particularly where the back-door listing candidate has acquired other entities in the lead up to a back-door listing, as special purpose accounts will need to be prepared and audited in relation to those businesses. This is likely to add additional cost, complexity and potential delay to the back-door listing process. However, ASIC’s Consultation Paper 257: Improving disclosure of historical financial information in prospectuses: Update to RG 228 released for comment yesterday suggests that ASIC may be minded to accept some relaxation of the requirement where the disclosure of historic financial information would include information not relevant to an informed assessment of an entity’s financial performance or prospects, or which would not be reasonable for investors and their professional advisers to expect to be disclosed.

In relation to back-door listings, ASX is also proposing to bring forward the date of the listed company’s trading suspension to immediately after the transaction announcement. This is likely to remove a key existing advantage of back-door listings, where under current requirements, suspension takes effect from the date of the shareholder meeting. This means that a listed entity the subject of a back-door listing will no longer be afforded the opportunity to gauge market reaction after the transaction is announced, which may assist with the pricing of any capital raising to be undertaken by the entity. We note that this proposed measure was given effect in relation to at least one company in the past week.

ASX proposal: Increase the financial thresholds for listing

Entities seeking admission to the ASX must satisfy certain financial thresholds – either a ‘profit test’ or an ‘assets test’.

At present, the ‘profit test’ requires (among other things) that the entity has consolidated profit from continuing operations of at least $400,000 for the 12 months prior to admission. ASX is proposing to increase this threshold to $500,000 to ensure that minimum standards of size and quality of listed entities are maintained. 

The current threshold for entities seeking admission under the ‘assets test’ is that they have NTA of at least $3 million (after deducting the costs of fundraising), or a market capitalisation of at least $10 million. ASX is proposing to increase the ‘assets test’ thresholds to an NTA of at least $5 million or a market capitalisation of at least $20 million.

One highly publicised effect of these changes is that very small cap companies, including tech start-ups and junior mining companies, would be prevented from listing at too early a stage.

The above thresholds do not apply to investment entities.

ASX proposal: Require audited accounts from assets test entities

Presently, entities admitted under the assets test are permitted to provide unaudited accounts for a period shorter than 3 full financial years. 

ASX is proposing to introduce a new requirement for entities seeking admission under the assets test to produce audited accounts for the last 3 full financial years. If the accounts for the last full financial year are more than 8 months old, the entity may also be required to produce audited or reviewed accounts for the last half year. These changes bring the assets test into line with the requirements of the profit test, but may present an increased financial burden on entities which would not normally produce audited accounts.
Importantly, the proposed rule change would also apply to any entity or business proposed to be acquired by the listing entity at or ahead of listing. This will have an impact on back-door listings.

The update to Guidance Note 1 states that ASX may agree to accept less than 3 full financial years of audited accounts (e.g. for a start-up company), but usually only in circumstances where ASIC will accept less than 3 full financial years of audited accounts in a disclosure document. 

In that respect, ASIC Regulatory Guide 228 Prospectuses: Effective Disclosure for retail investors explains that if, for example, there has been a significant restructure of the company in the last 3 years, this should be demonstrated by the use of pro-forma information or otherwise explained. Alternatively, if the entity seeking admission is a start-up with no operating history, it should include its most recent statement of financial position and a pro forma statement of financial information showing the effect of the offer.

ASX proposal: Introduce a minimum free float requirement

Listing Rule 1.1 condition 1 requires that an entity seeking admission to the official list of ASX have a structure and operations that are appropriate for a listed entity. 

Although there is not currently any specific Listing Rule requirement for a minimum free float, existing ASX Guidance Note 1 contemplates that in order to have an appropriate structure, a candidate for listing must have a free float of at least 10% (unless the ASX accepts the entity’s explanation for how it plans to increase its free float to at least 10% and the timeline for that increase).

ASX is proposing to introduce a new condition to Listing Rule 1.1 which requires a 20% minimum free float at the time of admission. ‘Free float’ will be defined by ASX as the percentage of the entity’s main class of securities that are not restricted securities or subject to voluntary escrow, and that are held by non-affiliated security holders. Securities held by or for an employee incentive plan are not regarded by ASX as forming a part of an entity’s free float. 

The proposed change will bring the ASX into line with peer exchanges, including HKEx and NZX, which both require that 25% of a listed entity’s issued share capital at listing be held by public shareholders. SGX requires between 12% and 25% depending on the market capitalisation of the entity. 

ASX proposal: Change the spread test

In addition to the increase to the free float threshold outlined above, the proposed new ASX Listing Rule changes contemplate that if an entity has a free float at the time of its admission with a value of:

  • Less than $50 million, there must be at least 200 non-affiliated security holders; or
  • $50 million or more, there must be at least 100 non-affiliated security holders,

each of whom holds a parcel of the main class of securities (that are not restricted securities or subject to voluntary escrow) with a value of at least $5,000.

ASX does not have a rule-based requirement for a minimum number of Australian-resident security holders counted in spread, and is not proposing to introduce such a requirement. It does however, encourage a ‘reasonable number’ of Australian-resident security holders, and it may exercise its discretion under Listing Rule 1.19 to require a minimum residency threshold (usually in cases where the entity has its main business operations in, or has a majority of its board or a controlling shareholder resident in, an emerging or developing market).

The proposed changes represent a significant increase to the value of the parcel of securities required to be held by each security holder from $2,000 to $5,000, but is balanced by a decrease in the number of initial investors required.

ASX proposal: Apply the same working capital requirements to all assets test entities

ASX is proposing to standardise the current $1.5 million working capital requirement for entities seeking admission under the assets test, by extending the additional requirements that currently only apply to mining and oil and gas exploration entities, to all entities admitted under the assets test. The change is designed to give investors confidence about the level of working capital and to increase the likelihood that the entity has sufficient resources to carry on its business for a reasonable period.

Under the proposed amendments, an entity admitted under the assets test must have at least $1.5 million in working capital available after: 

  • taking into account the entity’s budgeted revenue for the first full financial year that ends after listing; and
  • allowing for the first full financial year’s budgeted administration costs and the cost of acquiring any assets referred to in the prospectus, PDS or information memorandum (to the extent that those costs will be met out of working capital). 

Updated Guidance Notes

In addition, ASX are proposing to make consequential amendments to the following Guidance Notes:

  • Guidance Note 1 Applying for admission – ASX Listings
  • Guidance Note 4 Foreign Entities Listing on ASX
  • Guidance Note 12 Significant Changes to Activities
  • Guidance Note 29 Applying for Admission – ASX Debt Listings
  • Guidance Note 30 Applying for Quotation of Additional Securities 

The proposed changes to the Listing Rules and to each of the above Guidance Notes can be viewed at http://www.asx.com.au/regulation/public-consultations.htm 

Submissions are due to ASX by 24 June 2016. It is expected that final changes to the Listing Rules will be released in early August 2016, and will come into effect on 1 September 2016.

By Julie Athanasoff, Adam D'Andreti, Sarah Turner, Lucy Hall, David Naoum

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