07/09/2021

This guide provides an overview of the process for conducting an initial public offering (IPO) in Australia and sets out, at a high level, some of the key legal and structuring issues relevant to a company seeking to conduct an IPO and list on the Australian Securities Exchange (ASX). There are a variety of reasons why a company may consider an IPO, including to raise capital and provide additional financial flexibility and access to capital markets to pursue growth opportunities.

Chapters:

If you would like more information on IPOs or other Australian legal issues, we contact our Equity Capital Markets lawyers.

This guide is current as of 12 August 2021. Please note that this guide reflects the 4th edition of ASX Corporate Governance Principles and Recommendations which took effect 1 January 2020.


The role of advisors in an initial public offering

Lawyers

  • Advising on all Australian legal aspects of preparing for listing (including the establishment of a due diligence process, assisting with the preparation of the prospectus, supervising verification of the prospectus and pre-listing corporate restructuring matters)
  • Advising on the entity’s board composition and corporate governance
  • Participating as a member of the DDC and providing a legal sign-off to the DDC that, among other things, the prospectus is not misleading or deceptive and that an appropriate due diligence process has been carried out
  • Carrying out legal due diligence, including reviewing any material contracts and preparing a report for the DDC
  • Assisting the entity with drafting and negotiating the underwriting agreement with the lead manager/underwriter and its counsel
  • Co-ordinating the listing application with ASX, lodging the prospectus with ASIC and seeking any other necessary regulatory approvals
  • Providing tax advice on structuring the offer (including any sell down by existing shareholders, including employees) and assisting on tax disclosures in the prospectus

Underwriters and lead managers

  • Advising on the structuring of the offer
  • Advising on the entity’s capital structure, dividend policy and board composition
  • Evaluating and keeping the entity informed of current market conditions and assessing the likely level of demand for the entity’s securities
  • Marketing to investors (including accompanying the entity’s management on roadshow presentations)
  • Advising on the best method of marketing, the size of the issue, the timing and price
  • Either underwriting the offer (by agreeing to acquire shares not taken up) or simply managing the offer (which usually involves the provision of “settlement support” in respect of investors who default on their settlement obligations)
  • Participating as a member of the DDC

Accountants

  • Assisting the company with preparing accounts and financial disclosure in the prospectus
  • Conducting a review of the financial information contained in the prospectus (including a review of the forecasts and underlying assumptions) and tax due diligence
  • Preparing an investigating accountant’s report for inclusion in the prospectus
  • Participating as a member of the DDC and providing a sign-off to the DDC on the financial information
  • Advising generally on accounting issues

Other experts

Independent financial advisers

Companies sometimes also appoint an independent financial adviser to assist them with the IPO process, including managing appointments of underwriters and lead managers and providing an independent perspective on their advice.

Share registry

Company will need to engage a registry to handle the receipt and processing of applications and the establishment and management of the share register.

Public Relations consultants

Company may wish to engage a public relations consultant to assist with publicising and marketing the offer.

Foreign legal counsel

Company will need to engage US legal counsel if an offer is to be made into the United States and New Zealand legal counsel if shares will be offered to retail investors in New Zealand.

Specialist experts

Companies operating in speciality industries such as mining and property may need to commission specialist experts to advise on and prepare specialist reports.

Others

Company will also need to engage a printer, designer and typesetter to assist with the prospectus.


Steps for listing a company on ASX

The main procedural steps for listing a company on ASX (including an indicative timetable) are discussed in this guide.

ASX is Australia’s main securities exchange for listings.  Companies listed on ASX are bound by the Listing Rules.

Listing Rules

In order to gain (and maintain) a listing on ASX, a company must comply with the Listing Rules. The obligations imposed on a listed company by the Listing Rules are additional to the company’s obligations to comply with the Corporations Act.

As a condition to ASX permitting a company to list, a company’s structure and operations must be appropriate for a listed entity. A company can initiate discussions with ASX prior to the lodgment of any listing application, to ensure a company has an appropriate structure and operations warranted for quotation on ASX. A company can do this by way of an in-principle advice application to ASX (In-principle Suitability Application).

ASX now strongly recommend that all companies seeking to list on ASX complete an In-principle Suitability Application prior to a company embarking on the IPO process, and incurring associated costs, only to find that ASX will not approve a company’s listing application due to the suitability of its structure and operations.

ASX has an absolute discretion to accept or reject any application for admission to its official list and takes into account, among other things, the reputation, integrity and efficiency of its market in exercising its discretion. However, a company that is complying with both the letter and the spirit of the Listing Rules can expect ASX to positively encourage and assist with the listing.

The securities laws of Australia (the Corporations Act and the ASIC Act) recognise the importance of compliance with the Listing Rules, ASX Operating Rules, ASIC Market Integrity Rules, Clear (Futures) Operating Rules and ASX Settlement Operating Rules (together, the Rules), and ASIC monitors compliance with the Rules. The Corporations Act requires that the Rules be observed and enables certain persons to apply to a court to seek orders enforcing the Rules.

Of central importance is the continuous disclosure regime established under the Listing Rules.  Once listed, a company is obliged to notify ASX immediately of any information that a reasonable person would expect to have a material effect on the price or value of the company’s securities. 

ASX pre-requisites for listing

A company seeking general admission must satisfy certain criteria before it can be granted official listing on ASX. The main criteria are set out below:

 

Pre-requisite

Explanation

Profit test or assets test

The company must satisfy either the profit test or the assets test (see Profit test or assets test for more details).

Main class of securities

The company must apply for, and be granted, permission for quotation of all securities in the main class of the company’s securities (generally ordinary shares) however, different classes of securities, such as shares with preferential rights to dividends are permitted.

Constitution

The company must have a constitution that is consistent with the Listing Rules, as well as the law governing corporations resident in the jurisdiction of the company’s incorporation or registration.

Appropriate structure and operations

In determining whether the company’s structure and operations are appropriate for a listed entity, ASX may have regard to whether the principles on which the Listing Rules are based have been and will be complied with. As noted above, prior lodgment of an In-principle Suitability Application can provide a company with a level of certainty that it may have an appropriate structure and operations to warrant listing on ASX.

Compliance

ASX must be satisfied that the company will comply with the Listing Rules.

Good fame and character

ASX must be satisfied that each director or proposed director, CEO or proposed CEO, and CFO or proposed CFO (together, relevant officers) of the company as at the date of listing is of good fame and character.  This is to be satisfied by obtaining national criminal history and personal insolvency searches for each jurisdiction that each relevant officer (under their current name and any other name or alias) has resided in over the past 10 years, accompanied by statutory declarations. ASX may also have regard to any other information in its possession about a relevant officer from any source (including its prior dealings (if any) with the relevant officer in any capacity).

ASX may also require ‘good fame and character’ checks from people who are not currently, or proposed to be, relevant officers of the company but who are likely to be involved in its management.

Prospectus

The company must issue a prospectus (or, if the company does not need to raise capital in the short-term and is undertaking a compliance listing, with ASX’s agreement, an information memorandum which has distinct information requirements), lodge the prospectus with ASIC and give it to ASX.

Issue price

The issue price per share must be at least $0.20.

Free Float

The company must have a 20% minimum “free float” (being the percentage of the company’s shares that are not subject to mandatory or voluntary escrow, and are held by “non-affiliated security holders”).

Minimum shareholding spread

There must be at least 300 “non-affiliated security holders”, each holding a parcel of shares having a value of at least $2,000, excluding securities that are subject to mandatory or voluntary escrow.

This condition is not met if the spread is obtained artificially.

Corporate governance

Companies are recommended to comply with the ASX Recommendations which include recommendations about the size and composition of boards and board committees, amongst other matters. If the company does not comply, the prospectus will need to disclose why not.  Some recommendations are mandatory for particular companies. See Corporate governance and board structure for more details.

ASX liaison officer

The company must have a person who is responsible for communication with ASX on listing rule matters and who is contactable during market hours. Any person appointed to this role on or after 1 July 2020, must have completed an approved listing rule compliance course and attained a satisfactory pass mark.

Profit test or assets test

  • To meet the profit test, the company must satisfy each of the following:
    • Going concern – the company must be a going concern, or the successor of a going concern.
    • 3 years profit – the company must have an aggregated operating profit from continuing operations before tax for the past 3 full financial years of at least $1 million.
    • Last year’s profit – the company’s consolidated operating profit from continuing operations before tax for the 12 months to a date no more than 2 months before applying for admission must have been at least $500,000.
    • Same business – the company must have been in the same predominant business activity for at least the last 3 full financial years.
    • Unqualified audited accounts – the company must give ASX unqualified audited financial statements for the last 3 full financial years and an unqualified reviewed pro-forma balance sheet showing the effect of any material transactions (including any acquisitions, disposals or issues of securities) expected to occur in conjunction with the company’s admission (unless ASX agrees the pro-forma balance sheet is not needed).  The review must be conducted by a registered company auditor or an independent accountant. Unqualified audited or reviewed financial statements for the last half year must also be provided if the company lodges its listing application more than 6 months and 75 days into the current financial year. In each case the audit report or review must be given to ASX.
    • Directors’ statement – the company’s fundraising document must contain a statement confirming that the directors have made enquiries and nothing has come to their attention to suggest that the company is not continuing to earn profit from continuing operations up to the date of the fundraising document. Alternatively, the company must give ASX a separate statement signed by all its directors, which ASX will then release to market as pre-quotation disclosure.

A company that has not conducted the same main business activity during the last 3 full financial years or that is not able to provide audited accounts for the last 3 full financial years which meet the requirements above must apply for admission under the assets test, even if it has otherwise achieved the required profit levels to be admitted under the profit test.

  • To meet the assets test, the company must satisfy each of the following:
    • Net tangible assets – at the time of admission, the company must have net tangible assets of at least $4 million (after deducting the costs of fundraising), or a market capitalisation of at least $15 million.
    • Less than half cash – after raising funds, less than half of the company’s total tangible assets must be cash or in a form readily convertible to cash.  Alternatively, the company must have commitments consistent with its stated business objectives (as set out in its fundraising document) to spend at least half of its cash and assets in a form readily convertible to cash. In the alternative case, the company’s fundraising document must include an expenditure program setting out these commitments.
    • Working capital – The company’s fundraising document must state the objectives the company is seeking to achieve from its admission and any related capital raising. It must also contain a statement that the company has enough working capital at the time of its admission to carry out its stated objectives, or else the company must give ASX an equivalent statement from an independent expert.  In addition, the company’s working capital, as shown in its reviewed pro forma statement of financial position must be at least $1.5 million.
    • Unqualified audited accounts – the company must give ASX unqualified audited financial statements for the last 2 full financial years and an unqualified reviewed pro-forma balance sheet showing the effect of any material transactions (including any acquisitions, disposals or issues of securities) expected to occur in conjunction with the company’s admission (unless ASX agrees such accounts and/or pro-forma balance sheet are not needed).  The review must be conducted by a registered company auditor or an independent accountant. Unqualified audited or reviewed financial statements for the last half year must also be provided if the company lodges its listing application more than 6 months and 75 days into the current financial year.  In each case the audit report or review must be given to ASX. The same disclosure requirements apply to any significant entity or business that the company acquired in the 12 months prior to applying for admission or proposes to acquire in connection with its listing.

Escrow restrictions

Escrow refers to restrictions imposed on the ability of a shareholder to dispose of their shares in the listed company (whether directly through a transfer of those shares or indirectly, for example, by the sale of shares in the shareholder where it is a company).

Mandatory escrow restrictions are applied by ASX where the entity is admitted under the assets test (however, ASX retains a discretion not to impose escrow where the entity has a track record of profitability or revenue acceptable to ASX , or in ASX’s opinion, the company has a substantial proportion of its assets as tangible assets or assets with a readily ascertainable value).  Unless the company has operated the same main business activity for at least 3 full financial years, has generated aggregated revenue of less than $20 million in each of those years, has an IPO greater than $20 million and will have a market capitalisation of at least $100 million, this discretion will not be exercised in their favour. Where mandatory escrow restrictions apply, ASX will determine the length of the escrow restrictions based on its categorisation of existing shareholders against ASX’s published guidance.

A shareholder may also voluntarily agree to the imposition of escrow restrictions where these restrictions are considered commercially necessary to the success of the IPO.  The underwriter/lead manager will provide advice about what is required.

Corporate governance and board structure

The company will need to review its board size and composition and its corporate governance arrangements in connection with the IPO to ensure they are appropriate for an ASX listed company of the size and nature of the company.

The ASX Corporate Governance Council has published the ASX Recommendations for Australian listed entities in order to promote investor confidence and to assist companies in meeting stakeholder expectations.  The ASX Recommendations are not mandatory, but a set of guidelines.  However, under the Listing Rules, the company will be required to disclose the extent to which it has followed the ASX Recommendations. To the extent a company does not comply with the ASX Recommendations, it must identify the relevant recommendation and give reasons for not following it. The company must also specify what (if any) alternative governance practices it intends to adopt in lieu of the recommendation.

Some of the ASX Recommendations may require changes to the company’s board and its corporate governance arrangements that may take some time to meet, or which are mandatory.  These are set out on the next page.

ASX recommendation/ Consideration

Explanation

Background checks

A listed entity should undertake background checks on directors or senior executives before appointing them, or putting someone forward for election as a director. Some checks can take time; where a listed entity wishes to make a provisional appointment or put a resolution to members electing a director, subject to receipt of satisfactory outstanding checks, the entity should require the appointee to give an unequivocal undertaking to resign in case of receipt of unsatisfactory check.

Board independence

One of the ASX Recommendations is that the board comprise a majority of independent directors, and have a chair who is an independent director.  It can take time to identify suitable board nominees where additions are required to meet this recommendation.

The board should rule a director not to be independent if falling within certain examples unless it is clear that the interest, position, affiliation or relationship is not material and will not interfere with independent judgment.

Board committees – some ASX Recommendations are binding

An entity which will be included in the S&P All Ordinaries Index on admission must have an audit committee. If it will be in the S&P/ASX300 it must also:

  • comply with the ASX Recommendations in relation to the composition, operation and responsibility of the audit committee (at least 3 members, all non-executive directors and a majority who are independent directors); and
  • have a remuneration committee comprising solely of non-executive directors.

In addition, ASX recommends that each board have a nomination committee.

Securities trading policy is mandatory

All ASX listed companies must have in place a securities trading policy which discloses the “closed periods” for trading in the company’s securities and related matters.

Other recommended corporate governance policies

It can also take time to develop other corporate governance policies (such as those set out below) that are recommended by ASX.  A listed entity must have and disclose:

  • Board charter (setting out roles and responsibilities of board and management and matters reserved to board and those delegated to management);
  • Code of conduct for directors, senior executives and employees (with the board or a board committee being informed of any material breaches of the code);
  • Statement of values (considering not only the need to build long term sustainable value for its shareholders, but also the need to preserve the entity’s reputation and standing in the community. The company must also consider key stakeholders, such as customers, employees, suppliers, creditors, law makers and regulators);
  • Diversity policy (including measurable gender diversity objectives for each reporting period in the composition of board, senior executives and general workforce)
  • an entity in the S&P/ASX300 should have the objective of at least 30% of each gender represented in its board within a specified period;
  • Whistleblower policy (with the board or a board committee being informed of any material incidents reported under the policy);
  • Anti-bribery and corruption policy (with the board or a board committee being informed of any material breaches of that policy);
  • Continuous disclosure policy(including developing the company’s internal arrangements to enable it to meet its continuous disclosure obligations).

Other matters relevant to boards

Other considerations relevant to boards:

  • as noted above, prior lodgment of an In-principle Suitability Application can provide a company with a level of certainty that it may have an appropriate structure and operations to warrant listing on ASX;
  • put in place deeds of access, insurance and indemnity for the board that are appropriate for a listed entity; and
  • ensure that all remuneration and incentive arrangements for directors (or proposed to be put in place for executive and non-executive directors) are appropriate and consistent with the Listing Rules and the Corporations Act.

Foreign Companies – standard ASX listing

A foreign company seeking an ASX Listing must satisfy the same admission requirements as an Australian company, even where the foreign company is listed on an overseas stock exchange.  Additional requirements include:

  • it must be registered as a foreign company carrying on business in Australia under the Corporations Act;
  • if the foreign company is established in a jurisdiction whose laws have the effect that its securities cannot be registered or transferred under the operating rules of an approved clearing and settlement facility, the issuer must be approved as a foreign issuer of CDIs under those operating rules.

Financial statements given to ASX must be prepared in accordance with Australian Accounting Standards or other standards agreed by ASX. ASIC policy is that unless the company is legally required in its place of incorporation to prepare financial accounts in accordance with its local accounting standards, then the company must prepare accounts in accordance with Australian Accounting Standards.

The foreign company will need to appoint local counsel in its place of incorporation for conducting due diligence in that jurisdiction.

Foreign Companies – foreign exempt listing

Where a foreign company seeking admission to ASX is already listed on an approved foreign exchange, it can seek a listing on ASX without the need to comply with all of the admission requirements. In addition, it can seek exemptions from some of the ASX Listing Rules. This is called a “foreign exempt listing” and is only available to companies listed on a select list of approved foreign exchanges (such as NZX, NYSE, NASDAQ, HKEx, SGX and LSE). There are additional pre-conditions, such as a profit and assets test, which are significant for entities listed on exchanges other than NZX.


IPO vehicle and offer structure

A proprietary company cannot issue or offer to sell shares to the public or retail shareholders. In this respect, it will be necessary for a proprietary company to convert to a public company before an IPO.  Alternatively, a new public company could be established to be the IPO vehicle and to own the shares in the proprietary company.

It will be important to determine early in the process which entity will be listed. This will depend on a number of factors including:

  • whether the offer is a primary issue or sell-down (including tax ramifications);
  • the number of shareholders and ease of execution; and
  • a desire to contain prospectus liability.

IPO structures

Secondary sales

Sale of shares by existing shareholders directly to the public.  Often combined with a new share issue (which is known as a “primary issue”).

Primary issue

New shares issued to the public with a possible buy-back/capital return on shares held by existing shareholders or dilution of existing shareholders.

Vendor sale through SaleCo

Sale of shares by existing shareholders to SaleCo.  Sale of existing shares by SaleCo to the public. Often combined with a new share issue.

FloatCo

New special purpose vehicle, FloatCo (or its subsidiary), enters into an agreement with existing shareholders to acquire the business using proceeds of a new share issue to the public by FloatCo. Consideration for acquisition of business paid to existing shareholders can be cash and/or shares.


Issuing a prospectus before listing on ASX

Requirement for a prospectus

The company must issue a prospectus (or with ASX’s agreement, an information memorandum if the company is undertaking a compliance listing without raising capital) before it can be listed on ASX.

When an offer of new securities is made to Australian retail investors, a prospectus (which has been lodged with ASIC) must be issued to investors.

A prospectus (or other disclosure document) is also required for secondary sales of previously issued securities in certain circumstances.  The “on-sale” provisions contained in the Corporations Act (which impose this disclosure requirement) are intended to prevent companies or sellers from avoiding the prospectus requirements by issuing or selling their shares to sophisticated and professional investors only (who do not ordinarily require a disclosure document) only for those purchasers to “on-sell” those shares to retail investors.

Prospectuses do not need to be registered by ASIC, but must be lodged with ASIC. The company may distribute a prospectus immediately after lodgement, but must not accept an application for, or issue or transfer securities offered under the disclosure document until seven days after lodgement (or for up to 14 days, if extended by ASIC). This is known as the exposure period.

Liability and defences

Under the Corporations Act, civil, and potentially criminal, liability are imposed on those involved in the preparation and issue of a prospectus if:

  • the prospectus contains a misleading or deceptive statement;
  • there is an omission from the prospectus of any material required by the Corporations Act to be included in the prospectus; or
  • a new circumstance has arisen since lodgement of the prospectus which would have been required to be disclosed in the prospectus had it arisen prior to lodgement, and it was not included in a supplementary or replacement prospectus.

This “deemed” liability for the prospectus extends to the issuers of the prospectus (typically the company and any person who makes a sale offer), the directors and proposed directors of those entities, as well as to underwriters, persons named with their consent as having made statements included in the prospectus and other people involved in the preparation of the prospectus.  Each of these persons has personal criminal and civil liability regardless of whether or not they are personally at fault for the relevant deficiency.

The two defences potentially available to those persons are the “due diligence defence” and the “reasonable reliance defence”.

The ability to rely on these defences will depend on the nature of the due diligence system, the reliability and appropriateness of the people involved, and the involvement in the process and conduct of the person seeking to rely on the defence.

Content requirements

The prospectus will be prepared simultaneously with the conduct of the due diligence process which is managed and co-ordinated by a DDC. The content of the prospectus will reflect the findings of the due diligence process. The Corporations Act has both general and specific disclosure requirements.

The general requirement is that a prospectus must contain all the information in relation to the company that investors and their professional advisers would reasonably require to make an informed assessment of (broadly):

  • the rights and liabilities attaching to the securities offered; and
  • the assets and liabilities, financial position and performance, profits and losses and prospects of the company,

to the extent to which it is reasonable for investors and their professional advisers to expect to find that information in the prospectus. Disclosure will only need to be made if the company, its directors and proposed directors (if any), underwriters or advisers (including people named in the prospectus) actually know the information or (in the circumstances) ought reasonably to have obtained the information by making enquiries.

The prospectus must be worded and presented in a clear, concise and effective manner (ASIC Regulatory Guide 228 sets out ASIC’s view on how issuers can satisfy this requirement).

Unlike in other jurisdictions such as the United States and Hong Kong, it is not mandatory for ASIC to pre-vet a prospectus. Where certain issues arise however, ASIC has pre-vetted specific sections of the prospectus relevant to those issues.

Disclosure of historical financial information

Although historical financial disclosure requirements will vary from company to company (including whether the company is applying under the “profit test” or the “assets test”), in general, a prospectus must contain the following audited financial information for at least the 3 most recent financial years (or 2 years of audited information and a half-year of reviewed information, depending on the prospectus date):

  • consolidated income statement (showing major revenue and expense items and profit or loss, including EBIT and NPAT);
  • consolidated cash flow statement (at a minimum showing operating and investing cash flows);
  • other material information from financials, notes and any other documents attached to the financial reports;
  • any modified opinion by the auditor;
  • all events that have had a material effect on the applicant since the date of the most recent financial statements; and
  • a warning that past performance is not a guide to future performance.

You should also expect to provide a consolidated audited statement of financial position for the most recent financial year (or reviewed statement if most recently you have completed a half-year) showing major asset, liability and equity groups and a corresponding pro-forma statement of financial position showing the effect of the offer and any acquisitions.

It is also customary for pro forma income statements and cash flow statements to be prepared for inclusion in the prospectus.

Depending on the timing for lodgement of the prospectus, the most recent financial statements for the company might be a half-year accounts. In that case, because ASIC’s regulatory policy requires that prior period comparatives are also included in the prospectus, it may be necessary for a company to arrange a review of its half-year accounts for that prior period (if it hasn’t already). Practically, this means that the requirement for financial information disclosure in the prospectus is 3 years or 2 years plus 2 half-years.

There are very limited circumstances in which ASIC and ASX will soften these requirements, so we recommend early engagement with ASX, ASIC and the company’s auditor to ensure that the timetable allows for the preparation of audited or reviewed accounts.

Forecasts

There is no specific legal requirement for a prospectus to include a forecast, however the Corporations Act requires that a company disclose its “prospects”.  ASIC Regulatory Guide 170 indicates that ASIC expects a forecast to be disclosed in a prospectus if reasonable grounds exist for making such forecasts. Market practice is also for companies with operating profit to provide forecasts.  Accordingly, it will often be the case that a forecast is included in an IPO prospectus to assist the marketing of the IPO and to meet the disclosure requirements.

If a forecast or prospective financial information is included, there must be reasonable grounds for making that forecast or statement. Whether or not there are reasonable grounds for including prospective financial information depends on various factors. It is customary to include an investigating accountant’s report from an external accountant which covers the forecast financial information.  The length of the forecast given will depend on the nature of the business and the timing of the IPO (with forecasts generally ranging from 6 to 18 months).

Supplementary and replacement prospectuses

If a prospectus is found to be deficient, or if new information emerges during the period before the shares are issued (or transferred) under the offer, there may be a need to issue and lodge a supplementary or a replacement prospectus. It is an offence to proceed with the offer in the absence of a supplementary prospectus where the deficiency is materially adverse from the point of view of an investor.


Due diligence process

Overview and purpose

A prospectus due diligence process has a number of purposes, including to:

  • ensure that the prospectus does not contain any statements which are misleading or deceptive or omits material required by the Corporations Act;
  • ensure that the company had reasonable grounds for making every forecast or other representation in the prospectus about future matters; and
  • constitute reasonable enquiries, reasonable belief and reasonable reliance sufficient to establish the relevant defences under the Corporations Act.

To achieve these objectives and, in particular, to rely on the defences it is necessary to discharge two responsibilities, namely:

  • to establish a proper system aimed at preventing contravention of the Corporations Act; and
  • to provide adequate supervision to ensure that the system is properly carried out.

A company will establish a DDC to supervise the due diligence process.  Detailed records of the “design” of the system, the results of the investigation and the verification process must be kept.

DDC

Established practice in Australia is to form a DDC made up of the various parties with potential liability for the prospectus.  The DDC ensures that appropriate and adequate due diligence investigations are carried out. The parties involved in the prospectus due diligence process are generally the company, the company’s Australian lawyers, the underwriter/lead manager, the investigating accountant and other experts.

The accounting, legal and other advisers will prepare reports to the DDC. Ultimately this process will end with “sign-offs” or formal opinions being given by the legal adviser on the legal aspects of the prospectus and the other advisers in respect of their relevant areas. The “sign-offs ”/opinions are not a substitute for having properly conducted all necessary due diligence enquiries. The DDC reports periodically to the board of directors of the Company on the conduct of the due diligence process and provides a final report prior to lodgement of the prospectus.

Due diligence defences

A person seeking to make out a defence to a claim that the prospectus was misleading or deceptive or omitted information required to be included in the prospectus must be able to prove that they personally made all those enquiries it was reasonable to expect them to make. There must be reasonable grounds for a personal belief in the material completeness and accuracy of the prospectus, or those parts for which they were responsible, based on reasonable enquiries.

Each person seeking to rely on the defences must address their mind to the adequacy of the due diligence process and the draft prospectus. However, that does not mean that every director must personally be present throughout all due diligence enquiries. It is reasonable that the board delegates some of the tasks of enquiry both to the DDC and to other external experts.

The board must be satisfied with the adequacy of the due diligence system. The board should receive progress reports and address its mind to the contents, questioning where desirable and if necessary calling for further reports.

The company’s own internal verification procedures are of high importance, particularly because:

  • ASIC does not customarily pre-vet, or make formal requisitions in relation to any prospectus lodged with it (see Content requirements above);
  • ASIC does not check whether a prospectus complies with the requirements of the Corporations Act, contains statements that are misleading or deceptive, or omits any matter;
  • ASIC may impose a “stop order” prohibiting further use of the prospectus until any alleged defects are corrected through the issue of a supplementary, or replacement prospectus or the offer is withdrawn;
  • the information to be included in a prospectus is limited to the actual knowledge, or knowledge that ought reasonably to have been obtained by making enquiries of certain people involved in preparation of the prospectus; and
  • for the “due diligence” defences to be available, the Corporations Act expressly requires that a defendant must prove that they made “all enquiries (if any) that were reasonable in the circumstances” and “believed on reasonable grounds” that the statements in the prospectus were not misleading or deceptive and that there was no omission from the prospectus in relation to a particular matter. Management is expected to “sign-off ” to the DDC on issues directed to them by the DDC during the due diligence process and on the prospectus as a whole.

Summary of the due diligence process

 


Marketing

Marketing to retail investors is not permitted before lodging the prospectus with ASIC and there are restrictive provisions in the Corporations Act which constrain pre-prospectus advertising more generally. However before lodging the prospectus, certain types of marketing to institutional and other sophisticated investors is permitted.

This marketing may include:

Research reports

Affiliates of the lead manager or underwriter or other members of the underwriting syndicate may publish research reports about the company.  These reports may be circulated to institutional investors on a stringently monitored basis before the offering.  They are intended to provide information about the company and its business, and do not refer to the IPO.

In 2018, ASIC released Regulatory Guide 264, which contains detailed guidance from ASIC on how it believes that research reports should be prepared in order for risks of conflicts of interest and inside information to be managed. This guidance has led to changes in the manner in which pre-IPO research reports are prepared - for example, it is no longer the case that the analyst’s valuation is shared with the issuer or the lead manager bankers before it is widely disseminated to potential investors.

Pre-marketing

Sales people of the lead manager or underwriter may contact a number of institutional investors to:

  • familiarise themselves with the “equity story”;
  • generate investor interest; and
  • identify concerns to be addressed on the management roadshow.

This commonly takes the form of a “non-deal roadshow” which involves management meeting potential investors to introduce the company and its business with the help of a presentation deck.

Roadshows

The lead manager or underwriter will organise a series of meetings with institutional investors to ascertain the level of investor demand for the IPO.

General public

The publicity campaign to investors can begin once the prospectus is lodged. Generally speaking, mass media advertising is rare, other than in larger IPOs which include an offer to the general public.

More frequently, retail investors are solicited by brokers from their retail distribution networks.

Shareholders and employees

In late 2020, ASIC provided relief to companies to allow them to conduct certain pre-IPO communications with shareholders, employees and former employees before lodging its prospectus. This is provided the communications are factual and do not advertise the advantages, benefits or merits of the planned offer under the IPO. ASIC has updated Regulatory Guide 254 to incorporate this relief, which now contains guidance and a comprehensive list as to the types of matters this pre-IPO communication is limited to.


Pricing of securities 

Marketing the IPO to investors and the pricing of securities is one of the most important stages of an IPO. The final price is generally determined by a bookbuild run by a bookrunner (an investment bank who is the lead manager/underwriter) which can either occur at the “back-end” of an offer period or at the “front-end” (ie prior to lodgement of the prospectus).

Front-end (fixed price offering)

In a front-end bookbuild, the price for the shares is determined by a bookbuild conducted prior to lodgement of the prospectus with ASIC.  This allows the company to determine the price and include the fixed price in the prospectus. A front-end bookbuild is typically used to mitigate pricing risk in a challenging market. Unlike a back-end offer, an offer structured with a front-end bookbuild is typically underwritten by the underwriter at the conclusion of the bookbuild.

A front-end bookbuild will typically have the following structure:

Front-end

Pre-offer

  • Preparation of independent analyst research reports and investor education by the analysts

Marketing

  • Institutional roadshow by management using a pathfinder prospectus (ie a draft prospectus)

Price

  • Price range determined by the lead managers (based on feedback from investor education and roadshows)

Bookbuild

  • IPO price is determined by assessing demand from institutional investors
  • Allocation of securities between institutions and participating brokers
  • Underwriting Agreement signed

Prospectus

  • Prospectus is lodged with ASIC

Retail offer

  • ASIC exposure period
  • Retail offer period opens and closes

Settlement and trading

  • Trading can commence either before settlement (“conditional trading”) or after settlement (“deferred settlement trading”) of the IPO

Back-end

A back-end bookbuild is often used for determining the final price of the securities. The lead manager in a back-end bookbuild will provide settlement support in relation to investors who commit to invest but fail to settle.

A back-end bookbuild will typically follow the following structure:

Back-end

Pre-marketing

  • Preparation of independent analyst research reports and investor education by the analysts

Price

  • Price range determined by the lead managers based on analyst pre-marketing feedback
  • Offer Management Agreement signed

Prospectus

  • Prospectus is lodged with ASIC (exposure period)

Marketing

  • Roadshow and meetings with company management

Retail offer

  • ASIC exposure period
  • Retail offer period opens and closes

Bookbuild

  • Bids are submitted to the bookrunner by Australian and offshore institutional investors indicating the number of securities they wish to subscribe for and the price they are prepared to pay
  • Final bids constitute irrevocable offers to subscribe for the number of securities bid
  • After the close of the offer, the bookrunner in consultation with the company will determine the final price on the basis of the bids received in the offer

Allocation

  • The company and the lead managers will allocate the securities among retail applicants and the successful bidders of the institutional offer based on the final price determined through the institutional bookbuild

Settlement and trading

  • Trading can commence either before settlement (“conditional trading”) or after settlement (“deferred settlement trading”) of the IPO

Trading on ASX

Commencement of trading

Subject to negotiations with ASX, trading of a company’s securities following an IPO may commence on a “conditional and deferred settlement” basis following close of the offer but prior to settlement of the offer. Alternatively, trading may commence on a “normal settlement basis”, which is the day after settlement of the IPO, provided that the securities under the offer have been issued/transferred to investors and there is no general public offer. Where there is a general public offer, then unless ASX has allowed trading to commence on a “conditional and deferred settlement basis”, ASX will generally only allow trading to commence on a normal settlement basis 3 business days after holding statements have been issued following the issue/transfer of securities to IPO investors.

Settlement of ASX trades

ASX operates CHESS which is a fully digitised system. CHESS ended the need for a paper transfer document, by enabling securities to be transferred by electronic means. CHESS does not involve physical share certificates. Settlement time is currently the second business day after the trade unless trading has taken place on a “deferred settlement” basis. CHESS was developed with the ultimate objective of reducing settlement time to the first business day after the trade.

ASX can also facilitate listings of companies incorporated in jurisdictions whose laws are incompatible with the dematerialised nature of securities trading on ASX (eg United States, United Kingdom, Hong Kong).  CDIs can be issued over shares in foreign companies listed on ASX which fall into this category.


IPO timetable

Generally, a reasonably simple IPO can be completed in 3 to 4 months.

Set out below is a highly simplified indicative IPO timetable (for a front-end bookbuild). Most of the matters listed in the timetable proceed over a longer period of time.


Changes you can expect as an ASX listed company

Once a company is listed, it will be required to deal with increased media focus, manage its investor relations, and comply with the Listing Rules.

Compliance with Listing Rules and continuous disclosure

The Listing Rules are a contract between the ASX and the listed company, and are legally enforceable. The Listing Rules impose a number of new requirements on a company, including in relation to transactions with significant shareholders and related parties, the conduct of shareholder meetings, and the imposition of periodic financial reporting requirements.

The most significant new obligation imposed on a listed company relates to the need to make continuous disclosure to ASX. The continuous disclosure obligations are imposed by the Corporations Act and the Listing Rules to ensure that investors are able to make well-informed decisions. Ultimate responsibility for compliance with continuous disclosure obligations rests with an entity’s board of directors and a breach of these obligations can also constitute a breach of directors’ statutory and general law duty to take care.

Unless a relevant exception applies, Listing Rule 3.1 requires that “once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.”

There is no “one size fits all” approach to meeting continuous disclosure obligations. ASX-listed entities are susceptible to varying types of disclosure issues depending on their business and industry, their size and complexity and the types of investors that they have. The financial and human resources a company can devote to managing its continuous disclosure obligations will also vary. Effective continuous disclosure depends on an entity implementing a process that is both sufficient under the law and realistically attainable by the entity. All effective processes will have in common several key features which include:

  • identification and escalation of information that is potentially material;
  • clarity around decision making and the allocation of administrative responsibility for managing the continuous disclosure obligations (in particular, formation of a disclosure committee with oversight); and
  • documentation of the policy and procedures in a written continuous disclosure policy.

It is important to have a system of escalation in place, since a listed company will be deemed to be aware of a matter if its officers have the relevant knowledge. Likewise, officers have legal duties to take reasonable care to ensure the company complies with its disclosure obligations, which also requires that they put in place adequate arrangements to ensure information gets to them in the first place.

Periodic reporting obligations

Every ASX listed company has periodic financial reporting obligations, which include:

  • a half-year financial statement, directors report and Appendix 4D, which must be lodged with ASX within 2 months of the end of the half-year (within 75 days for mining exploration and oil and gas exploration entities);
  • a preliminary final report (an Appendix 4E), which must be lodged with ASX within 2 months of the end of the financial year; and
  • an annual report (which includes an annual financial statement and directors report), which must be lodged with ASX within 3 months at the end of a company’s financial year.

There are other periodic reporting obligations that may apply to specific types of companies (such as quarterly cash flow reporting).

Insider trading

While insider trading laws apply to all investors, they are particularly relevant to the board of directors and management of a listed company (and those who are close to them), as they are more likely to have non-public material information, or “inside information” about the company.

In addition to complying with the listed company’s internal securities trading policy, an insider must not trade in financial information when they have inside information (or procure someone else to), and must not share the inside information with someone who is likely to trade.

DOWNLOAD PDF
""
 
""