16 May, 2016
What you need to know:
Australian Securities Exchange (ASX) has issued a consultation paper proposing changes to the admission requirements for listing on ASX designed to ensure that the ASX market continues to be a market of quality and integrity and remains internationally competitive. The proposed changes come following a resurgence in very small early-stage companies listing on ASX where questions are being asked as to why they are listing at all when they have little or no revenue and raise only a small amount of funds by selling a minor stake in the company.
ASX is also proposing to provide more express guidance (which reflects formal processes put in place by ASX earlier this year) on when it will exercise its discretion to decide not to admit an entity to the official list even where that entity technically meets all the specific listing requirements.
More express guidance on when ASX will exercise its discretion to refuse admission to the official list consistent with the broad theme of market integrity, the proposed amendments include ASX amending the introduction of the Listing Rules to reinforce ASX's absolute discretion on questions of admission and quotation. The introduction will specify that ASX will take into account the reputation and integrity of its market in making these decisions. Guidance Note 1 (Applying for Admission — ASX Listings) will be amended to include a non-exhaustive list of examples of when
ASX may exercise its discretion not to list a company. These are when:
- ASX is not satisfied that the company has an appropriate structure and operations
- ASX is not satisfied with the qualifications and experience of the auditor
- ASX has had prior unacceptable dealings with the company, its directors, promoters, brokers, auditors, investigating accountant or other advisers
- ASX consider that the company is listing for collateral purposes unrelated to accessing capital markets
- ASIC or another regulator has expressed concerns to ASX about the company
- the company has been denied admission to the official list of another exchange
- ASX has concerns that the listing may put its reputation at risk
In terms of what ASX considers an appropriate structure and operations for a listed company, Guidance Note 1 will also be updated to give further guidance as to what ASX considers inappropriate. The examples focus on the business model and operations, the adequacy of regulation in the jurisdiction where the company operates, the legality of the operations, ownership its main assets and the quality or experience of the board and senior management.
These changes reflect the changes that ASX made to its admission process earlier this year under which ASX established a committee comprising senior managers which review listing applications from companies in emerging or developing markets (either by incorporation, operations, board or controlling shareholder). This review process focuses on the applicant's business structure, commercial operations, where it conducts business, the credentials of the promoters and management, the reasons for listing and any issues that have been raised by regulatory bodies.
Summary of key proposed changes to admission requirements
|
Requirement |
Existing Requirement |
Proposed New Requirement |
Comment |
|
Assets Test |
Net Tangible Assets of $3m (no change since 2012) Market Capitalisation of $10m (no change since 1999) |
Net Tangible Assets of $5m Market Capitalisation of $20m |
A material increase likely to impact exploration companies, tech companies and start-up companies that do not have a track record of profitability |
|
Profits Test |
Going concern Same business during the last 3 financial years Aggregate profits of $1m over the last 3 financial years Profits of $400,000 over the last 12 months
|
Going concern Same business during the last 3 financial years Aggregate profits of $1m over the last 3 financial years Profits of $500,000 over the last 12 months |
Hasn’t changed since 1994 Aim is to maintain a minimum standard in terms of size and quality |
|
Free-Float Requirement |
No rule-based free float requirement |
20% minimum free float |
ASX has in the past typically required a free float of 10% – 20% when exercising its general discretion whether or not to list a company It is now proposing to include a free float requirement as a specific admission condition (similar to LSE, HKEx, SGX and NZX) |
|
Spread |
One of the following: ● 400 shareholders with shares worth at least $2,000 ● 350 shareholders with shares worth at least $2,000 and a free float of at least 25% ● 300 shareholders with shares worth at least $2,000 and a free float of at least 50% |
● Free float <$50m: 200 shareholders; or ● Free float >$50m: 100 shareholders; and ● Each shareholder counted towards spread must have shares worth at least $5,000 |
Designed to ensure that there is a material level of investor interest in the company and that there will be a liquid secondary market No requirement for a minimum number of Australian resident shareholders although ASX encourages companies to have a reasonable number of Australian shareholders with holdings of at least $5,000 and retains its discretion to impose such a requirement |
|
Working Capital |
Companies listing under the Assets Test must have working capital of at least $1.5m, including budgeted revenue from the first financial year after admission Exploration entities must have working capital of at least $1.5m, after allowing for budgeted costs in the first financial year after admission |
All companies listing under the Assets Test must have working capital of at least $1.5m ● including budgeted revenue from the first financial year after admission ● after allowing for budgeted costs in the first financial year after admission |
Harmonises the working capital requirement to provide greater certainty to investors in relation to the financial stability of newly listed companies |
|
Audited Financial Statements |
Companies listing under the Profits Test – audited financial statements for the last 3 financial years Companies listing under the Assets Test – unaudited financial statements for a period shorter than 3 financial years |
All companies (listing under the Assets Test or Profits Test) must have audited accounts for the last 3 full financial years, unless ASX decides otherwise |
Aims to provide investors with a greater amount of financial information and to more closely align the ASX requirements with ASIC's policy In a new note to the Listing Rule 1.3.5, ASX states that it will generally only agree to accept less than 3 full financial years of audited accounts where ASIC will accept less than 3 full financial years of audited accounts in the prospectus |
Impact of increase to the assets test thresholds
The increase to the assets test thresholds is likely to impact companies without a track record of operating profit, such as exploration companies, tech companies and other start-up companies.
However, ASX carefully points out that it has a long history in supporting the listing of these early stage and start-up companies and continues to view admission under the assets test as a pathway for such companies. For example, in 2015 20 of the 25 technology companies admitted to ASX did so under the assets test (15 companies under the NTA test and 5 under the market capitalisation test). In press statements following the release of the consultation paper, ASX has stated that it continues to encourage tech-companies, start-ups and explorations to list on ASX, however, it has asked companies and advisors to consider what stage in the company's life is appropriate for listing.
While acknowledging the importance of the assets test as a pathway to accommodate these companies, the proposed changes to the NTA and market capitalisation thresholds are aimed at providing greater surety that smaller newly listed companies have sufficient resources to carry on their business for a reasonable period.
What are the minimum free-float requirements?
The proposed free float listing condition is aimed at increasing liquidity in the secondary market while balancing this with supporting innovation and emerging growth industries which have typically sought to list a smaller percentage of the company on admission and then, as they grow, so too will the level of free float.
"Free float" will be defined as the percentage of the main class of shares that are not restricted securities or subject to voluntary escrow, and that are held by non-affiliated security holders. A "non-affiliated security holder" will in turn be defined as a security holder who is not a related party of the entity, an associate of a related party of the entity, or a person whose relationship to the entity or to a related party of the entity or their associates is such that, in ASX’s opinion, they should be treated as affiliated with the entity.
Backdoor listings
ASX is also proposing that a company seeking to list under the assets test be required to produce 3 full financial years of audited accounts for any company or business to be acquired ahead of listing, unless ASX agrees otherwise. This change will have particular application to backdoor listings.
ASX currently allows shares of a company which has announced a backdoor listing to continue trading up until the meeting where shareholders approve the backdoor listing. If the backdoor listing is approved, the shares are suspended until it has recompiled with ASX’s admission and quotation requirements.
ASX is changing this policy so that it will now suspend trading from the announcement of a backdoor listing. This change is to stop the potential for pre-emptive capital raisings in the window between the announcement and readmission and to put backdoor listings on the same footing as front door listings, which can only trade if and when ASX’s admission requirements have been met.
This change in policy will take effect immediately and applies to all backdoor listings announced after 12 May 2016.
Next steps
The consultation period runs to 24 June 2016 after which ASX will seek to release the final changes to the Listing Rules in early August with the Listing Rule changes to come into effect on 1 September 2016. Companies which apply for listing before then will not have to meet the new requirements.
The policy and process changes come into effect immediately to the extent that they are not already being applied by ASX – the admission review process, the factors ASX will consider when exercising its discretion on listing, its policy on free float and on backdoor listings.
For further information, please contact:
Sarah Dulhunty, Partner, Ashurst
sarah.dulhunty@ashurst.com
