ASX to take a harder line on early stage IPOs

On 12 May, ASX released a consultation paper on its proposed changes to the admission requirements for a listing on ASX.  The media release and consultation paper can be found here.

On the same day, ASIC also released its own consultation paper and updated guidance to improve disclosure of historical financial information in prospectuses.  ASIC and ASX have worked closely in developing their respective papers.

ASX' key proposals include:

• (Minimum financial thresholds) increasing the financial thresholds for listing under both the profits and assets to:
• increase the consolidated profit requirement under the profits test for the 12 months prior to listing from $400,000 to $500,000, 
• increase the net tangible assets threshold from $3 million or a market capitalisation of at least $10 million, to an net tangible asset position of at least $5 million or market capitalisation of at least $20 million.
• (Free float) introducing a 20% minimum free float requirement (i.e. at least 20% of an entity’s securities must not be restricted securities, securities that are subject to voluntary escrow, or securities that are held by a related party)
• (Minimum spread) changes to the current minimum shareholder spread tests to require an entity to demonstrate a greater level of financial commitments by investors.  Specifically, ASX proposes to introduce a minimum spread requirement of:
• 200 security holders (if the entity has a free float of less than $50 million), or
• 100 security holders (if the entity has a free float of $50 million or more)
  
  and each security holder counted towards spread must hold a parcel of securities with a value of at least $5,000
• (Working capital) introducing the minimum working capital requirement of $1.5 million across all entities listing under the assets test (after allowing for the first full financial year’s budgeted administration costs, and the costs of acquiring any assets referred to in the entities’ disclosure document, to the extent that those costs will be met out of working capital), and
• (Financial information) increased financial reporting obligations on entities admitted under the assets test to produce unmodified audited accounts for the last 3 full financial years (unless otherwise agreed by ASX).

ASX General Manager Listings and Issuer Services, Max Cunningham, states ‘These proposals maintain the attractiveness of the ASX market as a venue for capital raising and funding innovation, including for technology and other growth companies’.  There are, however, clearly strongly held views in the market and debate is ongoing about how the proposed changes may impact upon the potential for early stage and small-cap technology companies, as well as ASX’ alignment with the national innovation agenda more broadly.

In addition, while the introduction of the proposed changes will have a significant impact on entities hoping to list on the ASX, regard should also be had to the impact of the amendments on the ongoing suitability of currently listed entities if they fall below the proposed minimum threshold requirements (once in force).

Submissions close on 24 June 2016, and ASX anticipates that the new rules will take effect on 1 September 2016.  We will continue to monitor developments to the ASX admission requirements and welcome any feedback from readers on any concerns you consider should be raised during the consultation process.

Reece Walker, Ben Wood, Naomi Benton