ASX continues to refine proposed changes to admission requirements

In an earlier post, ASX to take a harder line on early stage IPOs, we highlighted some of the key changes proposed by ASX to the admission requirements for a listing on the exchange.

The ASX consultation process for the proposed amendments closed on 24 June 2016, with the changes initially anticipated to take effect from 1 September 2016.  The transition date has, however, been delayed to 19 December 2016 following extensive industry feedback to ASX.

The level of feedback perhaps reflects a concern that the changes, if adopted, are likely to have a significant impact on small cap IPO candidates and back-door listings.

In the context of backdoor listings, ASX’s initial consultation paper included a range of amendments, primarily through an overhaul to Guidance Note 12 (on ‘Significant Changes to Activities’).  ASX has already implemented a change which brings forward the date of suspension of a company’s trading immediately upon the relevant transaction being announced until the entity has re-complied with ASX’s admission requirements (the date used to be set with reference to the date of the shareholder meeting called for the purposes of approving the transaction).  ASX has acknowledged this change effectively puts backdoor listings on the same footing as front door listings. In turn, suspension may impact the disclosure (prospectus) requirements for any contemplated capital raising.

Another key proposed change is an amendment to the conditions an entity undertaking a back door listing had to meet to qualify for relief from the '20 cent' rule (which requires shares to be issued with, or have a sale price of, a minimum of $0.20).  Prior to the consultation paper, a company was required to satisfy the following conditions to obtain an exemption to the ’20 cent’ rule:

• the issue price of any securities (excluding options) is not less than $0.02 and the issue price is specifically approved by shareholders as part of their approval of the transaction, and
• ASX is satisfied that the entity’s capital structure will be appropriate for a listed entity after completion of the transaction.

The consultation paper proposed an additional condition - that the price at which the entity’s securities last traded on ASX is not less than $0.02 per share.

Having considered the feedback received from stakeholders in response to the proposed amendments, ASX has decided to modify the additional condition so that it now requires either:

• the price at which the entity's securities traded on ASX over the 20 trading days preceding the date of the announcement of the proposed transaction (or, if the entity was already suspended at the time of the announcement, the last 20 trading days prior to its suspension) was not less than $0.02 each, or
• the entity announces at the same time that it announces the proposed transaction that it intends to consolidate its securities at a specified ratio that will be sufficient, based on the lowest price at which the entity’s securities traded over the 20 trading days referred to previously, to achieve a market value for its securities of not less than $0.02 each.

These revised conditions take effect immediately.

ASX has also included a warning statement in the amended Guidance Note 12 that it will closely examine capital raisings by both target listed entities and unlisted companies to ensure they do not undermine the spirit and intent of the ‘20 cent’ rule or the policy considerations that underpin when ASX will consider granting relief from that rule.  This change will also take effect immediately.

Additional feedback on the proposed amendments more broadly includes:

• further thought needs to be given on how best to facilitate access to capital for early-stage and start-up enterprises, given that the proposals from ASX will make it harder to source capital through an ASX listing.  For example, in the context of the requirement to provide three years of unmodified audited accounts, concerns have been raised that not enough consideration has been given to early-stage and start-up enterprises in rapidly evolving industries which often have a limited operating history, and
• if the minimum holding requirement for spread is increased, there is a risk that smaller issuers will tailor their offerings so that shares can only be applied for in $5,000 parcels to ensure that they satisfy the spread requirement.  This may exclude many small retail investors from participating in IPOs.

ASX is currently considering the feedback received, including undertaking targeted discussions with stakeholders to assist in finalising the proposed changes.  ASX’s reaction to current feedback indicates willingness by ASX to engage with key stakeholders to continue to refine the modified admission requirements.

A further iteration of the proposed amendments is expected to be released by ASX in September or October.

Reece Walker, Ben Wood, Naomi Benton