As set out in its May 2016 consultation paper, the Australian Securities Exchange (ASX) recently announced, effective from 19 December 2016, a number of significant changes to its admission requirements.
The revised ASX Listing Rules create higher thresholds and more strenuous requirements on local and foreign entities wishing to list on the ASX. As a result, a number of entities may face increased difficulty in becoming listed with many electing to remain private for longer.
Whilst Australian and perhaps more significantly international Initial Public Offering (IPO) sentiment suffered in 2016, the PrimaryMarkets’ private raisings and liquidity services have been warmly welcomed as a means of enhancing capital objectives across growth, strategic positioning and exit.
A major narrative that has increasingly pervaded the Venture Capital (VC) industry is that companies are staying private longer. The effectiveness of new capital platforms such as PrimaryMarkets is a driving force behind later stage companies’ desire to increasingly finance growth via the private/unlisted markets. Since 2008, the unprecedented, global quantitative easing programs across developed markets have created an abundance of capital available from private capital investors.
Generally, a Company would list on a public exchange such as the ASX to raise new capital and/or create a “liquidity” event for its shareholders i.e. a market place to sell their securities. PrimaryMarkets provides an alternative efficient and cost effective platform for both capital raising and creating liquidity.
The recent tighter ASX Admission Requirements have made it more difficult for some companies to pursue a listing. The poor performance of a number of recent IPOs and an uncertain global economic, business and political landscape has made the public listing process even more uncertain. With the abundance of private capital dry powder available, companies no longer need to pursue an IPO as a primary form of capital raising.
PrimaryMarkets provides a marketplace environment that allows efficient capital deployment and price discovery, with private capital and liquidity services to support companies fund a sustainable growth trajectory rather than subject themselves to the IPO process and ongoing public company compliance requirements. The new ASX Admission Requirements are intended to make it more difficult for early stage entities to effectively embrace public markets.
IPO v M&A/Private Capital
As many companies have opted worldwide to stay private longer, the average change between the last private financing valuation and IPO post valuation has fallen in recent years. For US markets in 2016, the median post valuation step-up multiple fell to a decade low 1.47x (Pitchbook, 30 September 2016) (see chart below):
Rather than face criticism with having a disappointing IPO many “unicorns” that the industry hoped would make a public offering in 2016 have instead opted to tap into easily accessible late-stage capital from the private markets once more. Those companies that did complete an IPO in 2016 realised only moderate valuation climbs. Accordingly, PrimaryMarkets expects the primary liquidity/exit route for VC-backed businesses will increasingly come via the M&A and private capital raisings.
KEY THRESHOLDS TO THE REVISED ASX ADMISSION REQUIREMENTS
A. Increasing the Financial Thresholds for Listing on the ASX
For those entities seeking admission under the Assets Test the ASX will now require entities (other than investment entities) to have either:
- Net Tangible Assets of at least A$4M – up from the previous A$3M; or
- Market Capitalisation of at least A$15M – up from the previous A$10M.
For those entities seeking admission under the Profits Test the ASX will now require the entity’s Consolidated Profit threshold for the 12 months prior to admission to be A$500,000 – up from the previous A$400,000 threshold.
B. Introducing a Minimum Free Float Requirement
An entity must have a “free float” > 20% at the time of admission to the ASX.
Free Float = percentage of the entity’s predominant security class (not voluntarily restricted or subject to escrow) held by Non-Affiliated Security Holders.
Non-Affiliated Security Holders = not related parties, associates of a related party or persons whose relationship should be treated as being affiliated with the entity e.g. promoters, insiders etc. Note the ASX has a broad discretion to form an opinion in regards to this requirement that security holders should be “treated” as affiliates of the entity.
Previously, there was no formal requirements for a minimum proportion of an entity’s securities to be available for investors to freely trade on the ASX. The ASX now intends that this amendment will increase the potential for secondary market liquidity.
C. Changing the Shareholder “Spread Test”
An entity must now have at least 300 Non-Affiliated Security Holders who each hold a parcel of the main class of securities (that are not restricted securities or subject to voluntary escrow) with a value of at least A$2,000. The requirement will not be met where the spread is created by artificial means.
Previously, the minimum spread ranged from 300-400 security holders (affiliates included) dependant to “free float” ratios.
D. Standardising the Working Capital Requirements for all Entities
All entities seeking admission to the ASX under the Assets Test will be required to have a minimum Working Capital amount of A$1.5M calculated by taking into account the first full financial year’s budgeted:
- Administration costs; and
- Costs of acquiring any assets.
Previously, accounting for administrative costs and asset acquisition was only applied to the Mining and Oil & Gas sectors. These new requirements are now sector agnostic.
The purpose here is ensure that an entity has sufficient resources to operate its business without needing to raise capital from the market. This requirement is only imposed at time of admission as on-going monitoring could disrupt commercial operations and promote inefficient capital management.
E. Requiring Audited Accounts from Entities seeking Admission under the Assets Test
The ASX now requires that all entities must disclose to the market at IPO two full financial years of audited accounts for:
- The entity seeking to be listed; and
- Any significant entity or business that it has acquired in the last 12 months or that it proposed to be acquired in connection with the listing.
Previously, entities were permitted to use unaudited accounts and provide accounts for a period less than three full financial years.
The ASX considers that this will improve the quality and integrity of the financial information provided. This will ensure that significant and relevant data is available to investors to appraise the financial condition of the entity.
F. Extending the ASX’s Discretion to Refuse Admission to the Official List
As before, the ASX retains its absolute discretion concerning the admission or removal of any entity to or from the official ASX list. However, now the ASX will also expressly take into account the imperative of maintaining the reputation, integrity and efficiency of the ASX market.
G. Foreign Exempt Listings
To list on the ASX as a foreign exempt entity, that entity must have its overseas home exchange as a stock exchange or market which is acceptable to the ASX.
The Foreign Entity must further have:
- Net Tangible Assets of at least A$2B; or
- Market Capitalisation of at least A$2B.
Previously, the entity was only required to be a member of the World Federation of Exchanges. Whilst it has not been made explicit as to which stock exchanges are ‘not acceptable’ to the ASX, it is clear that foreign exempt entities are expected to be subject to regulation equivalents to that of the ASX.
The new market capitalisation option available to Foreign Entities under the Assets Tests brings the listing requirements more closely in line with the admission of standard listings despite the higher financial threshold.
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