ASX finalises changes to admission requirements for IPOs

What you need to know

The changes to the admission requirements for listing on ASX are broadly consistent with those proposed in the ASX Consultation Paper released in May. However, ASX has made the below changes following feedback received during the consultation period:

• ASX has reduced the proposed increases to the thresholds under the Assets Test;
• simplified the minimum spread test so that there is only one test which applies to all applicants;
• ASX now requires 2 full years of audited financial information for entities seeking admission under the Assets Test; and 
• ASX has a new policy regarding the suspension of trading in the securities of entities conducting a backdoor listing.

ASX has also flagged that it will soon publish a paper setting out how ASX's and ASIC's expectations in respect of financial information work together in practice.

The changes apply to applications for admission received by ASX after 19 December 2016. Entities considering applying for admission before this date should note that the ASX is already applying the new 20% free float requirement under its general power to impose conditions on listing and the changes to the ASX Guidance Notes should be taken as explaining ASX's current approach to new listings.
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 has concerns: (i) that the applicant’s structure, business, financial condition, governance arrangements, board or management may not be suitable for an entity listed on ASX; (ii) about the regulatory environment in an emerging or developing market where the applicant has established or has its main business operations; (iii) about the genuineness of the applicant’s interest in accessing the Australian equity market;
• ASX is not satisfied with the qualifications and experience of the auditor, investigating accountant or other expert or professional adviser providing services or a report for inclusion in disclosure document;
• ASX has had prior unacceptable dealings with the applicant or a director, promoter, broker, auditor, investigating accountant, expert or professional adviser involved in the application;
• the applicant has not engaged legal and accounting advisers to assist it with the preparation of the disclosure document giving rise to concerns about the quality of the disclosure document or the due diligence supporting it;
• the applicant has not engaged a broker or financial adviser to assist it with its capital raising giving rise to potential concerns about the ability to meet the minimum spread requirements;
• ASIC or another corporate regulator has expressed concerns to ASX about the admission of the applicant;
• the applicant has been denied admission to the official list of another exchange; or
• ASX otherwise has concerns that admitting the applicant to the official list may put at risk the reputation of the ASX market as one of quality and integrity.

Guidance Note 1 has also been updated to give further guidance as to what ASX considers to be an appropriate structure and operations for a listed company. Examples of where structure and operations may not be appropriate include a vague or ill-defined business model, issues with the solvency of the entity or having enough working capital to carry out its stated objectives, the legality of the operations, not having the key licences and approvals, assets or intellectual property rights needed to carry on its operations, inappropriate ownership structures, inexperienced board and senior management and inappropriate capital structures.

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 (see ASX Compliance Update 4/16).

Summary of key proposed changes to admission requirements

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 has been careful to point out that it has sought to balance maintaining appropriate minimum standards and investor confidence with supporting the listing of early stage and start-up companies.  In this respect, out of all the listings on ASX during 2014 and 2015 only 14 entities admitted under the Assets Test had an NTA of less than $4 million and only 9 of these entities had a market capitalisation of less than $15 million.  In press statements following the release of the changes, ASX has stated that it will continue to provide a pathway for companies to list and access capital across their lifecycle. 

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

Prior to the consultation on the admission requirements, ASX allowed securities of an entity conducting a backdoor listing to continue to trade up until the meeting where shareholders approve the backdoor listing.  If the backdoor listing was approved, the securities were suspended until it recompiled with ASX’s admission and quotation requirements. 

In the May Consultation Paper, ASX proposed that entities which announce a backdoor listing be automatically suspended from trading from the time of the announcement until after shareholders have approved the backdoor listing and the entity has re-complied with ASX's admission requirements.  This was on the basis that during this period the securities in the entity may not be trading on a fully informed basis.  

ASX has amended this proposal so that ASX will now allow the securities in the entity proposing the backdoor listing to trade during this period if the entity makes a detailed announcement including prescribed information regarding the transaction.  The information that must be disclosed is set out in a new Annexure A to Guidance Note 12 and includes:

• the material terms of the transaction;
• the new entity's principal activities and business model, including any key risks;
• the impact of the transaction on the entity’s capital and structure;
• any person who will acquire control of the entity as a result of the transaction;
• whether the entity or target has issued securities in the 6 months preceding the announcement, and the details of any such issue;
• whether the entity or target is proposing to issue securities, and the details of any such issue; and
• the financial accounts of the target.

This policy is intended to provide entities proposing a backdoor listing with greater choice as to how to implement the transaction while addressing ASX's concern over market integrity during the period between announcement and completion of the transaction.