The ASX proposes changes to the admission requirements for listed entities

The ASX has recently released a consultation paper with a number of proposed amendments to the requirements for admission to the Australian Securities Exchange. The paper, Updating ASX’s admission requirements for listed entities, was released on 12 May 2016 and outlines the proposal to update the Listing Rules to ensure the market maintains its quality, integrity and international competitiveness.  The proposed amendments would require applicants for admission to the official list of ASX to ensure they satisfy certain increased thresholds and requirements.  The changes, although tightening the admission requirements, will still be administered subject to the ASX’s absolute discretion.

We have set out below an analysis of the key changes proposed in the ASX’s consultation paper, together with some relevant commentary. Importantly, and subject to the consultation process, the expected timing of the new the ASX listing rule requirements coming into effect is 1 September 2016 (ie the current listing rule admission requirements will continue to apply to all applications received by the  ASX up to 31 August 2016).

1. Increasing the financial thresholds for listing on ASX

Current requirement  New proposed requirement
The profit test requires that the entity:

  • is a going concern and has conducted the same business  activity during the last 3 full financial years prior to  admission;
  • has aggregated profit of at least $1 million from  continuing  operations for the last  full financial years prior to admission;  and
  • has consolidated profit from continuing operations of at  least  $400,000 for the 12 months prior to admission.

Requirements 1 and 2 remain the same.

Requirement 3 is to be amended to increase the consolidated profit for the 12 months prior to admission to $500,000.

The assets test requires entities (other than investment entities) to have either:

  • net tangible assets of at least $3 million; or
  • a market capitalisation of at least $10 million.

 

Amend the requirements as follows:

  •  Increase the threshold of net tangible assets to $5 million.
  •  Increase the threshold of market capitalisation to $20 million.

 

Commentary

The proposed increases to these financial thresholds are intended to ensure that the minimum standards for size, quality and operations of ASX-listed entities are maintained, without adversely impacting on the international competitiveness of the ASX (compared to overseas exchanges).  It is also expected to provide greater certainty to the market and investors that the listed entity (particularly those in the early stages of their lifecycle) has sufficient resources to carry on its business for a reasonable period.  Of course, the corollary of this is that many ‘start-ups’ will need to defer their listing ambitions until they have built up their profit history or asset reserves to the new levels required by ASX.


2. Introducing a minimum free float requirement

Current requirement New proposed requirement
There are currently no formal requirements for a minimum proportion of an entity’s securities to be available at the time of admission to the official list of ASX for investors to freely trade in the public market (eg those securities not locked up by the founders and others under trading restrictions and escrow). To introduce a rules-based 20% minimum free float requirement at the time of admission, where:

  • “free float” is defined as the percentage of the entity’s main class of securities (that are not restricted securities or subject to voluntary escrow) held by non-affiliated security holders; and
  • “non-affiliated security holders” is defined as those who are not related parties, associates of a related party or persons whose relationship, in the ASX’s opinion, should be treated as being affiliated with the entity.

Commentary

In the past, ASX took a relatively flexible approach to an entity’s ‘free float’ requirements. The proposed amendments; requiring a 20% minimum proportion of the entity’s securities, seek to strike a balance between supporting liquidity in the secondary market and emerging growth industries. ASX has, in any event, been exercising its discretionary powers of late to require a minimum level of free float (often somewhere between 10% and 20%). In many respects, providing certainty by amending the listing rules to include this requirement is a good thing for applicants and investors.


3. Changing the spread test

Current requirement New proposed requirement
Under condition 7 of listing rule 1.1, ASX’s spread test can be satisfied in one of the following:

  • by having 400 security holders who hold a parcel of securities with a value of at least $2,000; or
  • by having 350 security holders who hold a parcel of securities with a value of at least $2,000, where there is a free float of at  least 25%; or
  • by having 300 security holders who hold a parcel of securities with a value of at least $2,000, where there is a free float of at  least 50%.
To change the minimum spread requirement to:

  • 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;
  • provided that, in each of the above situations, each security holder counted towards spread must hold a parcel of securities with a value of at least $5,000.

Commentary

In summary, the proposed spread changes allow a listing entity to have fewer security holders in order to satisfy the spread test, but with each security holder needing to have a registered holding with a higher value.  The primary purpose of this rule change is to ensure that there is sufficient investor interest in an entity to warrant its listing on the ASX (which may not be the case where an entity has many security holders having a low-value parcel, which can lead to suggestions that the spread has been satisfied by artificial means).


4. Applying the same working capital requirements to all entities satisfying the assets test

Current requirement New proposed requirement

Under the assets test all entities are required to have at least $1.5 million in working capital, after taking into account any budgeted revenue for the first full financial year of listing.

For mining and oil and gas exploration entities, this $1.5 million must be available after allowing for the first full financial year’s budgeted administration costs and costs of acquiring any assets.

All entities under the assets test are required to have the minimum working capital amount of $1.5 million, calculated by taking into account the first full financial year’s budgeted:

  • revenue;
  • administration costs; and
  • costs of acquiring any assets.

Commentary

Applicants must also be aware that they need to include a company or expert statement in their IPO prospectus or PDS confirming they have sufficient working capital to carry out their stated objectives.


5. Requiring audited accounts from entities seeking admission under the “assets test”

Current requirement New proposed requirement
Under the assets test, entities are allowed to use unaudited accounts and provide accounts for a period less than 3 full financial years to meet the listing rule requirements. All entities seeking admission under the assets test to provide:

  • audited accounts for the last 3 full financial years;
  • if the accounts for the last full financial year are more than 8 months old, audited or reviewed accounts for the last half year; and
  • audited accounts for the last 3 full financial years of any entity to be acquired by the entity at or ahead of listing.

Commentary

These proposed changes are aimed at ensuring there is consistency in the requirements to produce audited accounts in both the profit test and assets test.  ASX will retain its discretion to accept audited accounts for less than 3 full financial years. However, this will only likely occur in circumstances where ASIC also accepts such accounts in approving the IPO disclosure document (thereby creating consistency between the regulators).


6. Reinforcing ASX’s discretion to refuse admission to the official list

New proposed requirement
 Update the introduction of the ASX listing rules in order to reinforce ASX’s discretion on admission and quotation decisions by:

  • clearly stating that ASX will take into account the reputation, integrity and efficiency of its market in exercising its discretion;
  • providing examples of when ASX may exercise its discretion in refusing admission to the official list; and
  • providing additional examples of circumstances where an entity does not have the appropriate structure and operations for a listed entity.

Commentary

In its consultation paper, ASX set out a non-exhaustive list of examples such as:

  • ASX is not satisfied with the qualifications and experience of the entity’s auditor;
  • the applicant is from an emerging market and ASX is not satisfied with the level of corporate regulation in that market;
  • the applicant’s board has no directors with experience in directing or managing a listed entity or an entity of the type of the applicant;
  • ASX has had prior unacceptable dealings with the applicant entity (or one of its directors, brokers or professional advisers);
  • the applicant appears to be seeking listing on ASX for collateral purposes unrelated to accessing Australian capital markets;
  • ASX considers that the applicant has priced its IPO securities at an artificially high price to meet the admission requirements;
  • ASX believes the entity may not have sufficient capital to meet its business objectives because there is no minimum subscription condition in the  IPO disclosure document or ASX regards the minimum as being insufficient;
  • the applicant has been denied admission to an official list of another exchange; or
  • ASIC, or another corporate regulator, has expressed concerns to ASX about the admission of a particular entity.

7. Changes applicable to ASX Foreign Exempt listings

Current requirement New proposed requirement
Admission of foreign entities as a secondary listing on the ASX market as ‘ASX Exempt listing’, if the entity:

  • has its main listing on an overseas market which is a member of the Word Federation of Exchanges (WFE); and
  • meets certain eligibility criteria (such as minimum net tangible assets of $2,000 million).

In addition to being a member of the WFE, ASX will require that the home exchange of the entity is ‘acceptable to the ASX’.

Require foreign exempt listings to have either:

  • minimum net tangible assets of $2,000 million; or
  • minimum market capitalisation of $2,000 million.

Commentary

ASX proposes to list the exchanges it considers to have a regulatory framework broadly equivalent to the ASX official list.  These accepted exchanges include those such as EuroNext (Brussels), TSE (Tokyo) and TSX (Toronto).

As outlined above, ASX’s consultation paper proposes a number of amendments that will affect entities applying to enter the official list. Any interested parties are invited to provide their submissions on the proposed changes by 24 June 2016.


This article was written with the assistance of  Nhu-Thuy Dinh, Law Graduate.


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