ASX says size does matter
On 12 May 2016, ASX released a consultation paper proposing changes to the admission requirements for entities seeking to list on ASX, including increasing the financial thresholds for listing under both the profit test and the assets test and changing the spread test. According to ASX, the purpose behind the proposed changes is "to ensure that the ASX market continues to be a market of quality and integrity, and remains internationally competitive." ASX is also proposing to provide more express guidance on when it will exercise its discretion to not allow an entity to list on ASX, even when the entity technically meets all of the specific listing requirements.
The proposed changes will have a significant impact on small start-ups that are considering listing on ASX.
The key proposed changes to the admission requirements are:
- increasing the financial thresholds for listing – both for the profit test and the assets tests;
- introducing a 20% minimum free float requirement;
- changing the "spread test" to better demonstrate a sufficient level of investor interest in the entity and its securities to justify listing;
- making the minimum working capital requirements consistent across all entities admitted under the assets test; and
- introducing a requirement for entities admitted under the assets test to provide audited accounts for the last 3 full financial years.
ASX also proposes to update its Guidance Notes to include further examples of application of the listing rule requirements.
ASX's proposed changes
Increasing the financial thresholds for listing
Entities must meet either the profit test or the asset test to qualify for listing on ASX. ASX is proposing to increase both the profit and assets test.
The profit test currently requires that an entity has consolidated profit from continuing operations of at least $400,000 for the 12 months prior to admission. Under ASX's proposed changes to the profit test, this threshold will increase to $500,000 for the 12 months prior to admission.
The asset test currently requires that the entity (other than an investment entity) has:
- net tangible assets of at least $3 million; or
- market capitalisation of at least $10 million.
Under ASX's proposed changes to the asset test, an entity (other than an investment entity) will be required to have:
- net tangible assets of at least $5 million; or
- market capitalisation of at least $20 million.
Introducing a minimum free float requirement
ASX does not currently have any formal requirements in place regarding the minimum proportion of an entity's securities that will be available at listing for investors to freely trade in the public market. ASX has addressed this issue through guidance and has generally expected that entities will list with a free float of at least 10%.
ASX proposes to introduce a 20% minimum free float requirement for ASX listings at the time of admission. "Free float" will be defined as the percentage of the entity's main class of securities that are not restricted securities or subject to voluntary escrow, and that are held by non-affiliated security holders.
ASX is currently exercising its discretion under Listing Rule 1.19 and administering the Listing Rules to require an applicant for an ASX listing to have a minimum free float of 20% at the time of listing.
Changing the spread test
Currently, ASX’s spread test can be satisfied in one of three ways:
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%.
Under ASX’s proposed changes to the spread test, an entity will be required to have:
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.
Applying the same working capital requirements to all assets test entities
All entities admitted under the assets test are currently required to have at least $1.5 million in working capital, after taking into account any budgeted revenue for the first full financial year after 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 the costs of acquiring plant, equipment and/or tenements.
ASX proposes to standardise the current $1.5 million minimum working capital requirement by requiring an entity admitted under the assets test to have at least $1.5 million in working capital available after:
- taking into account the entity's budgeted revenue for the first full financial year that ends after listing; and
- allowing for the first full financial year's budgeted administration costs and the costs of acquiring any assets referred to the in the disclose document (to the extent that those costs will be met out of working capital).
Requiring audited accounts from assets test entities
Currently, entities admitted under the assets test are allowed to provide unaudited accounts and provide accounts for a period shorter than 3 full financial years. They must also ordinarily provide a pro forma statement of financial position reviewed by any auditor or independent accountant.
ASX proposes introduction of new requirements for entities seeking admission under the assets test to produce:
audited accounts for the last 3 full financial years. If the accounts for the last full financial year are more than 8 months old, the entity would also be required to produce audited or reviewed accounts for the last half year (i.e. as currently applies to the accounts for entities seeking listing under the profit test); and
3 years of audited financial statements for any business to be acquired by the entity at or ahead of listing.
In each case, the audit report or review must not contain "a modified opinion, emphasis of matter or other matter that ASX considers unacceptable."
ASX has acknowledged that an entity seeking admission under the assets test may not be in a position to provide 3 years of audited accounts. Accordingly, it has noted that ASX will have discretion to accept less than 3 full years of audited accounts, or to accept a modified audit opinion, but that it will generally only do so in the circumstances where ASIC will accept less than 3 full years of audited accounts, or a modified opinion, in a disclosure document.
Reinforcing discretion to refuse admission
It is proposed that the ASX Listing Rules be updated to reinforce ASX’s absolute discretion on admission and quotation decisions. ASX intends to specify that it will "take into account the reputation, integrity and efficiency of its market in exercising these discretions." Guidance Note 1 will also be updated to include a (non-exhaustive, but extensive) list of examples where ASX may exercise its discretion to refuse entry to the official list, which would include, for example, where ASX has had prior unacceptable dealings with the applicant or a director, promoter, broker, auditor, investigating accountant or professional adviser involved in the application.
ASX currently allows the securities of an entity that announces a backdoor listing to continue trading after the announcement up to the day on which its security holders are asked to approve the transaction. If the security holders approve the backdoor listing, ASX then suspends trading in the entity's securities until it has re-complied with ASX's admission and quotation requirements. ASX has changed this policy so that it will now suspend trading in an entity's securities from the moment it announces a backdoor listing transaction until it has re-complied with ASX's admission and quotation requirements.
This policy change has taken immediate effect and applies to all backdoor listing transactions announced after 12 May 2016.
Submissions are due to ASX by 24 June 2016. It is expected that final changes to the ASX Listing Rules will be released in early August 2016, and will come into effect on 1 September 2016.
If you require any advice or further information on ASX listing criteria or listing on ASX generally, please contact noland [at] kempstrang [dot] com [dot] au (David Nolan), Partner, morgant [at] kempstrang [dot] com [dot] au (Tom Morgan, )Senior Associate or dooleyr [at] kempstrang [dot] com [dot] au (Rebecca Dooley), Lawyer.