ASX consults on listing rule updates that will impact IPOs and secondary raisings

16 Jun 2022

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This article is published in Gilbert + Tobin Knowledge Publications.

What’s happening?

ASX has issued a consultation paper seeking feedback on a range of changes to the Listing Rules proposed to be made in December 2022. If implemented in their proposed form:

(IPOs) companies applying to list under the “assets test” will be able to avoid quarterly reporting where they have an acceptable track record of profitability or revenue (which will appeal to tech and other companies with largely intangible assets who are generating enough revenue to avoid ASX mandatory escrow). ASX is also proposing to narrow the spread test so that only investors resident in Australia or another jurisdiction acceptable to ASX will count towards there being at least 300 non-affiliated security holders; and
(Capital raisings) all ASX listed companies will have more constraints on their allocation policies for their share purchase plans, rights issues and ‘material’ institutional placements (as well as some additional disclosure requirements). These changes would actually go beyond those which ASX imposed temporarily in 2020 during the initial phase of the COVID-19 pandemic and they are not accompanied by the higher dilution thresholds (25% vs 15% for a placement; greater than 1 for 1 for a non-renounceable entitlement offer) that served as the justification at that time. This addresses what ASX calls “inappropriate practices” it has “occasionally observed” in relation to allocation of securities in capital raisings and to improve investor, regulator and other stakeholder’s confidence in allocation processes.

The proposed changes will go through a period of consultation with the market before being finalised and implemented. We expect ASX’s proposed encroachment on boards’ discretion around allocations – in particular on entitlement offers – to be the subject of some discussion.

Impact on secondary capital raisings

As part of its response to the COVID-19 pandemic, ASX introduced temporary relief to facilitate larger issues of securities by increasing an issuer’s placement capacity from 15% to 25% and allowing non-renounceable entitlement offers to have an offer ratio of greater than one new security for each security held, provided that certain conditions were satisfied.

The changes proposed by ASX in relation to secondary raisings will, if implemented, require issuers to provide more specific disclosure of allocation policies in offer documentation and offer results announcements, and only allow limited flexibility in the allocation policy that may be adopted across SPPs, entitlement offers and material placements as a price of obtaining the exception from the 15% placement cap. ASX’s clear preference is for pro rata allocations, either based on existing security holdings or on the number of securities applied for in the offer.

These changes align to the temporary COVID-19 measures in all but two respects. First, there is no increase in the placement capacity of entities from 15% to 25% (nor any ability to conduct a non-renounceable entitlement offer of greater than 1 for 1) as there was in 2020. Secondly, ASX now proposes that any shortfall in an entitlement offer is first offered to security holders who participated in the offer and applied for more securities than their entitlement (if the issuance is to be exempted from the placement cap). This will practically require issuers to always offer security holders the opportunity to apply for more than their entitlement. Whilst this will not radically change the way in which the institutional component of entitlement offers are conducted (since typically existing security holders who participate in that component of the offer are offered the opportunity to subscribe for shortfall securities via a bookbuild managed by the underwriter or lead manager), it does remove allocation flexibility that currently exists (and which can be important in limited cases, such as where there are major shareholders on the register or where the shortfall bookbuild is being used to diversify the register) . Additionally, an ‘oversubscription’ or ‘top up’ facility is not always offered to security holders participating in the retail component of an entitlement offer, and where it is offered, a retail security holder’s application for additional securities is often capped to a percentage of their entitlement to ensure there are securities available to be allocated to sub-underwriters, which are usually very important to the underwriting arrangements.

We expect this allocation policy will be welcome by existing security holders (particularly retail security holders) as they will always have the opportunity to follow their money (and more). However, the impact on the market for sub-underwriting (and the resulting implications for the cost and availability for underwriting, especially of the retail components of entitlement offers) will require careful consideration, particularly for smaller companies undertaking capital raisings which already can face significant challenges securing underwriting support.

Market participants will be familiar with the changes proposed in relation to the disclosure and implementation of allocation policies for securities in SPPs and placements having experienced them during the flurry of secondary raisings undertaken in 2020. As was the experience in 2020, we expect these changes will facilitate more transparent disclosure to investors of the decisions directors are making in relation to secondary raisings and more consistency in terms of how allocation policies are applied.

Quarterly reporting change will remove some red tape

We welcome the ASX’s move to exempt assets test entities with an acceptable track record of profit or revenue from the requirement to provide quarterly cash flow and activities statements for the first 2 years of listing. This is a reform which has been sought for some time and will reduce compliance costs since entities will be able to report on their cash flow when required by their continuous disclosure obligations rather than in a more formal manner every 3 months.

Next steps

ASX is seeking submissions by 27 May 2022. ASX is interested to hear whether its proposed changes are appropriate and workable in practice, and whether there are any alternatives approaches that might be better suited.

Subject to receipt of the necessary regulatory approvals, ASX is targeting 1 December 2022 for these proposed rule changes to take effect.

The key proposed changes to the Listing Rules

In the table below, we have summarised the key proposed changes to the Listing Rules that will impact IPOs and secondary raisings.

No.	IPO / secondary raising	Proposed changes to the Listing Rules
1.	IPO admission (spread test)	Currently, an issuer must satisfy ASX that it has at least 300 non-affiliated security holders each holding a parcel of unrestricted securities with a value of at least $2,000. In response to some difficultly ASX has experienced validating the authenticity of some foreign security holders, ASX proposes to more narrowly define this test by specifying that only security holders resident in Australia or another jurisdiction acceptable to ASX will count towards the 300 non-affiliated security holder threshold.
2.	IPO admission (assets test)	Currently, issuers applying for admission to ASX under the assets test are required to include in its IPO prospectus commitments (and an expenditure program) consistent with its stated objectives to spend at least half of its cash in circumstances where more than half of the issuer’s tangible assets are cash or in a form readily convertible to cash. ASX proposes to clarify that if the issuer has a track record of profitability or revenue acceptable to ASX, it will not be required to provide those commitments in its IPO prospectus, and it will not need to prepare quarterly activity and cash flow reports. This change would effectively put entities applying for admission under the assets test with a track record of profitability or revenue on the same footing as issuers applying for admission under the profit test. This aligns to the treatment of those entities for escrow purposes and removes an anomaly.
3.	Share purchase plans (SPPs)	To be able to rely on Exception 5 in Listing Rule 7.2, which allows issuers to conduct an SPP without utilising its 15% placement capacity, ASX is proposing to require that issuers disclose in the SPP documentation the scale back arrangements to be applied in the event the offer is oversubscribed. Any scale back must be applied on a pro rata basis to all holders who participate in the SPP, based either on: the size of their security holdings on the record date for the SPP or an earlier date selected by the issuer; or the number of securities they have applied for under the SPP. The scale back arrangements may also include measures to address security holders who have acquired nominal holdings to receive the SPP offer or split their holdings to receive multiple offers. ASX has not prescribed any further detail in relation to these matters.
4.	Pro rata issues (entitlement offers)	Similar to the changes proposed for SPPs, ASX is proposing changes to Exception 3 in Listing Rule 7.2, which allows issuers to place the shortfall of an entitlement offer without utilising its 15% placement capacity. ASX proposes that any shortfall must first be allocated to security holders who participated in the offer and applied for more than their entitlement, and that the shortfall must be allocated to those security holders as set out above in relation to SPPs – that is, on a pro rata basis based on either the size of the security holder’s holding on the record date for the entitlement offer or an earlier date selected by the issuer, or based on the number of securities the security holder has applied for in excess of their entitlement.
5.	Placements	Where an issuer undertakes a material placement, which ASX proposes to define as a placement of securities comprising more than 10% of the number of ordinary securities on issue at the commencement of the placement or where the placement raises more than $50 million (whichever is the lesser), the issuer must: disclose in the offer documents whether existing security holders will be entitled to participate and if so, on what basis; within 5 business days of completing the offer, announce the results of the offer to the market and details of the approach the issuer took in identifying investors to participate in the offer and how it determined their respective allocations in the offer (including the key objectives and criteria adopted in the allocation process, whether one of those objectives was a best effort to allocate pro rata to existing security holders and any significant exceptions/deviations); and within 5 business days of being requested by ASX, provide to ASX (not for market release) a detailed allocation spreadsheet showing: details of the persons to whom securities were allocated in the offer (including their name, existing holding as understood by the issuer, the number of securities they applied for at or above the final price or were offered in the offer, and the number of securities they were allocated); and details of persons who applied for securities at or above the final price and who did not receive an allocation in the offer (including their existing holding as understood by the issuer and the amount of securities applied for at or above the final price).