As foreshadowed in its May 2016 consultation paper, Australian Securities Exchange (ASX) has made reasonably significant changes to the admission requirements within the Listing Rules, which effectively impose higher thresholds and more strenuous requirements on local and foreign entities wishing to list on the ASX. These amendments, in addition to the discretion conferred upon ASX to refuse admissions (a sword it has used on some recent occasions, including the much publicised case of Guvera), may result in a number of entities having increased difficulty in successfully listing on Australia’s primary bourse.

On 3 November 2016, the ASX released the final Listing Rule amendments and its report discussing the outcomes of the consultation process. The amended rules apply to applications for admission submitted from 19 December 2016.

The final amendments differ somewhat from the proposed amendments released for consultation in May (and which were discussed in our previous update on 20 May 2016), having been relaxed in a number of respects following the consultation process.

We have set out below some of the key changes of which industry participants need to be aware:

Increasing the financial thresholds for listing on the ASX

Previous requirement

New requirement

For those entities seeking admission under the profit test, the test requires that the entity:
  • is a going concern and has conducted the same business activity during the last three full financial years prior to admission
  • has aggregated profit of at least $1m 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 amended to increase the consolidated profit threshold for the 12 months prior to admission to $500,000.

For those entities seeking admission under the assets test, the test requires entities (other than investment entities) to have either:
  • net tangible assets of at least $3m or
  • a market capitalisation of at least $10m
The assets test requires entities (other than investment entities) to have either:
  • net tangible assets of at least $4m or
  • a market capitalisation of at least $15m

Commentary

The main purpose of the profit test is to show that the entity is a going concern, has a track record of profitability and has a maintainable business. The consolidated profit requirement for the 12 months prior to admission has been increased to ensure that an appropriate minimum standard of profitability is maintained over time by demonstrating the entity has a sustainable business and sufficient resources to continue this business.

For those entities seeking admission under the assets test, the increase in the net tangible asset threshold has been implemented to impose appropriate minimum standards regarding the size of entities listed on the ASX. While still a significant increase, the final market capitalisation test requirement of $15m is less than the $20m initially proposed by the ASX in its consultation paper.

Introducing a minimum free float requirement

Previous requirement

New requirement

There are currently no formal requirements for a minimum proportion of an entity’s securities to be available for investors to freely trade in the public market at the time of admission to the official list of the ASX (e.g. those securities not locked up by the founders and others under trading restrictions and escrow).

That said, since the consultation process commenced in May 2016, the ASX has been applying the new requirement.

An entity must have a ‘free float’ of at least 20% at the time of admission.

For the purposes of this requirement:

  • “free float” is 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” are 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

This amendment brings the ASX into line with many other major markets. The ASX expect that this amendment will increase the potential for secondary market liquidity. We believe that both applicants and investors will be provided with greater certainty with the implementation of the new free float requirement.

Changing the spread test

Previous requirement

New requirement

Under condition 7 of listing rule 1.1, the 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%.

An entity must 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 $2,000.

The requirement will not be met where the spread is created by artificial means.

Commentary

The new spread test requirements simplify the previously tiered test. The new spread only counts non-affiliated security holders, aimed at ensuring a genuine spread is achieved by the entity. This excludes securities issued to related parties and their affiliates. 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. The ASX views the new spread requirements as striking an appropriate balance between showing a minimum level of investor interest to justify listing on a public market and not becoming a barrier to listing for entities which may otherwise be worthy candidates for listing.

Standardising the working capital requirements for all entities

Previous requirement

New requirement

For those entities seeking admission under the assets test, all entities are required to have at least $1.5m 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 $1.5m must be available after allowing for the first full financial year’s budgeted administration costs and costs of acquiring any assets.

All entities seeking admission under the assets test are required to have the minimum working capital amount of $1.5m , calculated by taking into account the first full financial year’s budgeted:
  • revenue
  • administration costs and
  • costs of acquiring any assets.

Commentary

The purpose of standardising the working capital requirement is to provide a greater level of certainty to investors, and ensure that an entity has sufficient resources to operate its business without needing to raise capital from the market. Understandably, the ASX has not imposed the working capital requirement on an ongoing basis (ie it only applies at the time of admission), as it could disrupt the operation of newer businesses and promote inefficient capital management.

Requiring audited accounts from entities seeking admission under the assets test

Previous requirement

New requirement

Under the assets test, entities are permitted to use unaudited accounts and provide accounts for a period less than three full financial years to meet the listing rule requirements. Entities must disclose to the market 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 acquire in connection with the listing.

Commentary

This new requirement is aimed to ensure that the audited historical information provided is significant, relevant and informative for investors in the context of the financial condition of the entity seeking admission. The ASX considers that this will improve the quality and integrity of the financial information provided and will assist the ASX in assessing the suitability of an entity seeking admission under the assets test.

Extending the ASX’s discretion to refuse admission to the official list

Previous discretion

New discretion

The ASX has absolute discretion concerning the admission or removal of any entity to the official list. In exercising these discretions, the ASX will take into account the principles on which the Listing Rules are based.

Same as before, but the ASX will also expressly take into account the imperative of maintaining the reputation, integrity and efficiency of the ASX market.

Commentary

While the ASX already has an absolute discretion concerning the admission or removal of an entity, the additional considerations are intended to provide greater transparency of the factors the ASX takes into consideration when using and justify this discretionary power. As we have observed recently, the ASX is increasingly relying on its absolute discretion to deny admissions and the above changes do not, in practice, give prospective applicants any further clarity on the ASX’s position here. There is hope that this may develop over time, even if in the form of the ASX guidance (eg in ASX’s Guidance Notes) rather than in the rule itself.

Foreign exempt listings

Previous requirement

New requirement

To list as a foreign exempt entity, the entity must have a member of the World Federation of Exchanges as its overseas home stock exchange. To list as a foreign exempt entity, the entity must have its overseas home exchange as a stock exchange or market which is acceptable to the ASX.
To list as a foreign exempt entity the entity must have net tangible assets of at least $2b. To list as a foreign exempt entity the entity must have:
  • net tangible assets of at least $2b or
  • a market capitalisation of at least $2b.

Commentary

This amendment gives the ASX a broad discretion to reject a foreign exempt listing on the basis that its overseas stock exchange or market is ‘not acceptable’. Guidance Note 4 will provide a list of the home exchanges generally considered acceptable. It is not clear whether a stock exchange or market outside this list will be acceptable; however, the ASX has indicated that the purpose of this amendment is to ensure that foreign exempt entities are subject to regulation equivalent to that of the ASX.

The addition of this alternative market capitalisation option under the assets tests brings the listing requirements for foreign exempt entities more closely in line with the admission of standard listings, despite the considerably higher financial threshold. It is certainly more common for unlisted foreign entities to consider the ASX listing; however, this will be made no easier by the new rules and the threat of the ASX’s broad discretionary power, which can be exercised very late in transactions.

Do the revised admission criteria offer more hope for Australia’s secondary exchanges, such as the NSX? We think so…

This article was written with the assistance of Vanessa Murphy, Law Graduate.