The ASX yesterday released its long anticipated consultation paper "Updating ASX's admission requirements for listed entities".
A number of amendments to tighten the admission requirements under the Listing Rules are proposed which may make it more difficult for early stage entities to access the market. In addition, some policy changes have immediate effect which will have material consequences for backdoor listings.
IMMEDIATE POLICY CHANGES
Announced a backdoor listing? No more trading until you relist
ASX has changed its backdoor listing policy. Trading in an entity's securities will now be suspended from the moment it announces a backdoor listing transaction until such time as it has re-complied with ASX's admission and quotation requirements. The move to an immediate suspension is intended to bring backdoor listings onto the same footing as front door listings, which can only trade when the entity seeking a listing has met ASX's admission and quotation requirements. The move is also designed to prevent what ASX has described as "potential mischief", with some listed shells completing pre-emptive capital raisings prior to the shareholder vote on a backdoor listing.
This policy change has taken immediate effect and applies to all backdoor listing transactions announced after 12 May 2016.
Requirement for a 20% free float - a hurdle for backdoor listings
ASX is proposing to introduce, as part of the amendments to the admission requirements, a minimum 20% free float requirement for both backdoor and front door listings. “Free float” is the percentage of the entity’s main class of securities that are not:
- "restricted securities" (ie, securities which are subject to ASX escrow);
- securities subject to voluntary escrow; and
- securities held by "affiliated security holders", generally being persons who are a related party of the entity, or an associate of a related party, or other persons that ASX considers should be treated as affiliated.
The condition is introduced with immediate effect and will initially be implemented by ASX exercising its general discretion under Listing Rule 1.19. Currently, ASX guidance suggests that a 10% free float will generally be expected.
This will most significantly impact backdoor listings without a separate capital raising component, as the shares issued to vendors of the asset being acquired by the listed shell will be restricted securities, and will not count towards the free float.
TIGHTENING ADMISSION REQUIREMENTS, MAINTAINING THE QUALITY OF THE MARKET
The key message from the consultation paper is that ASX is seeking to "maintain the quality of the market".1 The new backdoor listing requirements and proposed tightening of the admission rules are not the only measures being undertaken by ASX to support this objective.
In late April 2016 ASX introduced a formal pre-vetting procedure to the listing process. The pre-vetting is designed to identify, at an early stage, any issues which may result in ASX exercising its discretion to refuse admission to an entity that, in its opinion, is not appropriate to be listed on ASX.
The practical implications of this procedure are that, at a minimum, an entity seeking an ASX listing must:
- consult with ASX well ahead of any formal application to list; and
- provide to ASX information including the entity's structure and operations, business, and location of its business, credentials of its promoters and management, lead managers and brokers and its reasons for listing on ASX.2
An "emerging or developing market" entity is an entity that:
- is incorporated,
- has its main business operations, or
- has a majority of its board or a controlling resident,
in an emerging or developing market, being a developing country declared by the Minister for Foreign Affairs.
Over 100 countries have been declared as "developing countries" including the PRC, Indonesia and Malaysia.
An additional level of pre-vetting by the newly established Standards, Listings and Policy Committee will be required for "emerging or developing market" entities, and other entities with uncommon or novel attributes, which may include providing additional information to ASX on foreign due diligence conducted and legal opinions obtained to ensure the legality of the operations in these markets.
While ASX has made it clear that it is supports early stage growth entities, time will tell if the tightening of the admission rules will have the desired effect of a more robust listed company base, or if early stage growth entities will be unable to access the ASX market to raise capital to fund growth.
Practical implications of the amendments
As a matter of course we always advise our clients who are looking to list on ASX to consult with ASX at an early stage. The proposed changes now mean that this early consultation is essential to give entities some certainty that they will be suitable for admission to the ASX. Also, given the additional potential stages of the pre-vetting process, time needs to be built into an IPO or backdoor listing timetable to cater for this.
Summary of the proposed amendments
The proposed amendments to the standard ASX listing requirements are:
Click here to view table
Foreign exempt listings
ASX is also proposing to change the admission requirements for foreign exempt listings to:
- tighten the requirements to require that the home exchange of the entity is "acceptable to ASX" in addition to being a member of the World Federation of Exchanges; and
- broaden the requirements by introducing a minimum market capitalisation threshold test of $2,000 million.
Submissions from the public
ASX is seeking submissions on the proposals canvassed in the consultation paper by 24 June 2016. We will make a submission to ASX on the proposals and we welcome any feedback.