ASX has released a consultation paper detailing ASX’s proposals to facilitate capital raising for mid to small caps and updating the ASX admission requirements.

The Australian Securities Exchange (ASX) has recently released Strengthening Australia’s equity capital markets: ASX proposals and consultation (Consultation Paper) which outlines a number of proposed ASX Listing Rule reforms aimed at easing capital raising for mid to small caps and updating the initial admission requirements.

According to ASX, the consultation paper is the first of a number of listing initiatives ASX plans to roll out in 2012 to strengthen Australia’s equity capital markets.

The Consultation Paper also summarises the feedback received in ASX’s consultation of reserves and resources disclosure rules for mining and oil & gas companies which closed on 27 January 2012 (See ASX seeks comments on proposed changes to mining, oil and gas exploration and production company reporting and disclosure requirements from the Piper Alderman e-Bulletin November 2011).

Which entities are mid to small caps?

The Consultation Paper defines mid to small caps as ASX listed entities with a market capitalisation of $300m or less. ASX intends to compile and publish a list of all entities that fall into this category twice a year – every six months on the last trading day in May and November.

Increasing the capital raising limit

The change proposed by the Consultation Paper’s that is likely to be of the most interest to mid to small caps is to increase the capital raising limit for mid to small caps.

At present, ASX Listing Rule 7.1 provides that a listed entity must not (subject to certain exceptions, examples of which include rights issues, dividend reinvestment plans and certain share purchase plans) during any 12 month period issue or agree to issue any equity securities representing more than 15% of its total issued capital.

According to ASX, mid to small caps have limited access to venture capital and debt funding, and their narrow range of shareholders limits the usefulness of rights issues as a fundraising tool. As such, ASX considers that placements are a vital source of capital for these entities. The Consultation Paper further provides that an analysis of capital raising in 2011 shows that placements provide approximately 70% of the secondary capital needs for mid to small caps.

With this in mind, the Consultation Paper proposes to introduce a new Listing Rule 7.1A under which mid to small caps will be able to seek a 12 month shareholder mandate to issue 10% of issued capital at a maximum 25% discount to market price. This will be in addition to the 15% permitted under Listing Rule 7.1.

In order to obtain shareholder approval under the proposed new Listing Rule 7.1A, the entity will be required to provide certain disclosures in the relevant notice of meeting. These disclosures relate largely to the dilutive effect of the issue on existing shareholders and include:

  • the minimum price at which the equity securities may be issued
  • a statement of the risk of economic and voting dilution of existing shareholders, including the risk that:
    • the share price may be significantly lower on the issue date than on the date of the approval under Listing Rule 7.1At
    • the securities may be issued at a price that is at a discount to the market price for those securities on the issue date.

(Note that this statement must also be accompanied by a table describing the potential dilution of shareholders on the basis of at least three different assumed issue prices and three different assumed capital bases.)

  • the date by which the new securities may be issued
  • the purpose of the issue
  • if the entity has previously obtained approval under Listing Rule 7.1A, the total number of securities issued in the preceding 12 months as a percentage of capital, and prescribed details of each issue
  • a voting exclusion statement.

In addition, following completion of any security issue under the proposed new Listing Rule 7.1A, the entity will also be required to make an announcement (under a proposed new Listing Rule 3.10.5A) containing the following information:

  • details of the dilution to existing shareholders as a result of the issue
  • if the securities are issued for cash, a statement of the reasons why the entity issued the securities as a placement under Listing Rule 7.1A and not as a pro rata issue or similar type of issue that all shareholders would have been entitled to participate in
  • details of the allocation policy for the issue and the process by which it was determined (including the involvement of the directors)
  • details of any underwriting arrangements including fees
  • any other fees or costs incurred in connection with the issue.

ASX considers that this proposal will make ASX’s capital raising framework for mid to small caps comparable and competitive with other exchanges such as Toronto, London, Hong Kong and Singapore.  

Admission requirements

The Consultation Paper also includes proposals for updating two of the admission requirements.

Firstly, it proposes to amend the spread requirement so that the acceptable shareholder spread can be achieved in one of the following three ways:  

  • at least 400 shareholders (currently 500) holding parcels with a value of at least $2,000
  • at least 350 shareholders (currently 400) holding parcels with a value of at least $2,000 and at least 25% of shares are held by non-related parties
  • at least 300 shareholders holding parcels with a value of at least $2,000 and at least 50% of shares are held by non-related parties (this is a new proposal).

Secondly, ASX proposes to increase the net tangible assets test on admission from $2m to $4m. The existing alternative $10m market capitalisation test will remain unchanged.

The deadline for submissions on the Consultation Paper is 14 May 2012.

Reserves and resources disclosure for mining and oil & gas companies

The Consultation Paper also outlines that the feedback received by ASX on its consultation on reserves and resource disclosure rules for mining and oil & gas companies confirmed broad support for ASX’s proposals to facilitate greater transparency and consistency in reserves and resources reporting.

Based on the feedback received on this consultation process, ASX intends to release an exposure draft of a number of proposed amendments to the Listing Rules with respect to the reserves and reporting requirements for comment in mid 2012.