As a result of the global financial crisis, a significant number of ASX listed entities have sought to raise additional capital through the equity markets, with substantial capital raisings being announced on an almost daily basis. The ability to tap the market quickly has proven critical to the success of capital raisings in times of market volatility. Recent regulatory reforms have facilitated this capital raising activity by broadening the types of capital raisings that can be undertaken without a prospectus, thereby reducing the time required to implement a capital raising.
This article sets out brief detail on the types of offers that can now be made without a prospectus, the disclosure requirements for such offers, recent developments in market practice and regulation of secondary capital raisings and considerations for entities assessing their capital requirements, particularly as we head into financial reporting and AGM season for a large number of listed entities.
What types of offers can be made without a prospectus?
ASX listed entities have a number of available options for raising capital without a prospectus including:
- placements to existing and new institutional investors
- security purchase plans (SPPs) of up to $15,000 per shareholder
- pro-rata rights issues.
Each of these types of offers can be undertaken separately or in conjunction with one of the other types of offers.
While the changes to facilitate rights issues without a prospectus were implemented in mid 2007, the regime took some time to gain market acceptance, particularly for underwritten offers. However, this approach is now common practice for the majority of rights issues. ASIC has also recently increased the threshold for SPPs that can be offered without a prospectus from $5,000 to $15,000.
While there are a number of conditions that must be satisfied to rely on these exemptions (primarily relating to quotation of the securities and compliance with continuous disclosure), ASX listed entities should be able to satisfy these requirements in most cases.
What are the key disclosure obligations for these offers?
For each of the above types of offers, the entity will need to issue a "cleansing notice" to the ASX at or around the time of the capital raising either confirming that the entity has disclosed all material information to the market under the continuous disclosure regime or disclosing any such information. This includes disclosure of any information that the entity may be withholding under the carveouts from the continuous disclosure requirements in the ASX listing rules.
In recent times, entities have typically addressed this requirement by announcing any material price sensitive information to the ASX (for example, periodic financial information, updated earnings guidance, asset writedowns, debt refinancings or acquisitions) contemporaneously with the announcement of a capital raising before issuing the cleansing notice.
For rights issues and SPPs, the entity must also issue an offer document outlining the terms and conditions of the offer. However, given the separate ASX announcements generally made prior to the capital raising as set out above, these documents do not generally contain any significant additional information regarding the entity.
Entities should also ensure that any proposed capital raising is kept confidential until it is announced to the market. In particular, care should be taken to ensure that "soundings" of existing or potential new investors by the entity or its advisers are made subject to appropriate confidentiality arrangements and restrictions on trading.
Is due dilligence required?
While the specific prospectus liability provisions of the Corporations Act will not apply to a capital raising without a prospectus, entities are still exposed to liability when undertaking a capital raising using a cleansing notice. Potential sources of liability include liability for false and misleading statements (for example, in any ASX announcement made by the entity in conjunction with the capital raising) or for contravention of other provisions of the Corporations Act including the continuous disclosure and insider trading provisions.
The recent decision in the James Hardie litigation and the various class actions that have been, or are currently being, run in relation to alleged false or misleading disclosure to the ASX are also a timely reminder of the liability that may attach in relation to announcements made to the ASX (or failure to make appropriate disclosure).
For this reason, it is advisable for entities to undertake due diligence in relation to a capital raising conducted without a prospectus. ASIC has reiterated this view in recent releases regarding such capital raisings.
Due diligence for these types of capital raisings will typically consist of:
- due diligence on the entity's continuous disclosure compliance and to identify any information being withheld under the carveouts to the continuous disclosure regime
- due diligence on any ASX announcements to be made in conjunction with the capital raising
- for underwritten offers, completion of a management due diligence questionnaire prepared by the underwriters.
While due diligence is recommended, it typically involves a less formal process than the due diligence and verification process undertaken for a prospectus.
On-going monitoring should also be undertaken in relation to material information that may arise prior to the issue of the shares under the offer.
What are some of the key developments in the market in the last 12 months?
Some of the key developments we have seen in the last 12 months as a result of both market conditions and regulatory reforms include:
- placements followed by SPPs – placements of up to 15% of existing capital to institutional investors (both existing and new investors) to raise capital in the shortest possible time-frame. However, given the potential dilutionary impact, particularly where the placement occurs at a substantial discount to market price, most entities have also offered their retail shareholders the opportunity to participate in the capital raising through an SPP at the placement price (or, if lower, a discount to market price at the time of the SPP)
- placements to strategic or cornerstone investors - substantial placements of up to 15% to a single strategic or cornerstone investor. Arrangements with strategic investors may also involve board representation for the investor, co-operation or similar business agreements and arrangements, subject to shareholder approval, for the investor to further increase their equity stake
- related party participation in placements and top-up offers – placements to related parties (including major shareholders) generally require shareholder approval. However, ASX has recently granted relief from this requirement on a number of occasions to enable major shareholders to participate in the placement for their pro-rata share, subject to certain conditions regarding follow-on SPPs and top-up offers being offered to other shareholders on a substantially pro-rata basis
- accelerated entitlement offers – this is a pro-rata offer to shareholders where institutional investors receive their offer on a shorter (or "accelerated") timetable compared to retail investors. While this offer structure has existed for some time for larger, more complex capital raisings, it is now being used commonly for rights issues because it enables an entity to lock in a significant portion of the fundraising in a shorter time frame and facilitates underwriting of the institutional component of the offer by reducing the amount of time the underwriter is "on-risk". Placements of up to 15% are also commonly offered in conjunction with an accelerated entitlement offer to raise additional capital, including from new investors
- shortfall facilities – where there is a shortfall in a rights issue because shareholders do not take up their rights, entities are commonly offering existing shareholders (and in some cases, new institutional investors) the right to apply for additional shares under a "shortfall facility". Enabling retail shareholders to participate in a shortfall facility is a recent development and, due to the substantial discount being offered for a number of rights issues and increasing investor confidence as the market has stabilised, in a number of cases retail participation in such shortfall facilities has exceeded demand resulting in a scale-back of applications
- control issues arising from rights issues and underwritings – a significant shortfall under a rights issue (particularly a large, heavily discounted rights issue) may have a significant impact on control of an entity, particularly where the rights issue is underwritten wholly or partially by an existing major shareholder or a third party. Due to the potential risk of a challenge being made to the Takeovers Panel that such a transaction affects control (as has happened on a number of occasions recently) such offers are commonly being structured to reduce, to the extent possible, the potential control implications in accordance with guidance issued by the Takeovers Panel, including through third party underwriting and sub-underwriting arrangements and the use of shortfall facilities as set out above.
What are some of the relevant considerations for entities contemplating a capital raising?
While a large number of factors will be relevant to the structure and timing of a capital raising, some relevant considerations may include:
- size of the offer – placements of up to 15% of existing capital can be made without shareholder approval. For entities that have utilised their placement capacity or need to raise in excess of this amount, a pro-rata rights issue may be the only option
- need for underwriting – while underwriters have shown willingness to underwrite placements and the institutional component of accelerated entitlement offers, until recent weeks, it has been less common for the retail component of rights issues to be underwritten (arguably because of the greater market risk over the extended offer period). Most recent SPPs have not been underwritten
- related party/control issues – whether there are any related party or control issues that may affect the structure of any capital raising for the reasons set out above
- shareholder approvals at AGM – whether any shareholder approvals should be obtained at an upcoming AGM, either to "refresh" their placement capacity (if they have used it in the last 12 months) to maintain flexibility for any future capital raising proposals or to approve any proposed capital raising that may require shareholder approval (for example, because of related party or control issues as mentioned above)
- timing and periodic financial reporting - if all material information of which the entity is aware will be disclosed in conjunction with an entity's upcoming periodic reporting, there may be a window of opportunity to undertake a capital raising without further disclosure needing to be made outside the periodic reporting framework.