In August 2019, the Australian Securities and Investments Commission (“ASIC”) announced that it had doubled the security purchase plan (“SPP”) limit from $15,000 to $30,000 (see our recent client alert). In a year where institutional placements and SPPs have proved particularly popular, this higher limit presents a great opportunity for Boards to use placements over entitlement offers without disadvantaging small securityholders, but it also raises some interesting considerations.
What does this change mean for Boards?
As with any corporate transaction, it is important for Boards to consider carefully the various capital raising options available to them to determine which best suits their commercial objectives whilst also being in the interests of securityholders.
For many Boards, the prospect of a fast-paced institutional placement and a follow on SPP is very attractive compared to an entitlement offer. Subject to the 15% placement capacity restriction under Australian Securities Exchange (“ASX”) Listing Rule 7.1, entities will get the funds they require more quickly as placement bookbuilds are shorter and easier to execute than ones for entitlement offers. The due diligence process and offer documentation is also relatively less cumbersome than for an entitlement offer. It is also attractive for underwriters, who will generally only underwrite the institutional placement component and therefore will get off risk more quickly.
One of the hesitations for Boards in implementing an institutional placement and follow on SPP is that it is not pro rata and may cause some securityholders to be diluted. A benefit of the $30,000 cap is it will allow most retail securityholders to subscribe for an amount of securities equal to or more than their pro rata amount.
Although there are clear advantages in opting for an institutional placement and follow on SPP, it is important that Boards carefully weigh this up against the advantages to securityholders which are unique to an entitlement offer.
Entitlement offers allow eligible securityholders to participate for their pro rata share of new securities. This means that they are not diluted and there is less likelihood of the capital raising having control impacts.
Renounceable entitlement offers give existing securityholders the opportunity to obtain some value for their entitlements if they do not participate.
For example, pro rata accelerated institutional, tradeable retail entitlement offers (also known as ‘PAITREOs’) allow eligible retail securityholders to trade their entitlements on ASX at the front end of the offer. This allows those securityholders to get monetary value at a similar time to institutional securityholders, rather than being delayed to the end of the offer.
None of these entitlement offer advantages are available to securityholders under the institutional placement and follow on SPP alternative.
In addition, $30,000 is a fairly high amount, particularly for smaller issuers. The flexibility the higher threshold creates for Boards may also lead to greater uncertainty as to how much will be raised in the SPP. This uncertainty may be priced into the institutional placement by institutional investors to the detriment of issuers. This potential pricing impact may result in Boards setting lower SPP thresholds, setting total SPP offer caps or implementing greater scale back to reduce the uncertainty. This in turn may increase expenses for issuers in having to return cash to scaled back securityholders and deal with disgruntled ones.
It is important that Boards consider all of these points carefully in making their decision as to what type of capital raising to proceed with. It remains to be seen what impact ASIC’s change will have on secondary capital raisings going forward. Our best guess is that, despite the “considerations” we have listed, the $30,000 cap will make the institutional placement and SPP alternative a more compelling option for many Boards.