ASX has released a Consultation Paper titled “Updating ASX’s admission requirements for listed entities” setting out proposed Listing Rule and Guidance Note changes to ASX’s admission requirements. ASX is seeking submissions by Friday, 24 June 2016 with a view for changes to come into effect on 1 September 2016, subject to regulatory approvals.
The key proposed changes relate mostly to entities seeking to list on ASX and to simplify and improve the drafting and operation of the admission rules generally. The proposed rule changes complement changes that ASX has already made to its admission processes to maintain and enhance the integrity and reputation of the ASX market.
Key considerations
ASX listed entities considering a change in scale or their activities, and entities considering a back-door listing, should be mindful of these changes. For example, if the changes are implemented, small and micro-cap listed entities and those in the junior mining and exploration sector may be impacted in their ability to re-emerge as a new business via a backdoor listing. ASX is also currently exercising its discretion and administering the Listing Rules to require all applicants for an ASX listing to have a minimum free float at the time of listing of 20%, notwithstanding the changes have not yet been formally implemented. It may also be possible that ASX exercises a similar discretion in requiring entities to comply with some of the other changes prior to 1 September 2016.
Changes
The following sets out a summary of the proposed changes:
| Item | Current ASX Rules | Proposed Changes |
| Increasing the profit test threshold for listing | Entities with established operations and a track record of profitability are able to seek admission under the profit test. Currently, the profit test requires that the entity:
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To increase the consolidated profit requirement under the profit test for the 12 months prior to admission to at least $500,000. The other requirements in the profit test will remain unchanged. |
| Increasing the asset test thresholds for listing | The minimum requirements for entities other than investment entities to meet the assets test are a NTA of at least $3 million, or a market capitalisation of at least $10 million. | To increase the thresholds for a NTA of at least $5 million or a market capitalisation of at least $20 million. |
| Introducing a minimum free float requirement | ASX does not currently have in place a rules-based requirement for the minimum proportion of an entity’s securities that will be available at listing for investors to freely trade in the public market (“free float”). To date, ASX has taken a flexible approach to this issue and has addressed it through guidance.
Guidance Note 1 currently states that ASX has generally expected that entities will list with a free float of at least 10%, but has been prepared to admit entities with a lower free float if the entity has explained its plans to increase its free float to at least 10% and set out the timeframe for that to occur. |
To introduce a rules-based 20% minimum free float requirement for ASX listings at the time of admission.
“Free float” will be defined by ASX as the percentage of the entity’s main class of securities that are not restricted securities or subject to voluntary escrow, and that are held by non-affiliated security holders. A “non-affiliated security holder” will in turn be defined as a security holder who is not a related party of the entity, an associate of a related party of the entity, or a person whose relationship to the entity or to a related party of the entity or their associates is such that, in ASX’s opinion, they should be treated as affiliated with the entity.
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| Changing the spread test | ASX’s spread test can be satisfied in one of three ways:
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To amend minimum spread requirement for ASX listings to require:
ASX will not impose a rules-based residency requirement for spread, but will retain its existing discretion to impose such a requirement in an appropriate case. Guidance Note 1 will be amended to give more specific examples of when ASX is likely to exercise that discretion. |
| Applying the same working capital requirements to all assets test entities | All entities admitted under the assets test are currently required to have at least $1.5 million in working capital, after taking into account any budgeted revenue for the first full financial year after listing. For mining and oil and gas exploration entities, this $1.5 million in working capital must be available after allowing for the first full financial year’s budgeted administration costs, and the costs of acquiring plant, equipment and/or tenements. | To standardise the current $1.5 million minimum working capital requirement by extending the additional requirements that currently apply only to mining and oil and gas exploration entities, to all entities admitted under the assets test. |
| Requiring audited accounts from assets test entities | Entities admitted under the assets test currently have greater flexibility than entities admitted under the profit test in relation to the provision of financial accounts. Entities admitted under the assets test are allowed under the rules to provide unaudited accounts and provide accounts for a period shorter than 3 full financial years. They must also ordinarily provide a pro forma statement of financial position reviewed by an auditor or independent accountant. | To introduce a new requirement for entities seeking admission under the assets test to produce audited accounts for the last 3 full financial years.
If the accounts for the last full financial year are more than 8 months old, it is proposed that the entity also be required to produce audited or reviewed accounts for the last half year. ASX is further proposing that an entity seeking admission under the assets test be required, unless ASX agrees otherwise, to produce 3 full financial years of audited accounts for any entity or business to be acquired by the entity at or ahead of listing. This change will have particular application to backdoor listings. |
| Reinforcing ASX’s discretion to refuse admission to the official list | Limited guidance currently in Guidance Note 1. | Update the introduction of the ASX listing rules to reinforce ASX’s absolute discretion on admission and quotation decisions and to state that ASX will take into account the reputation, integrity and efficiency of its market in exercising these discretions. ASX also proposes to amend Guidance Note 1 to:
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| Changes applicable to ASX Foreign Exempt listings | ASX currently permits a foreign entity that has its main listing on an overseas marketing which is a member of the World Federation of Exchanges and that meets certain eligibility criteria, to maintain a secondary listing on the ASX market as an “ASX Exempt Listing”. | To amend listing rule 1.11 condition 1 to require the overseas exchange on which a foreign exempt listing is listed to be one “acceptable to ASX” and also amend the assets test for foreign exempt listings to require such entities either to have either minimum net tangible assets of $2,000 million (as is currently the case) or a minimum market capitalisation of $2,000 million. |
| Other changes | It is proposed that the chnages will be made to Guidance Notes 1 Applying for Admission – ASX Listings, 4 Foreign Entities Listing on ASX, 12 Significant Changes to Activities, 29 Applying for Admission – ASX Debt Listings and 30 Applying for Quotation of Additional Securities.
In particular, the changes include updates to:
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The proposed changes to the Listing Rules and to each of the above Guidance Notes can be viewed here.
Implications for backdoor listings
The significant changes proposed to Guidance Note 12 in relation to backdoor listings suggest that backdoor listings should not be considered as having a lower compliance threshold than a traditional IPO listing. In particular, the following key changes are proposed:
- Trading in the securities of an entity that announces a backdoor listing will be suspended from the point of announcement until the entity has re-complied with ASX’s admission requirements, which will align backdoor listings with front door listings;
- Additional guidance on ASX considerations in giving relief from the 20 cent rule (that is, an entity’s securities can be re-admitted to quotation for less than 20 cents). An entity that does not meet the conditions will not be granted relief from the 20 cent rule;
- ASX may be prepared to grant a waiver from Listing Rule 9.1.3 (referred to as “look-through” escrow relief) to permit the owners of the entity to be acquired to be treated as seed capitalists rather than as vendors. This relief is provided on the basis that if the entity or undertaking had applied for listing in its own right, its owners would have been treated as seed capitalists rather than as vendors, and therefore subject to less onerous escrow conditions. Where look-through relief is granted, the applicable escrow period will start at the time the owner paid cash to acquire their ownership interests in the entity being acquired, rather than the date they acquired their securities in the listed entity;
- ASX will carefully examine any capital raising that occurs in the lead up to, or after, the announcement of a proposed transaction under Listing Rule 11.1 to determine whether it is in the nature of a pre-emptive capital raising. That is, a capital raising that is undertaken for the purpose of a transaction where shareholder approval has not yet been obtained for that transaction;
- ASX will require audited accounts for the last 3 full financial years for the entity that is being acquired, and half year accounts if the financial year end was more than 8 months before the entity applied for readmission; and
- ASX charges a fee of $10,000 (plus GST) for reviewing a draft notice of meeting relating to a transaction where a backdoor listing is proposed.
Interested parties have until Friday 24th June 2016 to comment on the proposed changes to the ASX listing rules.
HWL Ebsworth’s capital markets team are happy to discuss any queries you may have in relation to the proposed changes.