In November 2016, the ASX released the Response to Consultation paper (Response Paper) updating their admission requirements for entities seeking to list on the ASX (Admission Requirements). This followed the release of the consultation paper ‘Updating ASX’s Admission Requirements for Listed Entities’ (Consultation Paper), which set out a number of proposed changes, and comprehensive public consultations over a six month period.
The changes addressed in the Response Paper became effective on 19 December 2016 and are intended to maintain the quality, integrity and reputation of the ASX, as well as to ensure the ASX market remains internationally competitive.
In summary, the key changes to the Admission Requirements, now effective, are:
- Heightened financial thresholds for both the Profit Test, Assets Test and Market Capitalisation Test;
- Standardised working capital requirements under the Assets Test;
- Introduction of a requirement for two years’ audited accounts from entities applying under the Assets Test;
- Introduction of new minimum free float requirements;
- A new single tier spread test;
- New minimum disclosure requirements for the announcement of a backdoor listing transaction; and
- Reinforcement of ASX’s discretion to refuse admission to the list.
Entities seeking admission to the ASX need to satisfy the ‘Profit Test’ or the ‘Assets Test’.
Listing Rule 1.2 has now been amended to increase the consolidated profit requirement under the Profit Test, to now require applications to have at least $500,000 consolidated profit from continuing operations for the 12 months prior to admission (previously $400,000). The additional requirements of $1,000,000 cumulative net profit in the preceding 3 years and the entity being a going concern, having “conducted the same main business activity during the last 3 full financial years”, will continue to apply unchanged.
Previously, an entity seeking admission to the ASX under the Assets Test must either have Net Tangible Assets of at least $3,000,000 or a market capitalisation of at least $10,000,000. Market capitalisation refers to the total dollar market value of all of an entity’s outstanding shares (this is calculated by multiplying the total number of shares on issue by the price of such shares). Listing Rule 1.3 has modified the Assets Test to now require Net Tangible Assets of at least $4,000,000 or a market capitalisation of at least $15,000,000. This will be relevant for many smaller companies looking to list, such as mining exploration companies.
Standardised Working Capital Requirements
Listing Rule 1.3.3 has now been modified to “standardise the $1.5 million working capital requirement for all entities admitted under the assets test”. The ASX also now requires the $1.5 million to be available after “allowing for the first full financial year’s budgeted administration costs and the cost of acquiring any assets referred to in the prospectus, PDS or information memorandum (to the extent that those costs will be met out of working capital)”. Previously, this requirement only applied to mining, oil and gas exploration entities. Thus this change signifies a tightening of minimum requirements for all other entities.
It should be noted that all entities must continue to confirm that their stated objectives can be met with sufficient working capital.
The ASX has now amended Listing Rule 1.3.5 to provide that entities seeking admission under the Assets Test be required to produce audited accounts for the last 2 full financial years prior to admission. It is also required that where an entity is more than 6 months and 75 days into the current financial year, the entity will be required to produce audited or reviewed accounts for the last half year.
It is important to note that the rule changes also apply to any entity or business that is significant in the context of the listing entity and has been acquired 12 months prior to applying for admission or proposes to acquire at or ahead of listing. This has particular effect on back-door listings.
Pursuant to Guidance Note 1, the ASX will generally consider an entity or business to be ‘significant’ if at the time of listing it will account for 25% or more of the applicants: “consolidated total assets; consolidated total equity interests; consolidated annual revenue; or in the case of a mining exploration entity, oil and gas exploration entity or other entity that is not earning material revenue from operations, consolidated annual expenditure; consolidated EBITDA; or consolidated annual profit before tax”.
The ASX has acknowledged that an entity seeking admission under the Assets Test or a significant business or entity may not be in a position to provide 2 full years of audited accounts, particularly if they are a start-up. Accordingly, the ASX has retained discretion to accept less than 2 years of audited or reviewed accounts.
New Free Float Requirements
‘Free float’ is defined by the ASX as “the percentage of the entity’s main class of securities that are not restricted securities or subject to voluntary escrow, and are held by non-affiliated security holders.” Essentially, the term describes the proportion of shares in a publicly traded company that are in the hands of public investors rather than company insiders.
A new requirement of an explicit condition under Listing Rule 1.1 has now been introduced requiring an entity to have a free float of at least 20% at the time of admission.
Previously there was no specific requirement for a minimum free float, although the ASX commonly considered that in order to have a “structure and operations appropriate for a listed entity” (for the purposes of previous ASX Listing Rule 1.1), an entity seeking admission must have free float of at least 10%.
The ASX considers this change to the Admission Requirements to be a “good balance between promoting potential liquidity in the secondary market and providing for more efficient price discovery”, while “not acting as a barrier” for early stage innovation and technology entities admission.
Importantly, this change to Listing Rule 1.1 brings the ASX into line with peer exchanges, including Hong Kong and New Zealand exchanges, which require that 25% of an entity’s issued share capital at listing be held by public shareholders.
In this context, ‘spread’ refers to the number of distinct holders of an entity’s shares. The ASX has now simplified the admission requirements by changing Listing Rule 1.1 to a single tier spread test requiring a “minimum of 300 non-affiliated security holders each holding a parcel of non-restricted securities with a value of at least $2,000.”
The new spread test no longer counts all ‘security holders’ but instead counts ‘non-affiliated security holders’ only. ‘Non-affiliated security holders’ is defined by the ASX 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”
The ASX’s previous spread test could be satisfied in one of three ways depending on the entity’s free float levels. This spread test was implemented when the ASX did not have a minimum free float requirement and was not only used to “demonstrate sufficient investor support for the entity’s listing”, but was also to “promote liquidity in the entity’s securities”.
However, with the introduction of the new minimum free float requirement the primary purpose of the spread test will now be to provide a “robust and genuine test” that demonstrates sufficient investor interest to justify listing on a public market.
When the Consultation Paper was released on 12 May 2016, the ASX immediately changed its policy on backdoor listings. Trading in a listing shell’s securities will now be suspended immediately from the announcement of a backdoor listing transaction and will not resume until the listed shell has re-complied with ASX’s admission and quotation requirements. This change has been applied to all backdoor listing transactions after this date.
The ASX has now relaxed this policy change by allowing entities to avoid suspension until re-compliance if they make an announcement of a backdoor listing transaction. Under the new minimum disclosure requirements an entity’s securities may be able to resume trade after an announcement that contains all information required as per Annexure A to Guidance Note 12. In addition, the ASX must also be satisfied that the announcement includes “sufficient information about the transaction for trading in the entity’s securities to take place on a reasonably informed basis”.
If an entity does not meet the announcement requirements prescribed in Annexure A, its securities will be suspended from quotation and will continue to be suspended until a supplementary announcement is made.
The Introduction to the ASX Listing Rules and Guidance Note 1 have been amended to reinforce ASX’s absolute discretion to refuse admission and to confirm that the ASX considers the “reputation, integrity and efficiency of its market” when exercising this discretion.
These changes, particularly to Guidance Note 1, provide potential listing applicants and the market with “greater transparency of the factors considered by ASX when exercising their discretion on admission and quotation decisions”.
If you have any queries relating to the new Admission Requirements or ASX listings generally, please contact Michael Bishop on (03) 9614 7707.