ASX Listing Rule Changes: Advising Small Caps That Want to List

Following a comprehensive public consultation process that began on 12 May 2016, the ASX implemented changes to its requirements for admission to the ASX official list, effective 19 December 2016.

The changes seek to ensure that:

  • The ASX continues to be a market of quality and integrity, and remains internationally competitive in light of the continuing trend in cross-border international listings.
  • The ASX’s listing admission standards continue to support and provide a pathway for early-stage resources and technology and innovation entities (ESE) to list and access capital.

The changes will largely affect small-cap companies in Australia seeking to list on the ASX via an initial public offering (IPO). In particular, advisers should be aware of the changes when giving advice to small-cap entities wishing to list.

This article does not consider the requirements relating to ‘investment entities’ (broadly, entities whose principal activities consist of investing in listed or unlisted securities or derivatives, and whose objectives don’t include exercising control over or managing any entity in which it invests) or backdoor listings.

Impact for legal advisers

The changes raise the bar for admission to the official list of the ASX, and may mean that early stage enterprise (ESE) and small-cap companies on the cusp of listing may need to defer their listing plans until they reach greater operational and financial maturity.

In light of the changes, advisers of entities seeking to list should:

  1. Discuss the tightened listing requirements with senior management and the entity’s board to determine the relevant test under which to seek admission.
  2. Assess the financial resources of the entity in light of the tightened controls.
  3. Continue to build a corporate governance function and culture of compliance appropriate to a listed entity.
  4. Ensure that the board and senior management are ready for the entity to ‘go public’ in view of ongoing disclosure requirements, increased scrutiny and increased reporting.

Entities that are unsure whether they can meet the amended admission requirements should seek early guidance from ASX Listings Compliance prior to making a formal application for admission to the official list.

In appropriate cases, the ASX may grant waivers in respect to a Listing Rule or be prepared to provide in-principle advice in relation to the application of the Listing Rules to a particular situation.

The key amendments to the ASX listing rules are summarised below. Other drafting changes to the listing rules can be found in these ASX resources:

The amendments: summary

A summary of the amendments is as follows.

For entities seeking admission under the profits test, an increase in the requirement for consolidated profits for the 12 months prior to admission from $400,000 to $500,000.

For entities seeking admission under the assets test:

  • An increase to the net tangible assets (NTA) threshold from $3 million to $4 million.
  • An increase in the market capitalisation requirement from $10 million to $15 million.
  • New audited accounts requirements broadly requiring disclosure to the market of two full financial years of audited accounts for the entity seeking admission and any ‘significant’ entity or business acquired by the entity in the 12 months prior to applying for admission or that it proposes to acquire in connection with listing.
  • A standardised $1.5 million working capital requirement.

For all entities:

  • A new 20% minimum free float requirement.
  • A single-tier spread test requiring at least 300 security holders each holding at least $2000 of securities.

These are discussed in more detail below.

Increased NTA requirements

The consolidated profit requirement under the profit test for 12 months prior to admission has been increased from $400,000 to $500,000. Other requirements of the profit test remain unchanged, namely that the entity must:

  • Be a going concern and have conducted the same main business activity during the last three full financial years prior to admission.
  • Have aggregated profit of at least $1 million from continuing operations for the last three full financial years prior to admission.

This represents a significant tightening which could prove prohibitive for many entities, particularly ESE, seeking to list on ASX.

Increased NTA test requirements

The minimum NTA requirement has been increased from $3 million to $4 million for entities across all industries and sectors applying for admission under the NTA limb of the assets test.

Increased market capitalisation test requirements

The minimum market capitalisation requirement has increased from $10 million to $15 million for entities applying for admission under the market capitalisation limb of the assets test.

Standardised working capital requirements

The $1.5 million working capital requirement has been standardised across entities admitted under the assets test. The amount must 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 entity’s offer document (to the extent those costs are to be met out of working capital).

This is to provide more investor certainty in relation to the minimum level of working capital an entity will have available at listing, and increase the likelihood that the entity will have sufficient resources to carry on its business for a reasonable period post-listing.

New audited accounts requirements for admission under the assets test

A new requirement has been introduced for entities seeking admission under the assets test to produce audited accounts for the last two full financial years prior to admission (including the accounts of any significant entity/business acquired in the previous 12 months or proposed to be acquired in connection with the listing). Previously, unaudited accounts were acceptable.

Where an entity (and its acquired significant entity/business, if any) is more than six months and 75 days into the current financial year, it will also be required to produce audited or reviewed accounts for the last half-year (for itself and any significant entity/business).

The new requirements may prove a barrier to listing for those entities, particularly ESE, which do not have a sufficient audited operating history due to factors such as the costs of compliance or a change in corporate structure (for example, from proprietary to public).

Amended ‘free float’ requirements

A new condition has been introduced for an entity to have a free float (the percentage of the entity’s main class of securities that aren’t restricted securities or subject to voluntary escrow, and are held by non-affiliated security holders) of at least 20 per cent at the time of admission, on the basis that this will:

  • Increase the potential for secondary market liquidity in the entity’s securities.
  • Not act as a barrier to the admission of early-stage innovation and technology entities.

This represents a significant tightening as, prior to 19 December 2016, there was no formal requirement for a minimum proportion of an entity’s securities to be available to freely trade in the public market at the time of admission.

Simplified minimum spread requirements

A single-tier spread test has been introduced requiring a minimum of 300 unaffiliated security holders each holding a parcel of non-restricted securities with a value of at least $2000. With the introduction of the minimum free float requirement, the primary purpose of the spread test is to demonstrate sufficient investor interest to warrant an entity listing.

Previously, the spread test was three-tiered, namely: 400 security holders if the entity had a free float of less than 25 per cent, 350 security holders if the entity had a free float between 25 to 50 per cent, or 300 security holders if the entity had a free float of more than 50 per cent, with each of these security holders required to hold a parcel of securities with a value of at least $2000.

The new rule is potentially more demanding than the previous three-tier requirement.

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