ASX requests feedback on proposed changes to admission requirements for listed entities
On 12 May 2016, the Australian Securities Exchange (ASX) issued for comment a Consultation Paper Updating ASX’s admission requirements for listed entities which seeks input on its proposed changes to requirements for admission to the official ASX list.
Some of the key proposals include:
- Increasing the financial thresholds
- Introducing a minimum free float requirement
- Changing the spread test
- Making the minimum working capital requirement consistent across all entities
- Requiring audited financial statements from ‘assets test’ entities.
These are discussed briefly below.
Increasing financial thresholds
The Consultation Paper proposes amending the financial thresholds for admission as follows:
- Increasing the ‘assets test’ threshold from net tangible assets (NTA) of $3 million or a market capitalisation of $10 million, to net tangible assets of $5 million or a market capitalisation of $20 million (Listing Rule 1.3.1)
- Increasing the ‘profits test’ threshold from $400,000 to $500,000 for profit from continuing operations for the 12 months prior to admission (Listing Rule 1.2.5).
While the ASX has a long history of supporting listings of early stage and start-up entities which may not have a track record of profitability but have significant intangible assets, it considers it necessary to increase the NTA threshold to maintain quality of the market and to provide greater surety that the listed entity will have sufficient resources to carry on its business for a reasonable period.
Introducing a minimum free float requirement and changing the spread test
The Consultation Paper proposes a minimum ‘free float’ requirement of 20% (refer proposed definition below) in Condition 7 of Listing Rule 1.1.
Proposed definition of ‘free float’ in Listing Rule 19.12
The percentage of the main class of securities of an entity that:
(a) Are not restricted securities or subject to voluntary escrow, and
(b) Are held by non-affiliated security holders.
Proposed definition of ‘non-affiliated security holder’ in Listing Rule 19.12
Security holders who are not:
(a) A related party of the entity,
(b) An associate of a related party of the entity, or
(c) A person whose relationship to the entity or a person referred to in (a) or (b) above is such that, in ASX’s opinion, they should be treated as affiliated with the entity.
The ASX Listing Rules currently do not contain minimum requirements for the proportion of securities that can be freely traded (i.e. not restricted or subject to voluntary escrow). Guidance 1 to the Listing Rules generally expects a free float of at least 10%, or an explanation of how a 10% free float will be achieved and in what time frame.
The ASX is currently exercising its discretion under Listing Rule 1.19 and requiring a free float of 20% so this rule change will merely formalise this position.
Changing the spread test
The Consultation Paper proposes changing the minimum credit spread in Listing Rule 1.1, new Condition 8, as follows:
- If the entity has a free float at time of listing with a value of less than A$50 million, there must be 200 non-affiliated security holders, or 100 security holders if A$50 million or more, and
- Each security holder counted towards the spread must hold a parcel of securities with a value of at least A$5,000.
There will not be a rules-based residency requirement for the spread, but the ASX will retain its existing discretion to impose such a requirement.
Listing Rule 1.1, Condition 7, currently allows the credit spread to be achieved by having either:
- 400 security holders who hold a parcel of securities with a value of at least $2,000
- 350 security holders who hold a parcel of securities with a value of at least $2,000, where there is a free float of at least 25%, or
- 300 security holders who hold a parcel of securities with a value of at least $2,000, where there is a free float of at least 50%.
The aim of this proposal is to support liquidity following listing in order to attract sufficient investor interest in the Australian investor community to justify listing.
Making the minimum working capital requirement consistent across all entities
All entities admitted under the ‘assets test’ will be required to meet the $1.5 million minimum working capital requirement, after taking into account:
- Budgeted revenue for the first full financial year that ends after listing, and
- Budgeted administration costs and the costs of acquiring assets referred to in the prospectus, product disclosure statement or information memorandum (to the extent that these costs will be met out of working capital).
Listing Rule 1.3.3(b) currently requires all entities admitted under the ‘assets test’ 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.
It is only mining and oil and gas exploration entities that must have $1.5 million in working capital available after also allowing for the first full financial year’s budgeted administration costs, and the costs of acquiring plant, equipment and/or tenements.
Extending these minimum working capital requirements to all entities is intended to increase the likelihood that the business has sufficient working capital to carry on its business for a reasonable period.
Requiring audited financial statements from ‘assets test’ entities
- Introduces a new requirement that entities seeking admission under the ‘assets test’ produce audited financial statements for the last three full financial years
- If the financial statements for the last full financial year are more than eight months old, the entity will also be required to produce audited or reviewed financial statements for the last half year
- Audited financial statements will also be required for any entity or business acquired by the entity, at, or ahead of a listing (e.g. will include backdoor listings)
- Audit/review reports may not contain a modified opinion, emphasis of matter or other matter paragraph that the ASX considers unacceptable.
Listing Rule 1.3.5(a) currently does not require the accounts to be audited (or reviewed).
ASX will have discretion to accept less than three full years of audited financial statements, for example, start-ups that have been operating for less than three full years.
This change will more closely align with the audit requirements for entities being admitted under the ‘profits test’ in Listing Rule 1.2.3.
The ASX has requested submissions to be made by 24 June 2016.