Australian Securities Exchange (ASX) has introduced a number of changes to the listing admission requirements in the ASX Listing Rules which impose higher standards on entities seeking admission to the official list of ASX.
Key changes
The key changes to the admission requirements are:
- For entities seeking admission under the profit test, increase of minimum consolidated profit threshold from AU$400,000 to AU$500,000.
- For entities seeking admission under the asset test:
- increase of minimum net tangible asset (NTA) threshold from AU$3 million to AU$4 million;
- increase of minimum market capitalisation threshold from AU$10 million to AU$15 million;
- new standardised requirement to hold working capital of AU$1.5 million; and
- new requirement to provide audited accounts for up to 2.5 financial years for the entity seeking admission and any significant business or entity acquired in the previous 12 months or to be acquired in connection with the listing.
- For all entities:
- new requirement to have a 20% minimum free float at the time of admission; and
- new single tier spread test which requires at least 300 'non-affiliated security holders' each holding at least AU$2,000 worth of securities that are not restricted securities or subject to voluntary escrow arrangements.
- For entities seeking a foreign exempt listing:
- new requirement to be listed on an overseas exchange or market acceptable to ASX; and
- new minimum market capitalisation threshold of at least AU$2 billion which may be met as an alternative to meeting a net tangible asset threshold of at least AU$2 billion.
The changes are intended to improve the quality, integrity and sustainability of ASX's listing participants and increase ASX's international competitiveness in light of increased cross-border listings. While the former may be true, the changes make it more difficult for early stage entities, such as resource exploration, technology and innovation entities (ESEs), to meet the admission requirements. This may result in these entities seeking to list offshore or on an alternative Australian based platform.
Further details of the key changes and the impact of these changes on prospective listing applicants are set out below.
Financial thresholds
Entities seeking admission to the official list of ASX must meet either the profit test or the asset test. The key change to the financial thresholds under each of these tests is described below.
| Former requirements | New requirements | |
|---|---|---|
| Profit test | Consolidated profit from continuing operations of at least AU$400,000 for the 12 months prior to admission. | Consolidated profit from continuing operations of at least AU$500,000 for the 12 months prior to admission. |
| Asset test |
|
|
Generally speaking, well established entities with a strong track record of profitability apply for admission under the profit test. Accordingly, the increase to the consolidated profit threshold from AU$400,000 to AU$500,000 is unlikely to have a major impact on the listing prospects of these applicants. In any event, although the increase appears substantial (25 per cent), this threshold has not changed since 1994 and so the increase is relatively moderate when considered over time.
On the contrary, ESEs typically seek admission under the asset test because they do not have a history of profit making operations but have assets of significant value such as plant and equipment or intellectual property. The increase to the market capitalisation threshold from AU$10 million to AU$15 million and to the NTA threshold from AU$3 million to AU$4 million is significant in percentage terms (50 and 33 per cent respectively) and, accordingly, is likely to have a material impact on the ability of some ESEs to gain admission to the official list.
Audited accounts
ASX has introduced a new requirement for entities seeking to list under the assets test which requires the entity to provide at least two full financial years of audited accounts (including the accounts of any significant entity acquired in the previous 12 months or proposed to be acquired in connection with the listing). Additionally, where an entity is more than six months and 75 days into the financial year it will need to produce audited or reviewed accounts for the last half year.
Although this will provide investors with greater assurance about an entity's assets, liabilities and financial performance, it is likely to create significant compliance headaches for entities that do not have sufficient operating history or cash resources to comply, such as ESEs.
Working capital
The working capital requirement for entities seeking to list under the assets test will be standardised so that all entities have working capital of at least AU$1.5 million at the time of admission, taking into account budgeted revenue and budgeted costs for the first financial year. This change is aimed at providing greater certainty to investors that a newly listed entity has sufficient financial resources to carry on its business.
Previously, only exploration entities were required to take into account budgeted costs for the first financial year.
20% minimum free float requirement
All entities seeking admission (whether under the profits test or assets test) must have a 'free float' at the time of admission of not less than 20%. The term 'free float' means the percentage of an entity's main class of securities that are not classified by ASX as restricted securities or subject to voluntary escrow arrangements and that are held by non-affiliated security holders.
Non-affiliated security holders of an entity are security holders who are not:
- a related party of the entity;
- an associate of a related party of an entity; or
- a person whose relationship to the entity, or to a person that is a related party of the entity, or to an associate of a related party of an entity is such that ASX considers the person should be treated as affiliated with the entity.
Despite being formally adopted on 19 December 2016, ASX has imposed a 20% free float since May this year under its residual discretion to grant or refuse admission on any conditions it thinks fit (described in further detail below).
Spread test
ASX has changed the existing spread test by introducing a single
tier test requiring an entity to have at least 300 non-affiliated
security holders who each hold securities worth AU$2,000 or
more.
Previously, the spread test was a three tiered test where the
minimum number of non-affiliated securities was determined
depending on the free float of the entity.
Foreign exempt listings
A special regime is applicable to entities with a main listing on an overseas stock exchange that maintain a secondary listing on the ASX market as a foreign exempt listing.
With effect from 19 December 2016, the following changes to the foreign exempt listing regime apply:
- A foreign entity must have its primary listing on an overseas
stock exchange or market that is acceptable to ASX.
The exchanges ASX considers acceptable are Borsa Italiana, Deutsche Börse, EuroNext (Amsterdam), EuroNext (Brussels), EuroNext (Lisbon), EuroNext (Paris), Frankfurt Stock Exchange, HKSE, LSE, SGX, SIX Swiss Exchange, TSE (Tokyo), TSX (Toronto), NASDAQ, NYSE, NYX, JSE and Bursa Malaysia.
Notably, this list does not include major international exchanges such as the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), Korea Exchange (KRX), the National Stock Exchange of India (NSE) or the Japan Exchange Group (JPX). - A foreign entity may have a minimum market capitalisation of at least AU$2 billion as an alternative to having an NTA of at least AU$2 billion.
Residual discretion to refuse admission
Despite the new changes, ASX retains a residual discretion to grant or refuse admission without giving any reasons or impose any conditions it considers appropriate. ASX has introduced new guidance on when it will exercise its discretion to refuse a listing, which includes:
- when an entity has an unacceptable structure or operations;
- where ASX has had prior unacceptable dealings with the applicant, its proposed directors, or professional advisers; or
- where ASX otherwise has concerns that admitting the applicant to the offical list may put at risk the reputation of the ASX market as one of quality and integrity.
Conclusion
The higher standards now demanded from prospective listing applicants should meet ASX's objective of improving the quality, integrity and financial stability of its listing participants and promote market confidence. However, the downside is that the changes are likely to preclude some prospective applicants who are unable to meet these higher thresholds from listing on ASX, particularly ESEs.
In a time when creating a regulatory environment in Australia that supports investment in technology, innovation and growth is so important, we hope that these changes do not have the opposite effect and result in strong and viable ESEs that are unable to meet the new threshold requirements seeking to list on, or raise capital from, markets offshore.
Next steps
Before making any decision to list on the ASX or to raise capital, early engagement with ASX and professional advisers is highly recommended.
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
