Australia: IPO update: Regulators finalise changes to listing and disclosure requirements

Last Updated: 28 November 2016
Article by Juanita Rayson and Michelle Hyams
Services: Corporate & Commercial
Industry Focus: Life Sciences & Healthcare

What you need to know

  • ASX has released the final version of the changes to the ASX Listing Rules in relation to admission requirements which take effect on 19 December 2016.
  • ASIC has released amended regulatory guidance clarifying its expectations in relation to the quality and quantity of historical financial information to be disclosed in a prospectus, which has already come into effect.
  • Entities considering an initial public offering (IPO) should get informed about the updated requirements, and those on the cusp of an IPO should consider what will change if they proceed before or after 19 December.

What has happened?

In our recent article ' So you think you're ready to IPO?' we summarised a number of impending changes to Australia's landscape for initial public offerings (IPOs) foreshadowed by Australia's corporate regulators. Last week, both ASX and ASIC issued two critical updates:

  1. On 2 November 2016, after receiving a substantial number of responses to its consultation paper Updating ASX's admission requirements for listed entities, ASX released its new admission requirements for listed entities (along with updated Guidance Notes to the ASX Listing Rules).
  2. On 3 November 2016, following its consultation paper Improving disclosure of historical financial information in prospectuses: Update to RG 228, ASIC reissued ASIC Regulatory Guide 228: 'Effective disclosure for retail investors' (RG 228).

In this article we explore the changes to the ASX Listing Rules and RG 228.

Changes to the ASX Listing Rules

New admission criteria

ASX has issued new admission criteria which take effect from 19 December 2016. The key changes to the ASX Listing Rules are summarised below:

Admission criterion Summary of changes
Satisfaction of profit test or assets test

For entities relying on the 'profit test', there is an increase to the minimum consolidated profit from continuing operations requirement to $500,000 in the 12 months prior to admission (up from $400,000)

For entities relying on the 'assets test', there are increases to the:

  • net tangible assets (NTA) threshold to $4 million (up from $3 million)
  • market capitalisation threshold to $15 million (up from $10 million).
Working capital requirements under the assets test

Any entity seeking admission relying on the 'assets test' will need at least $1.5 million in working capital after allowing for the first full financial year's budgeted administration costs and the cost of acquiring any assets referred to in the disclosure document (to the extent that those costs will be met out of working capital).

Audited accounts for asset test entities

Entities seeking admission in reliance on the assets test must provide audited accounts for:

  • the last 2 full financial years, and if the entity is more than 6 months and 75 days into the new financial year, audited accounts for the last half-year
  • the last 2 full financial years for any 'significant' entity or business acquired by the entity in the 12 months prior to listing or at listing. Additionally, if that significant entity or business is more than 6 months and 75 days into the new financial year, audited accounts for the last half-year. This new requirement will particularly apply to backdoor listings.

Guidance Note 1 will be updated to provide guidance on the meaning of 'significant' for these purposes. An entity or business will generally be considered 'significant' if at the time of listing it will account for 25% or more of any of the applicant's:

  • consolidated assets
  • consolidated total equity interests
  • consolidated annual revenue
  • 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.

ASX will, however, retain a discretion to accept less than 2 financial years of accounts but will only do so in circumstances where:

  • the entity has been operating for less than 2 financial years
  • the entity has undergone such a major and transformative change during its most recent financial year that the accounts for the previous financial year would not provide meaningful information to investors.
Minimum free float requirement

ASX has introduced a new listing rule requiring an entity to have a 20% minimum 'free float' on listing.

'Free float' is the percentage of the entity's quoted securities which are not subject to escrow (either voluntary or ASX-imposed) and which are held by 'non-affiliated' security holders.

This requirement confirms ASX's existing practice (relying on its general power to impose conditions on listing).

Single tier of minimum spread requirements

The minimum spread requirements have been simplified to require a minimum of 300 security holders each holding securities valued at least $2,000.

Discretion to refuse admission

ASX proposes to update the Introduction to the ASX Listing Rules and Guidance Note 1 to reinforce its discretion as to admission and quotation decisions and provide guidance, including examples on:

  • when ASX may exercise its discretion not to admit an entity to the official list
  • where an applicant may be considered to not have a structure and operations appropriate for a listed entity.

ASX has specifically noted that it may exercise its discretion not to admit an entity to the official list despite the applicant meeting, or being expected to meet, the requirements for listing and quotation.

Some other ASX Listing Rule changes

ASX has also issued marked-up Guidance Notes 1, 4, 12, 29 and 30 to clarify its guidance on various policies and procedures, including updates to Guidance Note 12 to address emerging issues with backdoor listings. Although the Listing Rule changes take effect on 19 December 2016, the changes to Guidance Note 12 take immediate effect (from 2 November 2016).

Under the amended rules, trading in the securities of an entity that announces a backdoor listing will be suspended from the point of announcement until the entity has either:

  • re-complied with ASX's admission requirements, which will align backdoor listings with front door listings; or
  • announced sufficient information to the market (as set out in Annexure A to Guidance Note 12), which includes:
    • the parties to and the material terms of the transaction
    • the target's principal activities and business model, including risks
    • the impact of the transaction on the entity's capital and structure
    • the identity of any person that will gain control of the entity under the transaction.

What happens next?

Applications for listing received before 19 December 2016 will be assessed against the admission requirements in the current ASX Listing Rules, although ASX is already applying the 20% minimum free float requirement under its general power to impose conditions on listing.

Applications lodged on or after 19 December will be assessed against the new admission requirements.

Amendments to ASIC RG 228

The key changes under reissued RG 228 (which took effect on 3 November 2016) are summarised below:

An entity issuing a prospectus should provide audited historical financial information of 2.5 - 3 years for itself and any business it acquires

ASIC expects that the prospectus will, other than in specific circumstances (see immediately below), contain 2.5 - 3 years of audited historical financial information regardless of the corporate form in which the business was carried out in the past or whether the business was subject to a historical financial reporting requirement (eg because it was a small proprietary company or a foreign company that was not required to prepare audited financial statements).

2.5 - 3 years of audited historical financial information will also be required for any significant businesses acquired in the 12 months before lodgement or proposed to be acquired using funds raised from the IPO. For consistency, ASIC has adopted ASX's definition of 'significant'.

When historical financial disclosure will not be required

ASIC has clarified that there may be circumstances where the disclosure of historical financial information for the past 2.5 - 3 years would include information that is either irrelevant or unreasonable for investors to expect. In these cases, certain historical financial disclosure will not be required.

For example, ASIC considers it would not be relevant to disclose where:

  • an entity's main business has undergone a major change
  • the entity is a vehicle for a backdoor listing and is effectively a shell without material assets or liabilities.

Further, ASIC considers it would not be reasonable to disclose where:

  • the entity acquired a business before the IPO, and has already consolidated the acquisition for a substantial part of its disclosed financial history
  • the entity is planning a roll-up listing (ie many immaterial businesses without audited financial statements in the same sector).

RG 228 provides additional examples of where it would not be reasonable to disclose historical financial information.

When a qualified audit opinion will be unacceptable

ASIC may treat financial information as not sufficiently reliable where an audit or review opinion included in a prospectus has a qualification or modification which indicates that the opinion provides limited independent assurance for investors (eg where an auditor's report includes a disclaimer of opinion indicating that financial records of the core business of the company were not available).

When an asset will be a 'business'

RG 228 specifies that an entity should use the guidance in Appendix B of Australian Accounting Standard AASB3 Business Combinations and interpretations to determine whether it has acquired a business or collection of assets.

Where the assets acquired by an entity are in substance a business, the entity should generally disclose historical income statements.

When financial disclosure will be considered to be 'current'

Where the existing business has not changed substantially and has an acceptable audit history, a prospectus will be considered by ASIC to be current if it includes the most recent:

  • half-year audited or reviewed financial statements (where the prospectus is lodged less than three months after year end)
  • full-year audited financial statements (where the prospectus is lodged with ASIC less than 75 days after half-year end).

In rare circumstances, where the business has changed fundamentally since the last balance date in the prospectus, ASIC requires more up to date financial statements to be prepared, audited and included in the prospectus.

When cash flow statements should be included

ASIC has clarified that where historical trading is disclosed cash flow statements are required to be included.

What happens next?

The changes to RG 228 take immediate effect, and therefore will apply to any draft prospectus lodged with ASIC after 3 November.

Key takeaway

While the changes to RG 228 have already taken effect, there is still some time before the changes to the ASX Listing Rules come into force. Entities on the cusp of an IPO should consider how their IPO activities will change if they move forward before or after 19 December.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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