Proposed changes to the requirements for listing on the ASX

On 12 May 2016 the ASX released a Consultation Paper on proposed changes to its requirements for admission to the ASX official list.  The changes to the Listing Rules are designed to maintain and strengthen the reputation of ASX as a market of quality and integrity.  The key proposed changes relate mostly to entities seeking to list in the “ASX listing” category and are discussed in detail below.

Increasing the financial thresholds to be eligible for listing

Entities seeking admission to the ASX must satisfy one of two financial tests – the profit test under listing rule 1.2 or the assets test under listing rule 1.3.

Profit test

Entities with established operations and a track record of profitability are able to seek admission under the profit test.  Currently, the profit test requires that the entity:

• is a going concern and has conducted the same main business activity during the last 3 full financial years prior to admission;
• has aggregated profit of at least $1 million from continuing operations for the last 3 full financial years prior to admission; and
• has consolidated profit from continuing operations of at least $400,000 for the 12 months prior to admission.

While the ASX states that it considers that the profit test overall remains appropriate for the Australian market, it is proposed that the requirement for consolidated profit from continuing operations for the 12 months prior to admission be increased from $400,000 to $500,000.   Apparently this increase is aimed at maintaining appropriate minimum standards of size and quality to be listed on the market.

Asset test

Currently, the minimum requirements for entities other than investment entities to meet the assets test are net tangible assets (NTA) of at least $3 million, or a market capitalisation of at least $10 million.  It is proposed to increase these thresholds to an NTA of at least $5 million or a market capitalisation of at least $20 million.  The proposed increases are claimed to provide greater confirmation that the listed entity has sufficient resources to carry on its business for a reasonable period.

A new minimum free float requirement

The ASX does not currently have in place a rules-based requirement for the minimum proportion of an entity’s securities that will be available at listing for investors to freely trade in the public market (Free Float), although ASX Guidance Note 1 anticipates that entities will list with a free float of at least 10%.  The

ASX has proposed to introduce a rules-based 20% minimum free float requirement for ASX listings at the time of admission.  Free Float will be defined by ASX as:

“the percentage of the entity’s main class of securities that are not restricted securities or subject to voluntary escrow, and that are held by non-affiliated security holders”.

The proposal is aimed at supporting liquidity in the secondary market and supporting innovation and emerging growth industries.

Changing the spread test

At it presently stands, under listing rule 1.1 condition 7, ASX’s spread test can be satisfied in one of three ways:

• by having 400 security holders who hold a parcels of securities with a value of at least $2,000; or
• by having 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
• by having 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 ASX has proposed to change the minimum spread requirement for ASX listings to require:

200 security holders if the entity has a free float of less than $50 million, or 100 security holders if the entity has a free float of $50 million or more; and
each security holder counted towards spread must hold a parcel of securities with a value of at least $5,000.

The primary purpose of the spread test is to demonstrate sufficient investor interest in an entity to warrant its listing.

Applying the same working capital requirements to all assets test entities

Under listing rule 1.3.3, all entities admitted under the assets test are currently required 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, with additional requirements for mining and oil and gas exploration entities.  The ASX proposes to standardise the minimum working capital requirement by requiring all entities admitted under the assets test to have at least $1.5 million in working capital available after:

• taking into account the entity’s budgeted revenue for the first full financial that ends after listing; and
• 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).

The proposal is apparently aimed at providing greater certainty to investors in relation to the availability of working capital.

Requiring audited accounts from assets test entities

Under listing rule 1.3.5, entities admitted under the assets test are allowed under the rules to provide unaudited accounts and provide accounts for a period shorter than 3 full financial years.  The ASX proposing introducing a new requirement for entities seeking admission under the assets test to produce audited accounts for the last 3 full financial years.  If the accounts for the last full financial year are more than 8 months old, it is proposed that the entity also be required to produce audited or reviewed accounts for the last half year.

The ASX is further proposing that an entity seeking admission under the assets test be required, unless ASX agrees otherwise, to produce 3 full financial years of audited accounts for any entity or business to be acquired by the entity at or ahead of listing.

Strengthening ASX’s ability to refuse admission

The ASX proposes to strengthen its discretion on admission and quotation decisions.  It proposes to amend Guidance Note 1 to:

• include examples of when the ASX may exercise its discretion not to admit an entity to the official list; and
• provide actual examples of circumstances that shown when an applicant does not have an acceptable structure and operations to be listed.

We welcome any more practical guidance from the ASX in this regard.

Learning points

Overall, the proposed changes contain more onerous tests and new qualitative criteria with the intention of lifting the quality of listing applications. Whilst the stated intention is altruistic in nature, raising the bar further may appear to be inconsistent with the national innovation agenda.

The changes may be implemented as early as July 2016.

Links and further references

Consultation Paper: Updating ASX’s admission requirements for listed entities, 12 May 2016, ASX Limited

ASX Listing Rules

Further information about corporate law

If you need assistance determining whether your company meets the requirements for listing on the ASX, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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