Australia represents only 0.32% of the world’s population.[1] Nevertheless, Australia has a sophisticated capital market with a total market capitalisation of around AU$1.77 trillion.[2]
The ASX is home to some of the world’s leading resource, finance and technology companies. Listing on the ASX enables you to access capital from a wide network of investors from Australia and across the world and join the global capital stage.
The ASX:
- Has over 2,100 listed companies, including domestic and foreign equity issuers spread across all industry sectors;[3]
- Is the world’s 8th largest equity market by free-float market capitalisation, the 9th largest exchange organisation and is consistently ranked in the top 5 exchanges for equity capital raising;[4]
- Operates in a highly regulated environment overseen primarily in Australia by two independent Australian government agencies: the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) who have extensive powers to enforce the laws and regulations that govern financial markets in Australia.[5]
In comparison to other jurisdictions, Australia offers foreign entities opportunities such as lower barriers to list on stock exchange, greater cost efficiencies, stable judicial and regulatory systems and worldwide intellectual property protection systems and social media engagement.
Foreign entities have therefore significant opportunities to list in Australia or Australian entities to purchase assets from foreign jurisdictions to list on the ASX as a “stepping stone” to access even bigger capital markets.
The Corporations Act 2001 (Cth) (Act) regulates the requirements for listing on the ASX. The Act prohibits operation of a financial market without an Australian Market Licence, and the ASX as a licensee must comply with provisions found in Division 3 of Part 7.2 of the Act.
What follows is an overview of requirements to raise capital on the Australian Securities Exchange, especially for foreign domiciled entities.
Regulatory Entities
In Australia, the regulatory entities involved in the listing application process include:
- The Australian Securities Exchange (ASX);
- The Australian Securities & Investments Commission (ASIC); and
- The Takeovers Panel.
Required Approvals
The ASX will approve and list securities once an applicant meets all eligibility and other requirements.
Listing Criteria
Suitability of Listing Applicant
A company or fund (applicant) seeking to list on the ASX must comply with the ASX Listing Rules. ASX Listing Rule 1.1 sets out the main requirements for an applicant seeking listing. However, there will be further conditions that an applicant must meet for admission. Most entities listed on the ASX are companies established under the Act, but many funds are also listed. It is possible for applicants domiciled outside of Australia to list on the ASX, subject to certain requirements.
Track Record or New Business
An applicant seeking to list on the ASX must meet either the Profits or Assets Test.
To meet the Profits Test, the applicant must:[6]
- Be a going concern or a successor of a going concern;
- Have conducted the same main business activity for the last 3 full financial years;
- Provide audited financial records for this period to the ASX;
- Have an aggregated profit from continuing operations over the past 3 full financial years of at least AU$1,000,000;
- Have consolidated profit from continuing operations for the 12 months to a date no more than 2 months before applying for admission exceeding AU$500,000; and
- Provide assurance from all directors that the applicant continues to earn profit from continuing operations up to the date of application for admission.
Alternatively, where there is a newly established company or fund seeking admission, the applicant must meet the Assets Test. Under this test, the applicant must have:[7]
- Net tangible assets of at least AU$4,000,000 after deducting the costs of fund raising or a minimum market capitalisation of AU$15,000,000;
- A statement included in the prospectus that the applicant will have enough working capital at the time of its admission to carry out its stated objectives or it must give the ASX one from an independent expert;
- Working capital of at least AU$1,500,000 or, if this is not the case, it would be at least AU$1,500,000 if the applicant’s budgeted revenue for the first full financial year that ends after listing was included in the working capital;
- Unless, the ASX agrees that such records are not needed, audited financial records for the last 2 full financial years; and
- Less than half of the applicant’s total tangible assets (after raising any funds) in cash or, if this is not the case, the applicant must pass the ‘commitments test’. This test ensures that where half or more of the applicant’s total tangible assets (after raising any funds) are cash, the applicant has commitments to spend at least half of its cash in a way that is consistent with its objectives. The business objectives must be clearly stated and include an expenditure program.
Eligibility for Electronic Settlement
ASX’s trading operations are entirely paperless. Securities must be available for electronic settlement.
Overseas Companies
If a foreign company meets the admission requirements for companies or funds generally, or by successfully seeking ASX foreign exempt listing under Listing Rule 1.11, ASX may list the foreign applicant. A company listed on a recognized overseas stock exchange that meets certain requirements about reporting to ASX is eligible for listing. Once this occurs, the foreign company or fund is then exempt from many of the ongoing ASX compliance requirements.
The foreign listed company must establish an electronic facility for trading in Australia. It is common for foreign companies that list on the ASX to comply with the general requirements for listing.
Free Float
Unrelated parties must hold at least 20% of the company’s shares after the offer.[8] The Act defines related parties as directors and their spouses, relatives of directors or their spouses and any other controlling entities of the company.
Restrictions on Major Shareholders
The Act prohibits a person and their associates from acquiring in a company more than 20% of the voting shares other than by a formal takeover bid, shareholder-approved acquisition, or scheme of arrangement.
Spread of Shareholders
A listed company must have a minimum of 300 non-affiliated shareholders that each hold shares with a minimum value of AU$2,000.[9] This spread of shareholders cannot be obtained by artificial means.
Post IPO Lock-Up
ASX can impose restrictions known as ‘escrow restrictions’ on the sale of existing shares after listing. These shares are known as ‘restricted securities’. Each holder of restricted securities must enter into an escrow agreement with the company. The underwriter may require a voluntary period of escrow.
Listing Procedure & Timetable
Depending on the state of readiness of the application, listing may take approximately 6 months or more. Realistically, it is usually a period of at least 12 months. The applicant must ensure that all its compliance obligations are in order, including any necessary re-structuring that must occur before making the application.
In the initial 2-month period, the applicant will invest time reaching an agreement in principle with the underwriter on issues relating to structure and pricing. During this time, the advisory team will agree to undertake their respective preliminary investigations, which will include the drafting of the prospectus and carrying out the due diligence.
At approximately the 5-month stage, marketing of the IPO commences and finalisation of the underwriting agreement or management arrangements takes place. The applicant lodges its prospectus and application with ASIC. At this point, the entity becomes listed on the ASX and trading may commence.
Marketing the Offer
There are strict prohibitions on any publicity or marketing that takes place pre-prospectus although there are exceptions for road shows to institutional investors. If the IPO is targeting retail investors, enthusiasm of retail clients will be assessed before committing. As for institutional investors, a detailed road show will be undertaken between completion of the prospectus and commitments leading into execution of the underwriting agreement.
Required Documentation
The prospectus and the ASX Listing application are required documents for lodging. Other documents may be necessary, which include the underwriting agreement, any escrow agreements, employee share plans, dividend reinvestment plans and corporate governance policies.
Publication of the Prospectus / Listing Documents
The prospectus is prepared under detailed company examination carried out by management and advisers and is lodged with ASIC. The Listing application must then be lodged within 7 days of lodging the prospectus with ASIC. Once the prospectus has been lodged with ASIC, the applicant announces its offer.
Documentary Requirements
Contents of Main Listing Document
The Act requires the Prospectus to contain information pertaining to the financial position of the applicant, prospects of the applicant, inclusion of historical financial information and potentially future projections. It contains such information that would be reasonably required by professional advisers to make an informed analysis and assessment of a potential investment.
Other Documents
Other documents may become necessary for the listing, which can include the underwriting agreement, escrow agreements, employee share plans, dividend reinvestment plans and corporate governance policies.
Articles / Constitutional Documents
The constitution of the company seeking listing must adhere to the requirements of the ASX Listing Rules. The applicant must provide a draft constitution to the ASX for approval before listing.
Financial Information
Audited Financial Statements
In relation to a going concern, the applicant must lodge with the ASX audited financial statements for the last three full financial years along with a reviewed pro forma balance sheet together with the review if required.
Applicable Accounting Standards
The accounts must be prepared according to the Australian Standards. However, in the case of a foreign entity, the ASX may agree to accounts being prepared to other standards.
Period Covered by the Accounts
The period covered by the accounts is a full three financial years.
Overseas Companies
Foreign companies wishing to list on the ASX must meet the same financial requirements as local companies.
Pro Forma Financial Information
A listed entity must give the ASX a reviewed pro forma balance sheet together with the review. ASX can agree that the pro forma balance sheet is not needed and waive this requirement. The review must be either conducted by a registered company auditor or an independent accountant.
Interim Financial Information
The prospectus will contain financial information: assets and liabilities and profits and losses along with any information that investors and their advisers require and expect to make an informed decision about the offer being made.
Parties Involved
Sponsor
In Australia, there are no requirements for advisers to be appointed. It is not necessary to have a sponsoring broker.
Other Advisers
Corporate Adviser
Usually a broker, investment bank, or corporate advisory firm. The corporate adviser leads the IPO process and provides advice to the promoters on structure and timing of the float and the factors in favour of proceeding with the float. The corporate adviser provides financial advice throughout the process.
Underwriter
If the offer is underwritten, a representative of the underwriter will form part of the team. The underwriter is responsible for marketing the float. The underwriter has an economic interest in the success of the float, and careful selection of the underwriter is critical to its success.
Legal Adviser
The lawyers’ main role is to advise as to liability in relation to the prospectus, implement a regime to minimise any liability, and deal with the ASX and ASIC.
Tax Adviser
The tax advisers will be involved at an early stage in assisting the corporate adviser in settling a float structure and will conduct due diligence and may prepare parts of the prospectus.
Accounting adviser
The accountants’ role is to prepare a historical report on the financial position and performance of the applicant, to include this information in the prospectus and to deal with other accounting issues, which may arise during the float process.
Management
Representatives of management will also assist the float team and they facilitate information flows between the applicant and the IPO team and provide instructions about critical issues.
Listing Costs
Listing Fees
An initial listing fee for an applicant with value of securities for quotation of up to AU$3,000,000 is currently AU$35,000. The listing fee gradually increases up to AU$505,000 for applicants with value of securities for quotation of AU$1B. Then additional 0.0318% is payable on the excess over AU$1B of value of securities for quotation.
In addition, there is an annual fee, which varies according to the applicant’s market capitalisation.
Sponsor’s Fees
Underwriting can attract around 3% to 5% of the total amount raised, and management can be approximately 2% to 3%.
Lawyer’s and Accountant’s Fees
Legal fees depend on the complexity and size of the transaction. Financial advisers and investigating accountants also have a wide range of fees.
Corporate Governance Requirements
Corporate governance policies must be in place and be appropriate for a listed company. These particular policies and procedures are described in the prospectus. The company must disclose its corporate governance policies and procedures in the annual report.
Continuing Obligations
ASX Listing Rules set out the continuing obligations of a listed company, which include:
- In ASX’s opinion, the listed entity must have a sufficient level of operations on a continued basis;
- The listed entity must continually meet its financial listing requirements;
- The proportion of assets in cash must remain as specified under the assets test;
- The listed entity must maintain a sufficient spread of securities to ensure an orderly and liquid market;
- The listed entity must have an appropriate structure and operations for a listed entity;
- The listed entity must appoint a specific person responsible for communicating directly with the ASX; and
- A listed entity that was included in the S & P All Ordinaries Index at the beginning of its financial year must have an audit committee during that year.
Commercial Lawyers Sydney at Pavuk Legal can assist you with a full range of legal services with the above and many other legal aspects of capital raising requirements for Australian and foreign entities.
Many other essential hot topics for business owners is all found in the book Nobody Else’s Business. Nobody Else’s Business is about helping business owners live the life they want to live, now and in the future. It is the ultimate guidebook for succession planning of modern Australian businesses.
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For the full range of Legal Services that Pavuk Legal offers please go to: www.pavuklegal.com/services/
[1] Source: The World Bank data at http://data.worldbank.org/indicator/SP.POP.TOTL
[2] Source: ASX Market Statistics at http://www.asx.com.au/about/historical-market-statistics.htm
[3] Ibid.
[4] Source: Listing on ASX at http://www.asx.com.au/listing-IPO-on-ASX.htm
[5] Source: ASX Regulatory Authorities at http://www.asx.com.au/regulation/regulatory-compliance/regulatory-authorities.htm
[6] ASX Listing Rule 1.2.
[7] ASX Listing Rule 1.3.
[8] ASX Listing Rule 1.1 (Condition 7).
[9] ASX Listing Rule 1.1 (Condition 8).
