ASX has released a consultation paper on Listing Rule 7.1A three years after it was introduced. The rule was designed as part of a package of amendments to strengthen Australia’s equity capital markets, and allows smaller listed companies to access much needed capital more quickly and easily.
The review examines whether the rule has had its intended effect, whether there have been any indications of inappropriate use or unintended consequences of the rule, and whether any further amendments are required to improve its operation.
Improving placement capacity for small listed companies
Prior to the Rule being introduced, a listed entity could only place more than 15% of issued capital during any 12 month period if it obtained shareholder approval by ordinary resolutions. Once approval was obtained, placement could be completed within 12 months.
Rule 7.1A allows an eligible entity to seek security holder approval by special resolution at the AGM (which means 75% shareholder approval) to issue an additional 10% of capital within 12 months from the date of approval. Shareholders who are likely to benefit from any subsequent placement under the Rule must be excluded.
To meet the eligibility requirements, entities must not be included in the S&P/ASX300 index and must have a market capitalisation equal to or less than $300 million.
ASX has monitored the implementation of Rule 7.1A over two annual general meeting cycles, and found that it has been well received by both companies and investors. It states that:
- More than $660 million was raised by mid to small caps in 404 equity issues under the Rule
- Of a total of 1,991 Rule 7.1A resolutions put to shareholders by mid to small caps, shareholders approved 94 per cent
ASX states that the regulatory framework for the Rule is working well, and it has not identified any serious or systemic problems in relation to the Rules’ operation. It has, however, identified what it describes as “some relatively isolated compliance matters” related to disclosure requirements at all three stages of a Rule 7.1A mandate cycle: at the time of approval, at the time of issue of any securities, and at the time of any subsequent approval of a new rule 7.1A mandate. This includes:
- Late lodgement of the information required under Rule 3.10.5A
- Failure to provide ASX with the list of allottees required under Rule 7.1A.4(a)
- Rule 7.1A.4 requires that an entity that issues securities under Rule 7.1A give ASX a list of names of the persons to whom the securities were issued
- Late or non-lodgement of an independent valuation of non-cash consideration
- ASX has observed instances of issues being made for non-cash consideration during the review period
- There was substantial non-compliance with the requirement to provide a valuation of the non-cash consideration to ensure compliance with the 75% floor price rule under Rule 7.1A.3
- If an entity fails to comply in the future, ASX may require the entity to reallocate the issue to its Rule 7.1 capacity, or take other or additional compliance actions
In addition, ASX has found that some companies are issuing non-quoted securities and purporting to use Rule 7.1A to do so. In these cases, ASX requires the entity to reallocate the issue to its Rule 7.1A capacity. If the entity’s Rule 7.1A capacity would be exceeded as a consequence of the issue, then the issue will be in breach of the rule.
- ASX considers that compliance with disclosure requirements would be facilitated by:
- Consolidating the disclosure requirements at the time of issue into the one place, which will involve updating Appendix 3B to incorporate disclosures under Rule 3.10.5A; and
- Producing a new Guidance Note to better inform entities and investors, and assist entities to understand and comply with their obligations relating to new issues of equity
- ASX is also considering feedback that some disclosure requirements in Rule 7.3A.6 (which relates to subsequent approval under Rule 7.1A) are duplicative of requirements that apply at the time of issue and/or that they place a compliance burden on entities that outweighs any benefit to investors.
- ASX proposes to amend Listing Rule 7.1A.3(b) to extend the current 5 day trading period to 10 days to give entities more time within which to effect a placement.
You can view the consultation paper here.