Steinepreis Paganin is a leading corporate legal firm servicing the mining and resources industry for 22 years from their offices in Perth and Melbourne and is consistently ranked as the number one most active equity capital markets legal advisor in Australia. Recently, they hosted over 200 company secretaries, brokers, company promoters and deal originators at the Perth Convention and Exhibition Centre to hear from their leading experts and the senior leaders from the Australian Securities Exchange in Perth at its 2020 "Conversations with ASX" seminar. The seminar was just a few days before a smaller presentation by ASX's Chief Compliance Officer and representatives of ASIC to select lawyers and other advisors in Perth.
Late 2019 saw ASX make a number of changes to the ASX Listing Rules and commit to re-writing a number of their policies that underlie those Rules. With tougher than normal market conditions making capital raisings a challenge for many small to medium sized companies, despite recent buoyancy in some commodity prices like gold, these seminars presented a good opportunity to hear directly from ASX about how they will implement the Listing Rules in 2020.
The top takeaways from the two seminars are below:
The change to the Listing Rules are not as onerous as the volume would suggest
ASX have stated that the changes to the Listing Rules have been made to "simplify the Listing Rules", but the volume of the changes appeared to suggest something different!
However, in truth, a large number of those changes have been to tidy up and fix historical anomalies or make corrections to the Rules. The biggest changes that ASX listed companies need to be aware of are changes to forms, like the Appendix 3B or 4C, and the introduction of new forms, like the Appendix 2A.
Similarly, changes to various Guidance Notes have been made to document policies that experienced advisors have been aware ASX has been applying for some time. This point was raised during the seminar, that there is a lag between the time when ASX introduces new policies and when they document those policies. The only solution remains ensuring that you engage experienced advisors to ensure that you have the best chance of being aware of the current ASX position on the transaction type you are looking to undertake.
ASX remains open for small companies (with the right structure)
One of the challenges for companies looking to list, either via an IPO or backdoor listing, has been perceived changes in policy or stance from ASX that have meant transaction structures or types that have previously been accepted have been rejected.
ASX remains open to small companies, including exploration companies, with a structure that complies with ASX's present policies (written or unwritten) and ASX's Perth office has always encouraged an open dialogue with transaction proponents. The use of experienced advisors always assists in navigating these structural matters.
The consideration of new listings is not a fixed science
It is frustrating for companies who feel that they meet the ASX listing criteria, or who have seen similar companies listed on ASX, to be told that ASX will not accept their application for listing. However, ASX does not have a fixed metric for determining whether to enable a company to list or not on its exchange, and it is a combination of factors that go into a decision to allow or disallow a listing. ‘Too early stage', ‘lack of ASX experience', ‘concerns over concentrated revenues' and/or ‘disapproval of the advisors' are all reasons given by ASX for rejecting listing applications. All of these reasons are discretionary. Therefore, if you have concerns that one of these reasons could apply to your application to ASX for listing, it is best to address these areas of your application to counter-balance any concern ASX may have.
Fees - ‘you know it when you see it'
There has been much angst recently amongst the promoter community about ASX's stance on fees payable to brokers and promoters on listings and other transactions. Again, ASX reiterated that they do not have a limit on what % fees should be constrained to, but when it comes to fee gouging "you know it when you see it".
Examples of matters causing concern for ASX include transactions where deemed promoters or founders: (1) had participated in seed raisings or were company founders; (2) received a fee for introducing the transaction to the company; (3) were appointed as lead managers to the offer; (4) entered into an ongoing corporate mandate; and (5) may or may not also be entitled to performance shares or rights. In some instances, promoters were also charging rent or directors fees as well.
Reasonable fees for capital raising services, including the work done to establish the company prior to a listing transaction, are acceptable to ASX, but blatant fee generation and large equity positions for advisers/promoters will see listings rejected and potentially have further consequences (see number 6 below).
Paying performance based consideration - needs to be independently verified
Quite reasonably, ASX are now insisting that performance based consideration have milestones that require verification by an independent party. Simply, they don't want directors receiving performance based consideration being the sole determiners of when the relevant milestones have been achieved.
If you're issuing performance shares or rights with revenue milestones, this will mean that a third-party auditor, most likely the Company's auditor, be charged with confirming that the revenue target has been met based on the Company's audited records and accounts.
Guidance Note 19 is in the process of being updated, but it is worth noting that ASX advised that they are not looking to put a cap on the number of performance based shares or rights that are issued to vendors in a transaction, but do have a concern and will impose limits on performance based securities being issued to promoters or other parties.
ASX has a ‘sin bin'
Rightly or wrongly, ASX has developed a list of advisors and promoters that either give it cause for concern, lead to greater scrutiny and review of transactions, or which ASX will simply refuse to deal with. It goes without saying you don't want to be on that list, and if you are looking to appoint an advisor to your transaction, you don't want to be engaging those advisors that could put your transaction at risk.
Who is on the list? ASX won't say, but it's reasonable to suggest that engaging in some of the practices referenced above including gouging on fees in transactions, being seen to structure transactions to circumvent Listing Rules, engaging in manufacturing spread, or being seen to provide misleading information to the ASX is a sure way to end up on the list.
ASIC is taking a closer look at conflicts of interest
In December 2019, ASIC released ‘Report 641 - An inside look at mining and exploration initial public offerings'. The report was an overview of ASIC's interpretation of the IPO process for some exploration and mining IPOs and covered topics such as the role of lead managers, conflicts of interest of people involved in these transactions and allocation of shares under the IPO process.
On the back of that report, ASIC have stated that they are now taking a closer look at the relationships of lead managers and other advisors in IPO transactions and the potential conflicts that may arise in all IPO transaction, regardless of market type. Given the close working relationships between ASX and ASIC (ASIC regulate ASX's market licence for those that were unaware), you can be assured that ASX will be sharing this type of information with ASIC where is considers it appropriate.