New 10% placement rule for small to mid caps and changes to admission requirements

Key points

• Small to mid caps can place extra 10%, subject to prior approval at AGM by special resolution
• Entities qualify if outside SP/ASX 300 and market cap less than $300 million
• Qualifying small to mid caps should consider urgently for AGM planning
• Investor spread requirements reduced but NTA requirement increased to $3 million

Introduction

From 1 August 2012, ASX has amended the ASX listing rules to make it easier for small to mid cap entities to raise capital by allowing them to place an additional 10% of their capital in a 12 month period. Certain conditions must be met, including approval by special resolution at the AGM and increased disclosure requirements. ASX has also facilitated ASX listings by reducing the investor 'spread' requirements for all entities seeking listing on ASX, but has increased the net tangible assets that an entity must have to be admitted to ASX. These new rules come into force on 1 November 2012.

The new additional 10% rule

Under listing rule 7.1, a listed entity has been permitted to place up to 15% of its issued capital in a 12 month period, above which it must obtain security holder approval by an ordinary resolution (50% of the vote) unless another exception applies. Now a small to mid cap entity may place an additional 10% of its issued capital (i.e., up to 25% of its issued capital) in a 12 month period if allof the following conditions are met:

• the entity is a small to mid cap entity as defined;
• approval of the ability to place the additional capital is given by a special resolution (75% of the vote) at an annual general meeting (AGM) of the entity;
• the notice of the AGM contains the additional information required by the new rules;
• the issue price of the placement is at least 75% of the market price of the entity's securities; and
• the entity complies with the additional disclosure requirements imposed by the new rule.

These conditions are explained in more detail below.

What is a small to mid cap entity?

To be eligible to use the new rule an entity must be a small to mid cap entity, i.e., one that at the date of the AGM:

• is not included in the S&P/ASX 300 index; and
• has a market capitalisation of $300 million or less.

ASX recommends that an entity seeking security holder approval at its AGM give ASX a draft calculation of its market capitalisation at the time it lodges the draft notice of meeting with ASX, so that ASX can check that it is eligible under the new rule. If approval is given at the AGM it remains valid for 12 months (as a general rule) even if the entity ceases satisfy the criteria after the AGM.

Security holder approval at AGM

Security holder advance approval of additional placement capacity can only be given at an AGM of the entity. The approval is valid for 12 months after the AGM at which it is given; however, the approval will cease to apply earlier if security holders are required to approve a change to the activities of the entity or a change to the main undertaking of the entity under chapter 11 of the listing rules.

Content of the AGM documents

The notice of meeting for the AGM must include the following information:

• the minimum price at which the securities may be issued;
• a statement of the risk of economic and voting dilution of existing investors, including examples of the potential dilution where the number of securities on issue has doubled and the market price of securities has halved;
• the date by which the securities may be issued (i.e. not later than 12 month after the AGM);
• a statement of the purposes for which the securities will be issued, including whether the entity may issue any securities for non-cash consideration;
• details of the entity's allocation policy for the issue;
• details of all issues of equity securities by the entity during the 12 months preceding the date of the AGM, including the price, number and class of securities issued and the use of the funds raised; and
• a voting exclusion statement. With offers to the public or for approvals at large for an issue up to a certain limit, a person will only be excluded from voting if it is known that they will participate in the proposed issue.

The issue price

The issue price of the placement must be at a discount of no more than 25% of the volume weighed average price (VWAP) for securities in the same class calculated over the 15 trading days on which trades in those securities were recorded immediately before:

• the date on which the issue price of the securities is agreed; or
• the issue date (if the securities are not issued within five trading days after the date on which the issue price is agreed).

ASX requires the entity to disclose the 15 day VWAP figure, and the source of the VWAP data, when announcing a placement under the new rule.

If the shares are issued for non-cash consideration, e.g. in consideration for the purchase of assets by the entity, the entity must provide the market with a valuation of the non-cash consideration. The valuation may be prepared by an independent expert or the board if it has appropriate expertise to prepare the valuation. In line with ASIC's approach under Regulatory Guide 74 for acquisitions approved by members, if the board provides the valuation it must contain the same level of analysis as an independent expert's report. Boards will therefore need to consider carefully whether they have the expertise and resources to prepare such a valuation or bear the cost of engaging an independent expert.

Additional disclosure obligations

At the time the placement is made the entity must release the following information to the market:

• details of the dilution of existing investors;
• if the securities were issued for cash, an explanation of why a placement was used and not a pro rata issue such as a rights issue - possible explanations might be an urgent need for capital or the desire to introduce a cornerstone investor;
• details of any underwriting arrangements; and
• any fees and costs of the placement.

Planning for the 2012 AGM

Small to mid cap entities should consider as part of their 2012 AGM preparation whether they wish to seek investor approval of a potential placement under the new rule so that they have additional placement capacity in the following 12 months. Any planning would have to address the information that must be disclosed in the notice of meeting of the AGM.

The new 'spread' test

The requirements of the investor 'spread' test for all entities applying for admission to ASX have been reduced with effect from 1 November 2012. Under the new rule the 'spread' test will be met if one of the following three tests is passed:

• 400 holders (reduced from 500 holders) of securities (in the main class) each holding parcels of securities with a value of at least $2,000 (excluding restricted securities);
• 350 holders (reduced from 400 holders) of securities (in the main class) each holding parcels of securities with a value of at least $2,000 (excluding restricted securities), if at least 25% of the securities in the main class are held by non-related investors (excluding restricted securities held by the non-related investors); or
• 300 holders of securities (in the main class) each holding parcels of securities in with a value of at least $2,000 (excluding restricted securities), if at least 50% of the securities in the main class are held by non-related investors (excluding restricted securities held by the non-related investors).

The reduced 'spread' requirements have the potential to reduce the relative appeal of 'backdoor' listings because the need to have a sufficient number of investors is often given as a reason for a "backdoor" listing.

The new 'assets' test

Currently, any entity applying for admission to ASX must meet the 'assets' test or the 'profits' test. To meet the 'assets' test the entity must have net tangible assets of at least $2 million after deducting the costs of fund raising. From 1 November 2012 that amount will increase to $3 million. This might hinder some micro-cap listings.