OPINION | The latest raft of changes to the ASX listing rules are a welcome development that will protect the international reputation of the bourse, while still enabling good local growth companies to attract much-needed capital.
From December 19, 2016 the Australian Securities Exchange will have greater powers to block very early stage companies from listing on the public bourse to raise capital.
The key changes to the ASX-listing admission rules are:
- Increasing the requirement for profit test entities to have consolidated profits for the 12 months prior to admission from $400,000 to $500,000
- Increasing the net tangible assets test from $3 million to $4 million
- Increasing the market capitalisation test from $10 million to $15 million
- Introducing a 20 per cent minimum free float requirement
- Creating a single tier spread test of at least 300 security holders each holding at least $2,000 of securities
- Requiring asset test entities to disclose to the market two full financial years of audited accounts and any significant entity or business that it has acquired in the 12 months prior to applying for admission or that it proposes to acquire in connection with its listing
- Standardising the $1.5 million working capital requirement for those admitted under the assets test.
Many in the start-up community have baulked at some of these changes, but I support them.
The incoming changes are necessary to enhance the credibility and reputation of the ASX for all stakeholders, from institutional investors, through to entrepreneurs. Having a healthy stock market is crucial to ensuring the ASX retains current institutional investors, while attracting new capital to the market.
As a country we need to boost general investment and attract more quality companies looking to list; to do both we must ensure a robust stock market continues.
I would argue that the mechanisms proposed will increase the quality of companies coming onto market, ultimately saving time for institutional investors looking for the next viable investment venture.
So, what do these changes actually mean for growing companies?
There are two primary reasons why a company decides to pursue and initial public offer (IPO): to raise capital, or provide liquidity to existing shareholders.
While an IPO is often described as an ‘exit strategy’, it is more accurately an avenue to provide liquidity to shareholders.
One of the biggest misconceptions among owners of young businesses is that an IPO is the ultimate marker of success, and that anything else is a sign of failure.
In a way, this is understandable. Aside from the prestige, an IPO can provide a cash injection that hopefully enables a developing company to go on to bigger and better things, while allowing a CEO to remain at the helm of the business they’ve built from the ground up.
This is perhaps at the heart of why the new ASX listing rules have caused some concern in the start-up space.
Some people are worried the changes could dampen innovation by reducing the willingness of entrepreneurs to take risks if the hurdles are higher when it comes time to list. But it is important to recognise that the move to restrict public listings is a necessary step to protect investors.
Requiring companies to be a certain size in order to list does not seem unreasonable, considering the high stakes.
A market cap of $15 million or assets of $4 million or more, while higher barriers to entry, are not that substantial for a public company and shouldn’t have significant impact on quality companies looking to list.
Companies that will not be able to list under the new rules still have opportunities to make a trade sale to exit, or look to the venture capital market to raise growth capital.
Access to venture capital was very tight in the five years to 2015, but in the past financial year more than $1 billion has been raised by Australian VC funds, making it an increasingly viable option.
The new listing rules demonstrate that the ASX is taking steps to protect the quality of Australian stocks, for investors, and this is paramount to a healthy public market in the long term. Ultimately, this will work to the benefit of business owners and investors alike.
Anthony Glenning is the investment director of Starfish Ventures. This article first appeared in the December print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.