Double-edged sword: Minimum spread safeguard means additional burden for ASX hopefuls

Introduction

In late 2023, ASX foreshadowed a raft of changes to the ASX Listing Rules which were reportedly designed to streamline the process for admission to its official list.

On Friday, ASX announced that these new changes will become effective on 5 February 2024 and include:

• the elimination of the requirement for applicants to enter restriction deeds in relation to ASX imposed escrow;
• a reduction in the kind of material contracts which must be submitted with a listing application; and
• a change in requirements to satisfy the minimum spread requirement in Listing Rule 1.1 condition 8 (Minimum Spread Rule).

The Minimum Spread Rule

Under the Minimum Spread Rule, a company will only be admitted to the official list of the ASX if the ASX is satisfied that the company has demonstrated a sufficient “spread” of securityholders which requires the ASX to be satisfied that, at the time of the listing of the company, the registers of the company will include at least 300 non-affiliated security holders who each freely hold (i.e., not subject to restriction or escrow) a parcel worth $2,000 of the main securities that the company proposes to issue.

Given the unequivocal requirement for a minimum of 300 securityholders, whether an entity complies with the Minimum Spread Rule largely turns on whether those securityholders are genuine buyers not affiliated with each other and that no artificial means are used to satisfy the rule.

Policing the register

As set out in ASX Guidance Note 1, in the recent past ASX may require companies to provide evidence regarding satisfaction of the Minimum Spread Rule, such as:

• copies of share registers, application forms and other evidence of payment by investors;
• ASIC (or equivalent company searches) for corporate securityholders, obtained at the cost of the issuer;
• copies of reports from identity verification services;
• copies of “know your client” checks performed by intermediaries involved in the offer; and
• statutory declarations from officers of the company or offer intermediaries “confirming that artificial means have not been used”.

While this process would seem simple enough, the prosecution and banning by ASIC of various financial advisers in 2018-2020 for providing offer managers with phoney buyers (who were either not bona fide buyers, fictitious or had a common beneficiary) shows that that the Minimum Spread Rule can be treated as a shell game by less scrupulous operators.

The fact that these abuses were discovered after these companies were listed (and in some cases became defunct) also shows that the ASX, despite its best efforts, has not been infallible.

The new approach to the Minimum Spread Rule

Under the new approach, it will now be mandatory for companies to include in their listing application:

• a standard form Excel spreadsheet template which sets out the information which the company submits to ASX to comply with the rule; and
• an attestation from a principal of the law firm acting as the company’s legal counsel, in a standard form required by ASX which states that the principal has reviewed the information provided by the company and taken reasonable steps to “…confirm that the security holders presented are able to be counted for spread…”.

If the attestation confirms 600 or more non-affiliated securityholders, the spreadsheet may not be required by ASX.  But it appears that for all new listings, no matter how large, a lawyer’s attestation will be required by ASX.

In our view, when compared with the evidence that ASX may request from a company previously, (e.g., the statutory declaration described above and copies of searches), the mandatory requirement for an attestation from the relevant principal lawyer to the company is a significant change as it requires a positive attestation that the security holders should be counted separately, rather than a negative declaration as to being “unaware” of the use of any artificial means to satisfy the Minimum Spread Rule.

As shown in the extract of the text, the principal will need to attest to having taken reasonable steps, the precise meaning of which is unknown in this novel context.

The fact that the issuer’s counsel will need to stake their professional standing (and practising certificate) on ensuring that they have indeed taken reasonable steps means that such attestations are unlikely to be given lightly.

Any lawyer will want to perform a thorough due diligence exercise of their own prior to providing the attestation, a process which will involve considerable cost both in terms of the time taken and disbursements for company searches which will need to be undertaken in respect of every corporate securityholder.

Not to mention what a lawyer might want to do to ensure individual applicants for shares are legitimately separate from one another.  Does ASX propose that stakeouts by the lawyers acting may be warranted, to ensure that multiple securityholders are not living under the same roof?

Another questionable aspect of this attestation requirement is that allocations of shares to securityholders under IPOs is simply not a process that the external lawyers have any involvement with.  Instead, that is the territory of the offer managers alongside company’s board and management.  Is it proposed that the external lawyers now become involved in allocations?  It seems doubtful – lawyers won’t want to and offer managers certainly won’t want the lawyers poking their nose about.  Yet ASX, instead of reasonably asking that the attestation comes from the offer managers, instead asks another party that has historically had no involvement, and therefore no expertise, in these matters.  It’s akin to ASX asking for a lawyer’s sign-off on the company’s financials.

The balancing act

When compared to its global peers, the ASX stands out as the only major exchange which, for the purpose of initial liquidity requirements, explicitly requires initial securityholders to be non-affiliated.

The introduction of the mandatory attestation requirement, however, risks being at odds with the ASX’s desired goal to streamline its listing process and to make itself a more attractive capital raising venue.

At a time when the listing pipeline is relatively dry, it seems critical for ASX to strike the right balance and, perhaps more importantly, to be upfront with companies about the potential time and cost requirement of a listing on the ASX.

The introduction of the attestation requirement is at odds with ASX’s desired goal, as reflected in the other changes, to streamline and make more efficient (and attractive) the ASX listing process.