Australia IPO Series – Part 2: The listing process for an IPO

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Following the decision to list on the ASX, there are a number of steps that a company must take before it can list. Both the Corporations Act and the ASX Listing Rules set out the requirements that must be met.

In almost all cases, if a company, in association with an IPO, is looking to issue securities, it will be required to issue a prospectus.

The Listing Rules also contain a number of requirements that need to be met before the ASX will allow a company to list on the exchange. The key requirement is that the company must satisfy either:

  • the profits test: the company must have aggregated profits from continuing operations for the last three financial years of at least $1 million, with profit from the past 12 months of at least $500,000; or
  • the assets test: the company must have net tangible assets at the time of admission of at least $4 million, or a market capitalisation immediately post IPO of at least $15 million.

Further, the company must have at least 300 non-affiliated shareholders post IPO, each holding at least $2,000 worth of securities (“shareholder spread”), and at least 20% of the company’s securities must be held by non-related parties and not subject to mandatory or voluntary lock up requirements (the “free float” requirements).

Preparing the prospectus

The prospectus must be prepared with great care, and must contain prescribed information, including sufficient information that investors and their advisors would reasonably require to make an informed assessment of:

  • the assets, liabilities, financial position and performance, profits and losses and prospects of the company; and
  • the rights and liabilities attaching to the securities to be offered.

One of the key considerations is whether the prospectus should contain financial forecasts. The decision is not an easy one. Sometimes the lead manager of an IPO will press for inclusion to facilitate the sale of securities in the marketplace by pointing prospective investors towards the forecasts. Forecasts also assist such investors to conduct their own valuations of the company.

However the ramifications of a company missing a forecast can be severe, and companies and their directors and other advisers face the prospect of litigation, in particular class actions suits, if forecasts are missed or financial information is otherwise defective.

Pre- IPO Restructuring

Before listing, the company will need to undergo a restructure. The key elements are usually:

  • convert the company to a public company.
  • add independent and non-executive directors to the board.
  • adopt the ASX Corporate Governance Principles and Recommendations or explain why not. Audit committees and remuneration committees are mandatory for larger listed companies.
  • restructure the capital.
  • adopt a constitution appropriate for a public company and compliant with the Listing Rules.

If a sell down is involved, sellers should seek tax advice in connection with the process, as should the company generally in connection with the IPO process.

Process and steps to a listing/IPO team/timetable including due diligence

The IPO team should be assembled around 3-4 months prior to the IPO proceeding.

At this time, a due diligence committee is formed of key advisers and company representatives who are responsible for ensuring an accurate and compliant prospectus is prepared, monitoring if amendments are required post lodgement of the prospectus, and ensuring that, in circumstances where the prospectus proves to be defective, certain “due diligence” defences are available against claims by investors.

Once the prospectus is finalised, an application for admission to the Official List of the ASX is made. The application is usually approved by the ASX subject to the satisfaction of certain conditions, including the execution of restriction agreements which lock up the shares of founders, promoters and other categories of investors for periods of up to 2 years if applicable, and meeting the shareholder spread requirements.

Pricing the IPO

Pricing of the shares to be offered at IPO and the ultimate valuation of the company upon listing is determined by the company upon receiving advice from the financial advisers to the IPO including the lead manager.

Valuations often take into account an earnings multiple, and the comparative valuations of similar businesses listed on exchanges. Financial advisers will often test the market to determine an appropriate IPO price with a near final draft of the prospectus (known as the red-herring prospectus) or conduct a bookbuild.

Bookbuilds, managed by the lead manager, are often used for larger offerings. The IPO price is then set by the lead manager in conjunction with the company based mainly, but not solely, on the prices bid for shares by prospective investors

Lodgement of the Prospectus and Admission to quotation

Once the prospectus is completed it is lodged with ASIC and it is then subject to a 7 day “exposure period” which can be extended to 14 days at ASIC’s discretion. During the exposure period, securities cannot be offered under the prospectus and ASIC has the right to place a stop order on the prospectus. Securities cannot be offered under the prospectus until the stop order is lifted.

Stop orders are placed on a prospectus if ASIC has a concern with the document. It is only lifted if the company can satisfy the regulator that the prospectus is compliant, or a supplementary or replacement prospectus is issued, curing the defect.

Once the prospectus has passed the exposure period, assuming there are no stop orders or such orders have been lifted, offers of securities can commence in accordance with the timetable set out in the prospectus.

Once the conditions of the admission letter issued by the ASX have been satisfied or waived, the ASX will admit the company to the Official List of the ASX and quotation of securities will usually occur a few days later.

This alert is the second in a three part series outlining the key steps for listing a company on the Australian Securities Exchange (ASX). See below if you want to read the first part of the series which outlines the key advantages and disadvantages of listing your company on the ASX. The third and final alert will compare the admission requirements of the key global exchanges in the UK, US, Hong Kong, Canada, Australia and Singapore to help an issuer identify the right exchange to list on.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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