Hardies Lawyers - Articles

Capitial Raisings Without a Prospectus

Sat, 02 Jan 2010 09:00:00 -0800

Recent Market Developments
The global financial crisis has had a profound effect on the way ASX listed entities raise capital. During the stock market recovery that commenced in March 2009, many ASX listed entities have successfully raised additional capital through the equity markets by taking advantage of recent regulatory reforms designed to broaden the types of capital raisings that can be undertaken in Australia without a prospectus.

One of the significant benefits of these reforms is that they allow ASX listed entities to tap the market quickly and cost-effectively which has proved most beneficial to companies in the junior and micro cap sectors of the market. This trend looks set to continue in 2010.

What Offers can be made without a Prospectus?

There are a number of options available to ASX listed entities that wish to raise capital without a prospectus, including:

placements to existing shareholders and new investors;
security purchase plans (SPPs) to existing shareholders of up to $15,000 per shareholder; and
pro rata rights issues to existing shareholders.

Each of these types of offers can be undertaken separately or in conjunction with one of the other types of offers.

Market conditions since the global financial crisis began have led to a surge in placements utilising a listed entity’s 15% placement capacity under the ASX Listing Rules without the need to obtain shareholder approval.

This process has the advantage of enabling listed entities to raise additional capital in the shortest possible time. However, given the potential dilutionary impact of this type of capital raising (particularly if the raising is done at a discount to the market price), many ASX listed entities have sought to combine a placement with a rights issue or SPP to provide existing shareholders with the opportunity to participate in the capital raising at the same or a similar price.

What are the Key Disclosure Obligations for these Offers?

The general rule is that disclosure to investors is required where a body’s securities are offered for sale within 12 months of their issue. This can have a significant and detrimental impact on underwriting arrangements and the ability of institutional investors, who have participated in a placement without a prospectus, to dispose of their shares within the 12 month period after the securities are issued.

Section 708A of the Corporations Act 2001 (Cth) (Act) – which applies only to “quoted securities” – purports to address the unintended consequences of these secondary sales provisions. According to the Explanatory Memorandum to the relevant piece of legislation, “the basis of the proposed amendments is that no further disclosure is required where investors have the benefit of information that is comparable to that otherwise available in a prospectus”.

Accordingly, the need for disclosure is not triggered provided that the listed entity satisfies certain conditions with respect to financial reporting, continuous disclosure and continuity of quotation of its securities on ASX. Suspensions from trading that do not exceed 5 days during the first 12 months from the date of issue of the securities will not disentitle the exemption. (Trading halts are not counted as suspensions).

To take advantage of the secondary sale exemption, the listed entity must issue a “cleansing notice” to ASX at or around the time of the capital raising either confirming that the entity has disclosed all material information to the market under the continuous disclosure regime or disclosing any such information. This information must be included in the notice only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in a disclosure document, such that the requirement imposes a prospectus-like test regarding the information to be disclosed without actually requiring the preparation and lodgement of a prospectus.

Typically, a listed entity will satisfy this requirement by announcing any material price sensitive information (eg, debt refinancing, asset writedowns, acquisitions etc) to ASX at the same time as the capital raising is announced and prior to issuing the cleansing notice. For rights issues and SPPs, the entity must also issue an offer document outlining the terms and conditions of the offer.

The Need for Due Diligence

Whilst the specific prospectus liability provisions of the Act do not apply to capital raisings without a prospectus, entities may still be exposed to liability when undertaking a capital raising using a cleansing notice if, for example, there has been other breaches of the Act (such as a breach of the continuous disclosure provisions) or false and misleading statements are made in connection with the capital raising.

For this reason, it is advisable for companies to carry out due diligence investigations even if the capital raising is conducted without a prospectus. Such investigations should include at a minimum:

due diligence on the entity’s continuous disclosure compliance;
due diligence on any ASX announcements to be made in conjunction with the capital raising; and
completion of directors’ due diligence questionnaires.

Whilst due diligence is recommended, it will usually be a less formal process than the sort of due diligence and verification processes required for a prospectus. Either way, it should be noted that due diligence is an on-going process and systems should be put in place to ensure that all material information is disclosed prior to the issue of shares under the offer.

Other Issues to Consider

There are many factors to be considered when undertaking any capital raising. Some of the more important issues to consider include:

the size of the offer – for entities that have already utilised their 15% placement capacity or need to
raise more than this amount, a pro rata rights issue may be the only option. Alternatively, shareholder
approval may be required in order to refresh” an entity’s 15% placement capacity. An opportune time
to do this is at the company’s AGM; and
related party/control issues – if a capital raising is underwritten by a related party and/or a major
shareholder, or if a placement is offered to such a person, additional disclosure will often be required
to explain the effect on that person’s voting power and their intentions with respect to the company.

Conclusion

In summary, capital raisings without a prospectus offer many advantages to ASX listed entities seeking to raise additional capital in a short time-frame. However, companies (and directors) should always seek legal advice regarding their disclosure obligations for any capital raising.

If you would like further information on the above, or if you wish to discuss the contents of this article in more detail, please contact us

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The IPO Process in Australia

Mon, 28 Dec 2009 09:30:00 -0800

What is the IPO Process?
The IPO (or initial public offering) process is the process of taking a privately owned company and making the transition to a publicly owned entity whose securities can be traded on a securities exchange such as ASX.

There are many reasons why a private company would want to undertake an IPO, including:

greater access to capital markets to fund acquisitions and/or assist with the growth of the company’s business;
exposure to retail and institutional investors; and
to provide an exit strategy for founders and other early stage investors.

The IPO process can be a complicated and time-consuming distraction for directors and senior management. It also contains numerous pitfalls for the unwary. Understanding the IPO process and how to manage it effectively can help avoid some of these pitfalls.

What Steps are Involved?

The importance of effective planning and transaction management should not be underestimated when undertaking an IPO. Detailed preparatory work undertaken by senior management and advisers can ultimately lead to significant cost savings in terms of both time and money. When preparing for an IPO there are a number of structuring matters that need to be considered, including reviewing the composition of the Board, determining the ideal legal structure for the public float, and identifying the assets and/or businesses within the group that will be included or not included in the IPO.

The IPO process typically involves the following steps:

1. Appointment of Advisers

The company needs to consider the appointment of various professional advisers to assist with the listing process, including:

lawyers;
corporate advisers;
accountants;
underwriters and stockbrokers; and
other experts as required (for example, independent geologists, valuation experts, share registries and investor relations consultants).

The importance of choosing quality professional advisers (preferably with experience in IPO’s) should not be underestimated. Moreover, it is critical to the success of a company’s listing on ASX that the advisers take the time to understand the company’s business and the direction the Board want to take the business post IPO.

2. Discussions with ASX

There are numerous regulatory issues that companies need to be aware of prior to listing, including with respect to constituent documents, listing timetables, escrow of securities, and related party transactions to name a few. In conjunction with its advisers, companies should endeavour to discuss these matters with ASX at the earliest opportunity.

3. Preparation of Prospectus and Due Diligence

In most cases, a prospectus or similar disclosure document is required to be issued before a company can list on ASX. A prospectus must contain all of the information that investors and their advisers would reasonably require and expect in order to make an informed decision about whether or not to participate in the IPO. The due diligence process is integral to the preparation of the prospectus and usually involves an all encompassing examination of the company, including detailed verification of the information to be disclosed in the prospectus. Given the importance of proper disclosure and the potential liabilities for directors and others involved in the preparation of a prospectus if they get it wrong, it is vital that appropriate professional advice is obtained in connection with the preparation of the IPO prospectus and the due diligence process. A properly conducted due diligence process may also provide a statutory defence against potential liability in certain circumstances.

4. Lodgement of Prospectus and Listing Application

The prospectus must be lodged with ASIC. After lodgement of the prospectus, the company cannot accept subscriptions for a period of 7 days. ASIC may extend this period to 14 days during which time it can require the company to make amendments to the prospectus. A listing application must also be lodged with ASX within 7 days of the prospectus being lodged with ASIC.

5. Offer Period

Once the prospectus has been lodged with ASIC, the offer opens to the public. It is common during this period for the company to undertake roadshow presentations to garner investment support for the listing. Prior to lodgement of the prospectus, there are restrictions on advertising and publicity in relation to the IPO, and companies should seek specific legal advice about such matters.

6. Admission to Official List of ASX

Once the listing application has been lodged with ASX, additional information may be required to ensure that investors have sufficient information to make an informed decision about whether or not to invest. Usually ASX will grant admission to the Official List subject to the satisfaction of certain conditions, including completion of the IPO capital raising.

7. Commencement of Trading on ASX

Once all conditions have been satisfied (including the issue of holding statements to all shareholders), official quotation of the company’s securities on ASX commences.

How Long does the IPO Process Take?

The timetable for listing on ASX depends on the complexity and scale of the transaction, how quickly the listing can be prepared and the time it takes to receive the funds from investors. If managed properly, the IPO process can be completed in 3-5 months. If not managed properly, the process can be a time-consuming and arduous task which has the potential to drag on and become a distraction for the Board and senior management.

Obviously, the longer the IPO process takes the more expensive it will be, so it is important for a company to have an adviser with ASX listing experience to manage the IPO process on its behalf to ensure that the process is streamlined as much as possible.

Conclusion

In summary, an IPO can provide significant benefits for a company. However, if the company gets it wrong, the potential liabilities for directors and others involved in the process, and the opportunity costs for the company, are high.

If you would like further information on the above, or if you wish to discuss the contents of this article in more detail, please contact us.

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