COVID 19: Capital Raises – Unpacking the key measures announced by ASX and ASIC
Australia update - by Natasha Davidson
Australian regulators have responded to the impact of COVID 19 on the Australian market by announcing key temporary measures to facilitate the execution of capital raise activity on an emergency basis.
ASIC Commissioner John Price introduced the measures saying that “[w]e want to give companies more fundraising flexibility in these circumstances. Many will need to seek a trading suspension to understand how COVID-19 will affect them and to put a capital raising in place. However, the usual rules still apply. Directors need to ensure the capital raising is in the best interests of the company and companies need to make sure they are keeping the market informed via continuous disclosure announcements, even when they are in suspension”.
Key Measure 1 – Four-day halt to consider, prepare and implement a Capital Raise
Listed companies may now request two consecutive two-day trading halts (four trading days) to enable them to consider, prepare and execute the institutional component of a raising. During this period our corporate customers ,with their advisers and underwriters, can undertake market soundings and build a book of demand which should ideally largely cover the capital sought. Any listed company requesting a halt will need to disclose it is considering a capital raise to ASX.
Key Measure 2 – Increasing the Placement cap limit
Placements of securities are made to institutional or sophisticated investors. They are a very effective method of raising capital quickly on a low doc basis. However, Placements have a dilutive impact on non-participating shareholders. As a result, Placements are subject to a limit of 15% prescribed under ASX Listing Rules (7.1). To enable all shareholders to participate in a raising opportunity, listed companies have paired a Placement with a pro-rata entitlement offer (Entitlement Offer) or a share purchase plan (Share Purchase Plan or SPP) which, while not offered pro rata, is offered to all shareholders.
The ASX has now increased the Placement limit cap to 25%, which increases the headroom available to listed companies to raise capital quickly. However, to take advantage of the uplift, the Placement will need to be followed by an Entitlement Offer or a follow-on SPP to specifically include retail shareholders. This is clearly a benefit to retail shareholders, as is the requirement that the offer price for the Entitlement Offer and the SPP price must be equal or less than the Placement price.
The ASX has made clear that, placing a further 10% of issued share capital is a one-off opportunity for listed companies, and the class of shares offered to Placements must be in a class of fully paid ordinary shares. The ASX has also offered guidance on how the additional 10% should be considered for the purposes of placement capacity calculations under ASX Listing Rule 7.
This measure follows a similar announcement by the NZX on 19 March 2020. In this announcement, the NZX raised the applicable Placement capacity limit from 15% to 25%, which will apply until 31 October 2020. Other measures include a timetable of changes to accelerate the execution of Entitlement Offers as well as offering increased monetary thresholds under SPPs from $15,000 to $50,000. Of particular note in its announcement, the NZX acknowledged that the measures were designed to avoid dilutionary impacts.
Key Measure 3 – Suspension Conditions Relaxed
Low doc offerings for Placements, Entitlement Offers or SPPs can not be undertaken by any listed company that has been suspended from trading on the ASX for more than five days in the previous 12 months. For companies that satisfy this condition, information can then be marshalled relatively quickly and disclosed in a cleansing notice. However, for companies that could not, they had to observe a longer process of preparing a prospectus or product disclosure statement, making their access to capital more protracted.
ASIC has announced that listed companies that have been suspended for a total of 10 days in the previous 12 month period may use a low-doc cleansing notice for disclosure, however, there is still a requirement that any suspension from trading must not have occurred for more than five days in the period commencing 12 months before the offer and ending on 19 March 2020.
Listed companies who do not meet this criteria will need to apply for individual relief or prepare a prospectus or product disclosure statement.
Key Measure 4 – Relaxing requirements to Raise Capital
The ASX has waived the requirement for a 1:1 ratio to be applied to traditional and accelerated Entitlement Offers. Listed companies now have the structural flexibility to choose a ratio that meets their capital needs which that is fair and reasonable in the circumstances. The 1:1 non renounceable ratio would not have enabled many listed companies to raise sufficient capital and renounceable entitlement offers may have been considered too risky for this volatile market.
However, listed companies that do wish to rely on this wavier are required to notify ASX and provide information on their circumstances.
Implications for Board Members
As noted above, Australian regulators expect that Directors will continue to act in the best interests of their company when determining the timing and structure of any capital raising. Directors will need to consider the need for capital and how that is executed in respect of any dilutionary impact that may have to shareholders.
How Long Do These Measures Last?
These are emergency measures designed to fuel capital raising activity in our market in response to the COVID 19 pandemic. ASIC has made plain, that it is committed to refocusing its regulatory efforts on the challenges created markets. However, while these measures are temporary, ASIC acknowledges the need for certainty, and noted that it will revoke its relief with 30 days’ notice following an assessment of market conditions and in consultation with key stakeholders. ASIC will monitor the use of the relief and intervene where necessary.
The ASX has noted that its measures will be subject to review with industry participants closer to 31 July 2020 to determine if they should be modified or extended. The ASX will also monitor the use of their temporary relief measures and intervene if they are not having the desired effect on capital raisings.
What has become key is the need for viable data to be surfaced quickly for companies seeking capital in volatile markets. Regulators have responded to this particular challenge and are to be commended for doing so in such a timely and meaningful way. In combination with these measure, to maximise your speed to execution, data integrity and decision confidence, I encourage you to explore Ansarada’s Capital Raise Pathways. Our Pathways tools will equip you with an intuitive and innovative platform through which to collaborate across your organisation and to promote access to your data quickly to advise you as to what you may do in response to these measures. The need for viable data is critical and our Platform has been designed to provide you with exceptional software to optimise your data.
We are here to serve you and to partner with you through these challenging times. We look forward to hearing from you.