Deciding how to structure a secondary raising can often be challenging given the complexity of legal, regulatory and compliance requirements, and will often be influenced by a range of factors including timing and the amount of capital required.
There are four key secondary capital raising alternatives available to listed companies in Australia including a traditional rights issue (Prospectus), non-traditional rights issue (Cleansing Notice), Placement and Share Purchase Plans (SPP).
This article includes an overview of the key advantages and disadvantages of each capital raising alternative, which may assist companies in selecting the most appropriate structure for their current circumstances.
In addition to the key options explored in this article, more complex structures such as convertible notes or equity standby facilities may also be appropriate to some circumstances. Further, suspended companies or those which have been suspended for greater than 5 days in the last 12 months should obtain specific advice.
Overview of the different types of secondary raisings
Traditional Rights Issue (Prospectus)
A rights issue is an offer of securities for issue where:
- the securities offered are in a particular class and made to every person holding securities in that class on a pro rata basis; and
- the terms of each offer are the same.
Usually, a Prospectus will be required for a rights issue where no exceptions to disclosure apply, which will often be the case where the offer is made to retail investors. The benefit of conducting a rights issue under a Prospectus is that greater flexibility in the type and class of security that can be offered (e.g. offering new securities with attaching options).
Companies must include certain information in a Prospectus, including both general and specific disclosures.[1] If a company breaches the requirement to present a Prospectus in a clear, concise and effective manner or the Prospectus contains a misleading or deceptive statement, ASIC can issue a stop order preventing any offers, issues, sales or transfers of the company’s securities under the Prospectus for a period of time.
ASIC also has the power to exclude an issuer from issuing a Prospectus in reliance on section 713 of the Corporations Act[2] for a specified period. For instance, if in the previous 12 months, the issuer did not comply with any or all of its financial reporting and disclosure obligations under the Corporations Act or has been suspended from trading.
Non-traditional Rights Issue (Cleansing Notice)
As noted above, usually a Prospectus will be required for a rights issue where no exceptions to disclosure apply. Section 708AA of the Corporations Act provides an exemption from the prospectus disclosure requirements (often referred to as the ‘low-doc’ regime), which applies to securities that are quoted on a declared financial market at the time at which the offer is made; for example, the ASX.[3]
A company is only permitted to rely on the Cleaning Notice exemption for a rights issue where the class of securities:
- offered are of a quoted class of securities at the time of the offer;
- are offered in proportion to the existing holdings; and
- have not been suspended from ASX for more than five days (total) in the 12 months before the offer is made.
A company seeking to make a rights issue offer under section 708AA must provide a Cleansing Notice to the market within 24 hours before it makes offers, or by any earlier time required by the market operator.
A Cleansing Notice is a substantially more streamlined document than a prospectus, on the basis it is not technically a disclosure document and does not require the same level of content that a Prospectus does. Importantly, a Cleansing Notice must set out the terms of the offer and any information that:
- has previously been excluded from an ASX continuous disclosure notice; or
- investors or their advisers would reasonably require to make an informed assessment of the offer.
Placement
Placements involve an offer of securities to selected investors, which may include existing security holders and new investors.
The ASX Listing Rules place certain restrictions on an entity’s capacity to issue securities, in particular, the requirement to obtain shareholder approval for issues exceeding placement capacity, issues to restricted persons or issues that would result in a significant change to the entity’s activities.
Similar to a Rights Issue, the offer of securities under a Placement can be made under a Prospectus or a Cleaning Notice issued under section 708A of the Corporations Act, although the issuer is limited in the types of investors that the offer can be made to if it is made under a Cleansing Notice (e.g. sophisticated investors).
Share Purchase Plan (SPP)
SPPs are a useful method of raising equity capital from existing investors without the need for a Prospectus or a Product Disclosure Statement (PDS), provided certain requirements are satisfied. Compared to a pro rata offer (e.g. rights issue) or selective offer (e.g. placement), an SPP involves an offer to each shareholder to acquire a parcel of new securities in the company up to a value of $30,000.
Whilst an SPP is sometimes undertaken on a standalone basis, it is often conducted in conjunction with a Placement.
Comparison between the different types of Secondary Capital Raising alternatives
1. Traditional Rights Issue (Prospectus) advantages and disadvantages
Advantages:
- Availability of the due diligence defence to persons involved in the preparation of or named in the Prospectus for misleading or deceptive statements contained in or omissions from the Prospectus.
- High capital raising potential – 100% subscription can be guaranteed if fully underwritten.
- Can offer unquoted securities (e.g. attaching options).
Disadvantages:
- Offered at a discount to market price.
- Financials required (pro forma at minimum).
- Due diligence and verification processes must be undertaken in order to potentially rely on the due diligence defence, which requires additional time to undertake.
- Less time and cost-effective – relatively longer time period, depending on type of Prospectus (i.e. sections 712 and 713 of the Corporations Act) than non‑traditional offer.
- Take up of securities on offer may be low (unless underwritten).
Approvals required: A copy of the Prospectus must be lodged with ASIC and the company cannot accept applications under the Prospectus until 7 days after the Prospectus was lodged. If ASIC considers the disclosure in the Prospectus to be deficient or a significant new matter arises, it can prevent offers from being made under the Prospectus until a supplementary or replacement Prospectus is lodged. The timetable for the offer must also be approved by ASX.
Eligible participants: Shareholders on the nominated record date.
Applicable Regulation: Sections 706, 710, 711, 712, 713 of the Corporations Act, ASX Listing Rule 7.2 Exception 2, ASIC Regulatory Guides 254 and 228.
Indicative timing: Three to four weeks. ASX has mandated offer timetables, which are set out in Appendix 7A of the ASX Listing Rules. Prior to launching an offer, issuers will need to agree the timetable with ASX (even if the ASX mandated timetable is strictly adhered to).
2. Non‑traditional Rights Issue (Cleansing Notice) advantages and disadvantages
Advantages:
- A Cleansing Notice is a streamlined offer document (not a disclosure document). An information booklet is ordinarily dispatched by the issuer to shareholders with information on how to apply for new securities under the rights issue and often contains additional information necessary to satisfy conditions for reliance on the Cleansing Notice.
- Relatively shorter timeframe to prepare offer document.
- More time and cost-effective than traditional offer.
- High capital raising potential – 100% subscription can be guaranteed if fully underwritten.
Disadvantages:
- Offered at a discount to market price.
- Unquoted securities (i.e. options) cannot be offered.
- Must not have been suspended for more than five days in the 12 months prior to the offer.
- Take up of securities on offer may be low (unless underwritten).
Approvals required: The timetable for the offer must be approved by ASX.
Eligible participants: Shareholders on the nominated record date.
Applicable Regulation: Section 708AA of the Corporations Act, ASX Listing Rule 7.2, Exception 2, ASIC Instrument 2016/84, ASIC Regulatory Guide 189.
Indicative timing: Two to three weeks per ASX timetable.
3. Placement advantages and disadvantages
Advantages:
- No disclosure document is required (i.e. Prospectus) if securities are only offered to sophisticated and professional investors. New securities can be issued in reliance on a Cleansing Notice.
- More time and cost-effective preparation of offer documents.
- Can be implemented simultaneously with an SPP.
Disadvantages:
- Sophisticated and professional investors may be difficult to identify for investing.
- Smaller investor pool.
- Capital raising potential capped by ASX Listing Rules 7.1 (15% limit) and 7.1A (additional 10% limit, if eligible) unless shareholder approval obtained.
- Effect of diluting existing shareholdings.
Approvals required: An entity cannot issue, or agree to issue, new ordinary securities that exceed 15% of its existing ordinary securities in any rolling 12-month period, without obtaining shareholder approval. Entities that have an additional 10% placement capacity under ASX Listing Rule 7.1A are limited to offers of ordinary securities and further restrictions on any discount on the offer price.
Eligible participants: Sophisticated investors and professional investors.
Applicable Regulation: Sections 706, 708(8) and 708(11) of the Corporations Act, ASX Listing Rules 7.1 and 7.1A.
Indicative timing: One week to draft and dispatch.[4]
4. Share Purchase Plan (SPP) advantages and disadvantages
Advantages:
- No disclosure document is required (i.e. Prospectus). A booklet is despatched by the issuer to shareholders with instructions on how to apply for new securities under the SPP.
- More time and cost-effective preparation of offer documents.
- Can be implemented simultaneously with a Placement and affords existing shareholders, particularly retail investors, the opportunity to acquire new securities often at the same discount offered to investors under the Placement and minimise the potential dilution of their shareholding.
Disadvantages:
- The amount that can be raised from each shareholder is capped at $30,000 in a 12 month period.
Approvals required: There are several conditions imposed by ASIC that an issuer must satisfy in order to undertake an SPP without a Prospectus or PDS.
Eligible participants: Shareholders on the nominated record date. Under ASX Appendix 7A, the record date is the day before announcement of the SPP.
Applicable Regulation: ASX Listing Rule 7.1, 7.2, Exception 15, ASIC Instrument 2019/547.
Indicative timing: One week to draft and despatch. ASX has mandated a SPP timetable, which is set out in Appendix 7A of the ASX Listing Rules. The length of time the SPP may be kept open is at the discretion of the Board of Directors. Commonly, an SPP may be kept open for between 3 and 6 weeks.
Next steps
Our team of specialist equity capital markets (ECM) lawyers offer assistance for all ECM transactions. We provide strategic support for secondary fundraisings and advise on a range of capital management solutions.
If you are currently considering undertaking a secondary capital raising, please get in touch with us so we can discuss a suitable secondary raising alternative that will work to your advantage. We can also help you understand your regulatory and compliance obligations under with Australian law, including compliance with statutory and ASX guidelines.
[1] A Prospectus must contain all the information that investors and their professional advisors would reasonably require to make an informed assessment of the matter set out in section 710 of the Corporations Act 2001 (Cth) (Corporations Act) and must make the specific disclosures set out in section 711 of the Corporations Act.
[2] Section 713 of the Corporations Act permits a company to issue a prospectus in reliance on short-form content rules if the company’s securities are continuously quoted securities (e.g. listed on ASX).
[3] ASIC RG 189 and ASIC Corporations (Non-Traditional Rights Issues) Instrument 2016/84 extend the operation of the low doc regime to allow certain non-traditional rights issues, which do not comply with all the technical requirements of sections 9A and 708AA of the Corporations Act, to qualify for the disclosure exemption.
[4] Note, if approval is required pursuant to ASX Listing Rule 7.1, must factor in additional six weeks minimum to seek ASX review and comment, post notice of meeting.
