Equity financing is the main source of funding for Australian corporations. During the GFC, secondary capital raisings by listed entities played a particularly important role in securing funding during a period when financial conditions deteriorated and there was greater uncertainty in wholesale debt and credit markets.
Access to equity capital markets
Almost 90 per cent of ASX-listed companies, or around 2,000, have a market capitalisation below $300 million. These companies are generally described as ‘mid-caps’. They include a large number of smaller mining and prospecting companies and start-up companies.
For mid-caps, the cost of issuing equity can be prohibitive. Compared to large corporates, mid-caps face disproportionately larger fixed costs of issuance. In addition, because mid-caps are generally not well known, they may have additional promotional costs. They are also less able to absorb costs associated with listing, such as complying with listing rules and corporate governance requirements.
There may be scope for Australia’s listed markets to become more inclusive. This year, the London Stock Exchange has developed a market segment for high-growth companies, such as internet and technology companies that are expected to, in time, seek a listing on the main board.113 Options might be available to take a similar course in Australia to provide smaller entities easier access to equity market listing, although the ASX discontinued a second board market in 1992.
Australian law provides some concessions on preparing prospectuses for low-value capital raisings. Submissions suggest these thresholds could be relaxed; for example, through higher limits for the amount of funding that can be raised under the ‘20 in 12’ prospectus exemption, or for a larger number of investors that can result in investing under that same exemption.114
Access for retail investors to new equity offers
Some submissions raise concerns about equity issuance by companies during the GFC that excluded retail investors. In its submission, the Australian Shareholders’ Association (ASA) states:
Retail investors were diluted out of more than $10 billion worth of value during the raft of capital raisings which occurred in the immediate aftermath of the global financial crisis. The primary causes were discounted institutional placements with no follow-up SPP (share purchase plan), unfairly restricted SPPs, a lack of renounceability in entitlement offers, separate book builds to deal with institutional and retail shortfalls and poorly marketed retail offers and limits on the ability of shareholders to apply for additional shares in entitlement offers.115
In particular, submissions argue that institutional placements and non-renounceable entitlement offers dilute retail investors. These submissions argue that rules relating to these secondary equity issues should be modified so that such ‘dilution’ cannot occur.116
Arguably, the fact that companies were able to use these methods enabled them to access funding more quickly and with greater certainty than otherwise would have been the case. An ASX report discussing the markets’ performance during the GFC noted that, as market conditions stabilised, the weighting companies applied to considerations of ‘fairness’ for all shareholders increased and the relative attractiveness of pro-rata issues rose, particularly for accelerated rights offers.117
Submissions put forward a number of suggestions to address dilution concerns. The Inquiry notes that recent developments in market technology could make it easier for companies to offer placements to the market and rights issues to all shareholders. Suggestions to address dilution include modifying private placement requirements by:
- Requiring that all existing investors be invited to participate in any on-market equity issue of continuously disclosing securities
- Requiring by law that all issues of new equity by issuers be conducted fairly, transparently and efficiently, unless shareholders approve the issue, despite not satisfying these criteria
Access to crowd-sourced equity funding
The Corporations and Markets Advisory Committee (CAMAC) recently released a Report with recommendations to help unlisted entities seek crowd-sourced equity funding (CSEF).118 The Report finds that the lack of a supportive regulatory environment for CSEF may result in worthwhile Australian entrepreneurs incorporating in other countries, or moving their businesses offshore to enable their ideas or projects to be more easily funded. The report is currently being reviewed by the Government.
In the view of CAMAC, for this form of corporate fundraising to operate in the best interests of investors, as well as issuers, a regulatory structure specifically designed for CSEF needs to be developed. This would include introducing a new corporate status — an ‘exempt public company’ — that would allow companies to seek crowd-sourced equity funding and a disclosure regime based on a standard offer disclosure template.
Policy options for consultation
The Inquiry would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:
- No change to current arrangements.
- Review the size and scale of offerings that can be made without a prospectus where the offering is limited to 20 people in 12 months up to a value of $2 million, or for offers of up to $10 million with an offer information statement.
- Introduce additional protections for investors in relation to use of private placements and non-renounceable rights issues.
The Inquiry seeks further information on the following areas:
- Is there a need to introduce differentiated markets to allow greater access to equity markets by smaller companies?
- Should other capital-raising requirements be modified to reduce dilution effects? Would this affect the capacity of corporates to raise funds, particularly under conditions of market stress?
114 Australian Shareholders Association 2014, First round submission to the Financial System Inquiry, page 7. The ‘20 in 12’ prospectus exemption is in s708(1) Corporations Act.
115 Australian Shareholders Association 2014, First round submission to the Financial System Inquiry, page 21.
116 Under listing rule 7.1, every listed entity has the ability to issue 15 per cent of its issued capital via a placement without security-holder approval in a 12-month period. Some entities with security holder approval have the ability to issue an additional 10 per cent of issued capital in a 12-month period under listing rule 7.1A
117 Australian Securities Exchange 2010, Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis, ASX Information Paper, ASX, Sydney.
118 Australian Government, Corporations and Markets Advisory Committee 2014, Crowd Sourced Equity Funding, Australian Government, Canberra, May.