Proposed listing rule changes may lock small investors out of sharemarket floats
Martin Flood has mostly done very well out of new listings on the Australian sharemarket.
He bought shares in Buymyplace.com.au, an online business that connects buyers and sellers of property without engaging a real estate agent, at the issue price of 20c when it listed in mid-March this year. The shares are now worth almost twice that.
But if changes to the listing rules proposed by the Australian Securities Exchange (ASX) go through, Martin fears he may no longer be able to get access to small floats.
That’s because the ASX is proposing to reduce the minimum number of investors a company requires to float from 300-400 investors (depending on how much of the company is held by related parties) to 100 for larger IPOs and 200 for smaller ones.
“As it is, only 15 per cent of shares in IPOs [initial public listings] in Australia go to retail investors – do we really have to reduce that to nothing?” Martin says.
Most of the shares go to large investors, including those individuals with large licks of money and institutional investors, such as fund managers.
Martin worked in technology before becoming a full-time investor a decade ago.
The 52-year-old Sydneysider has generally done well by investing in small IPOs, though he says the shares in the good ones are hard to get.
That’s different to large floats, such as the privatisation of public assets such as Telstra or Medibank Private, because the government has a political motivation to have wide participation from retail investors, who are also voters.
Figures from OnMarket Bookbuilds, an online platform connecting small investors with floats, suggest that for the 21 listings in the second quarter of this year, share prices were up an average 33 per cent as at June 30. Over the same three months, the Australian sharemarket rose by only 3 per cent.
Among larger IPOs, software company WiseTech Global jumped 32 per cent by June 30 after listing on April 11. Plumbing manufacturer Reliance Worldwide Corporation was up 24 per cent by June 30, after listing on April 29.
While these smaller IPOs can do particularly well, investing in IPOs comes with higher risks than investing in companies with long track records as listed companies.
Just look at Dick Smith, the electronics retailer that went into voluntary administration at the beginning of 2016 after a $520 million float by its private equity owners in December 2013.
OnMarket BookBuilds chief executive Ben Bucknell says the ASX’s proposed rule change would mean nearly all retail investors and trustees of self-managed super funds would not have the opportunity to invest in most IPOs.
“The ASX should follow the lead of the Hong Kong Stock Exchange and the Singapore Stock Exchange where 25 per cent to 40 per cent, respectively, of every IPO is reserved for retail investors,” Bucknell says.
Diana D’Ambra, the chairman of the Australian Shareholders’ Association, is also opposed to the change.
“Retail investors are presently excluded from many of these floats, as brokers will almost always give their allocation to their high-net-worth clients,” she says.
D’Ambra says reducing the minimum number of shareholders will mean even less incentive for shares in IPOs to be offered to the general public.
She says there should be a requirement for a minimum allocation to retail investors that is similar to what applies in Hong Kong.
Elio D’Amato, the director of research at shares researcher Lincoln Indicators, says with the exception of mega-floats such as Medibank, the reality for retail investors is good floats are very hard to get into; even at current investor thresholds.
“The reality is that often really ‘hot’ ones are very hard to get your hands on, even with the assistance of a good full-service broker,” he says.
“This proposed change, of course, makes it harder but the problem was there to start with,” D’Amato says.
Other changes being proposed by the ASX are supported as they improve the quality of companies listing on the sharemarket.
For example, companies will need net tangible assets of at least $5 million or a market capitalisation of at least $20 million to float. At the moment, the requirement is net tangible assets of $3 million or a market capitalisation of $10 million.
The ASX will also require “backdoor” listings to re-comply with listing requirements.
This is to stamp out the practice where a company wanting to float buys an already-listed company in order to circumvent the listing rules.
The period for submissions on the ASX’s proposals closed in early July.
ASX chief compliance officer Kevin Lewis says the package of rule, procedure and guidance changes is designed to strengthen ASX’s reputation as a listings market of quality and integrity.
He says the ASX is assessing the considerable amount of feedback received and discussing it with regulators and other stakeholders.
The final version of the rule changes and associated guidance will be released in September or October this year.
Lewis says the new rules are expected to take effect from December 19 this year.
The story Proposed listing rule changes may lock small investors out of sharemarket floats first appeared on The Sydney Morning Herald.