ASIC’s $30K SPP cap surprise: the end of the entitlement offer era?

This article was written by Amanda Isouard, David Friedlander and Will Heath.

What a year it has been so far.  In 2019, issuers have favoured using institutional placements and SPPs to raise funds, rather than entitlement offers.  Of the 10 largest capital raisings this year (excluding a DRP), 7 have been institutional placements and SPPs, and only 1 was an entitlement offer.   

Then this week came ASIC's surprise.  With no fanfare, ASIC has doubled the SPP participation limit from $15,000 to $30,000 per securityholder.

Could this be the end of the entitlement offer era?

The detail

On 2 October 2018, ASIC released a consultation paper regarding updating ASIC's class order relief for SPPs ("ASIC CO 09/425"). 

Under ASIC CO 09/425, ASX-listed entities could make an SPP offer without a prospectus or PDS subject to meeting certain conditions.  One of those conditions was that the securities issued did not exceed $15,000 per securityholder in any 12-month period (the earlier version of the class order had a $5,000 cap per securityholder). 

In the October consultation paper, ASIC noted that it was only proposing to make minor changes to ASIC CO 09/425.  In particular, ASIC stated that it did not intend to raise the $15,000 cap due to:

• there being less money raised under SPPs than when the cap changed in 2009;
• the impact of inflation not being significant; and
• it not seeing a "pressing commercial need" due to the lack of relief applications seeking a higher threshold and the "prevalence of companies raising funds under a rights offer using a 'cleansing notice'". 

All seemed pretty quiet.

And then came this week's ASIC surprise.  ASIC has just doubled the SPP cap to $30,000 per securityholder.  ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 was released to little fanfare (with a revised regulatory guide to follow) however it may have a big impact on Australia's secondary capital raising landscape, which is already seeing a trend this year towards institutional placements and SPPs for larger deals.

Why does this matter?

To put this in context – for a securityholder to hit a $30,000 take up in an entitlement offer, it would need to hold an approximately $100,000 parcel of shares in a 1 for 3 offer or an approximately $200,000 parcel of shares in a 1 for 6 offer.  Most retail securityholders will not have stakes in any one entity of that size.  What this effectively means is that even more retail securityholders will be able to take up more than their pro rata stake through an SPP offer than in the past. 

For a listed entity, the prospect of a fast-paced institutional placement and a follow on SPP is very attractive.  Subject to placement capacity restrictions under ASX Listing Rule 7.1, entities will get the funds they require more quickly as placement bookbuilds are generally shorter than ones for entitlement offers.  The due diligence process and offer documentation is also relatively less cumbersome than for an entitlement offer.  It is also attractive for underwriters, who will generally only underwrite the institutional placement component and therefore will get off risk more quickly.

What's the catch?

There are some benefits to securityholders in entitlement offers that are not available under the institutional placement and SPP alternative.  Entitlement offers allow eligible securityholders to participate for their pro rata share of new securities, meaning that they are not diluted and there is less likelihood of the capital raising having control impacts. 

Renounceable entitlement offers give existing securityholders the opportunity to obtain some value for their entitlements if they determine not to participate or if they are ineligible because they are located in a foreign jurisdiction. 

Pro rata accelerated institutional, tradeable retail entitlement offers (also known as 'PAITREOs') allow eligible retail securityholders to trade their entitlements at the front end of the offer, allowing them to get value at a similar time to institutional securityholders.

However, $30,000 is a fairly high amount, particularly for issuers with large numbers of securityholders.  The flexibility the higher threshold creates for issuers may also lead to greater uncertainty as to how much will be raised.  This may result in lower thresholds or total SPP offer caps being set or greater scale back taking place.

Given these points, it is very interesting that ASIC has made this change without further consultation.  It remains to be seen what impact it will have on secondary capital raisings going forward, but our best guess is that the $30,000 cap will make the institutional placement and SPP alternative a more compelling option than an entitlement offer for many boards.

King & Wood Mallesons have acted on 6 of the 11 largest capital raisings in 2019.