Many successful private companies choose to list on a stock exchange and become listed companies. Being a listed company can offer many benefits, like raising more capital and increasing your company’s public profile. However, listed companies are subject to more regulations and reporting obligations. In Australia, companies list on the Australian Stock Exchange (ASX). This article sets out three considerations a private company should know before undertaking an initial public offering (IPO), which is the process to list your company.
Why Bother Being a Listed Company?
Additional compliance and scrutiny come with being a listed company. However, many companies aspire to be list on the ASX because it:
- is prestigious;
- raises a lot of capital; and
- could be a great way to draw attention to your business.
Importantly, the IPO process can be complex and arduous. The complexity ensures that only companies that can comply with the law and act at the expected standard become listed companies. Therefore, any company considering becoming a listed company must assess whether the benefits of being a listed company outweigh the complexity associated with the IPO process and ongoing compliance and management requirements afterwards.
The table below sets out some pros and cons of being a listed company.
| Pros | Cons |
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Why List on the ASX?
Companies that undertake an initial public offering in Australia become listed on the ASX. The ASX is one of the world’s largest, most liquid and diverse stock exchanges. Likewise, the exchange has a strong presence of listed energy, financial, and information technology companies.
Additionally, many new companies decide to be listed on the ASX each year. Regarding liquidity, at the time of writing this article, the average daily turnover on the ASX is more than 5 billion. The strong performance of the ASX results from the strong Australian economy, which has continuously grown in the past few decades.
Continue reading this article below the formConsiderations Before Undertaking an IPO Process
1. Get a Team to Support You
Any private company considering going public will need a team of experienced professionals behind them, including:
- lawyers;
- an underwriter (which often also provide corporate advice); and
- financial advisors like the auditors, tax advisers, accountants etc.
The underwriter, usually an investment bank, primarily manages the IPO process. They will buy any outstanding shares your company does not sell in the IPO process.
Likewise, lawyers can guide you through the due diligence process. They can also help you to prepare the necessary documents for the IPO process like the prospectus. Further, they engage with regulators like the Australian Securities and Investments Commission (ASIC) as part of the IPO process.
2. The Process Is Slightly Different if You Are a Foreign Company
Additionally, Australia is a popular jurisdiction for foreign companies to list. However, foreign countries wanting to list on the ASX are subject to a slightly different IPO process than domestic countries.
Likewise, a foreign country wanting to list on the ASX may do so by:
- creating a newly incorporated Australian holding company as a vehicle to undertake the IPO process;
- becoming a public company by merging or being acquired by a shell company listed on the ASX; or
- listing in the form of a depositary receipt called a CHESS Depositary Interest.
Further, the law requires listed companies to have at least three directors and at least two of them residing in Australia. Of course, the directors must be of good fame and character. This also applies to foreign companies.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
3. Profit and Asset Test
Any company wanting to list on the ASX must pass the profit and asset tests. These are two specific tests.
Profit test: to pass the profit test, the company must:
- at least have one million net profit in aggregate over the last three financial years;
- have net profits of $500,000 for the 12 months before applying to be listed;
- ensure the main business of the company must not have changed in the past three years before being listed; and
- procure its directors to provide a statement that the business is profitable.
Asset test: to pass the asset test, the company must:
- have tangible assets worth at least $4 million or market value of at least $15 million;
- no more than 50% of the assets of the company can be held as cash or in a form readily convertible to cash; and
- the company must have sufficient capital for its stated objectives.
As part of the IPO process, ASIC may require the company to provide various documents to satisfy ASIC that the company passes the profit and asset test. Please note that the above is not an exhaustive list of requirements to pass the profit and asset test.
Key Takeaways
Listing on a stock exchange is a decision many businesses make each year. It has many benefits, including raising capital, the prestige that comes with being listed and helping to draw attention to your business. However, listed companies are subject to additional legal compliance requirements. Before undergoing an initial public offering process to be listed, a company must consider many things, including:
- the team of professionals that the company will need to guide it through the IPO process;
- the specific requirements you must meet if your company is a foreign company; and
- whether the company can pass the profits and assets test.
If you need help with an IPO process, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A listed company is a public company that undertakes an initial public offering in Australia to become listed on the Australian stock exchange (ASX).
Before undergoing an initial public offering process, a company must consider the team of professionals that they will need to guide it through the IPO process. Likewise, research the specific requirements you must meet if your company is a foreign company. Further, consider whether the company can pass the profits and assets test.
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