Brent Van StadenPartner, CBP Lawyers

Back-Door Listings and Equity Crowd Funding

Newsflash - ASX may not apply the 20 cent rule

Recent amendment to Guidance Note 12 - 20 cent rule may not always apply for an

RTO

– ASX recognises consolidations can be negative (price tends to fall after

consolidation)

– Subject to shareholder approvals, ASX may approve share issues and options

exercisable at no less than 2 cents (previously, no less than 20 cents)

– Greater flexibility, liquidity and price transparency (may delay inevitable)

Recent Back-Door Listings

New entity Ticker Activity Proposed raising $m

Shell Previous activity

LionHub Group LHB Chinese property $7-12 Arasor Electro-optical

Digital CC DCC Bitcoins $9 Macro Energy Oil exploration

Sandon Capital SDO Listed investment company $35 Global Mining Invests Resources investment

Reproductive Health Sciences

AOM IVF $2.4 AO Energy Minerals exploration

Ziptel SKL SIM cards $3 Skywards Nickel exploration

Ecopropp CKK Fracking proppants $3 Coretrack Drilling

Roxy Casino CAQ Cambodian casinos $0 Cell aquaculture Barramundi farming

YPB AUV Anti-counterfeiting $3-6 AUV Enterprises Sapphire exploration

Dairy Farm Investments APA Dairy farming $6-10 APA Fin Services Portfolio administration

Future Generation Investment Fund

AIX Charity listed investment company

$100-200 Aust Infra Fund Airport ownership

Recent Back-Door Listings (cont.)- Market Intelligence

Financial Review:

Big-ticket IPO's vs growing cohort of smaller enterprises using RTO's

Thought to be a faster and cheaper listing

Strong demand for shells

Growing number of resource companies are being used as shells

– ASX 2012-2013 - 21 back door listings

– ASX 2013-2014 - 20 back door listings

Trend expected to intensify

ASX - around 30 dormant companies available

How Much to Pay?

Dollars for shells

In past times, consideration between $1.25M and $2.5M

Financial Review - market average now about $300K-$400K

Measure of shell value?

No specific measure of shell value generally recognised

Important starting points are cash and assets in shell and spread delivered

How Much to Pay (cont.)

It's all about negotiation

Magic of negotiation - in practice, questions are:

– What's the shell worth to the vendor; and

– what's the vend worth to the shell.

Depends on how much parties need or want transaction

Vendor will consider time value of wasting asset/incurring holding cost in evaluating

how long to pursue negotiations for a premium over cash, assets and spread

Success should involve meeting somewhere in between

Key Commercial Issues to Consider

Cost often cited, but really moot point

– Speed to market and spread more important (assuming no cash)

Relative valuations

– Premium for shell over net assets - how much?

– Value of vend - how to value and upside?

– Shells discount to cash backing?

Future control and governance - what representation do vendors, legacy shareholders

and new investors get?

Liquidity of the stock after completion

Post completion strategy -

– Understanding how legacy shareholders will behave

– Aftermarket support - profile building and buying support

Front or Back Door?

Rules of thumb:

– In buoyant times when cash is easier to get, IPO's are preferred

– In tough times:

money in shell commands significant premium, as it's hard to raise, so back-

door deals predominate

Sentiment favours back-door deals

– Currently, divide is between micro-caps and bigger end of town

Chinese investors

– There is a view they prefer putting money into a shell than a cleanskin IPOCo

Cost vs benefit

– Paying the right premium for a quick back-door listing vs time cost of an IPO

Advantages of Back-Door Listings

Easier to sell the story

– IPO's not suited for micro-caps - harder to sell the story from scratch

Shell can deliver:

– Cash/Spread

– Shareholder base for new capital raisings

– Existing management structure eg CFO/Company Secretary/Existing board skills

– Existing analyst/broker following

Pricing transparency

– If not off the boards for too long, pricing history and transparency can assist liquidity

and in pricing the reconstructed company

Tax losses may be available

Can be quicker - best case scenario, possible to complete in 6 weeks

Disadvantages

Cost vs benefit

– Paying a premium for cash in the shell (value of "shell") vs spread obtained

Time - to negotiate deal

Fees - payable to introducers of shell

Continuous disclosure obligations of shell can make negotiations harder

Shareholder approvals - upfront costs and timing vs uncertainty of outcome

Expert Reports needed - time and cost

Increased regulatory scrutiny - ASX and Listing Rule 11.1.2/3/ASIC

Quality of share register may be poor

– disenfranchised, stale shareholders that are only seeking to exit asap to crystallise

loss

– Legacy shareholders often not aligned with new management

Disadvantages (cont.)

Legacy risk (legal)

– corporate, regulatory, taxation and other legacies eg tenement rehabilitation

Due Diligence

– Two layers of due diligence required - shell and vendor

Change of name

– can offset market profile of shell

Stigma

– often concluded "front door" was not available

Re-compliance

– If re-compliance is needed, rationale for back-door is less

Legal Issues - Broad Categories

Managing risk and selecting transaction mechanism:

Due Diligence on shell

Due Diligence on vendor entity

ASX Listing Rules - shareholder approvals/classified assets/escrow

Corporations Act - Disclosure and Control

Limitations of due diligence

DD is not panacea

Hard to get compensation for non-disclosure by shell, because you become the shell and

personal guarantees generally not given

Key Listing Rule Issues

ASX view on Back Door Listings

Requirement to notify ASX beforehand

Listing Rule Shareholder approvals

– Change of scale and/or nature activities

– Issues of shares to vendors - shareholder approval

Re-compliance with Chapters 1 and 2 of the Listing Rules

Vendor (and other) escrow - classified assets, seed investors and promoters

When ASX will require re-compliance

Re-Compliance will be required:

Transaction which, in ASX’s opinion, is a back door listing of another undertaking (whether

or not involving change of nature of activities)

ASX Indicia of a Back-Door Listing

ASX view of a back-door listing

– ASX entity acquiring a business or merging with a non-ASX listed entity; and

– primary objective of transaction is to inject unlisted business into listed entity,

resulting in significant change to nature or scale of target activities

Typical target - taxonomy of a "shell"

– comparatively small scale operations relative to vendor entity

– not successful, has dissipated assets, downsized, sold assets, failed expansion plan

– is not trading or very limited trading

– has indicated to market it is seeking new projects

ASX Indicia of a Back-Door Listing (cont.)

Hallmarks of back door listing transaction

– Target is a "shell"

– Primary motive is a back-door listing

– Significant dilution of existing shareholders of target

– Changes to board

– Changes to nature and scale of activities

Touchstones (ASX - "not definitive")

– Increase of 100% or more in any of the following measures for the listed entity:

o consolidated total assets; consolidated total equity interests; consolidated

annual expenditure; total securities on issue

Avoiding Re-Compliance?

Not a back-door listing

•Not a back-door listing, but a complimentary or bolt-on acquisition and intent to continue or

expand existing business

Staged deals

•Some transactions in stages/tranches escape classification as a back-door listing or can

delay shareholder approvals

Key Strategies for Success

After the close - strategy to come out the other end

– Arrange on-market buying and post-completion strategy to counter legacy sales

Harder if you struggle to the finish line

Profile

– Develop a strategy to re-invent public profile of new entity after completion

– Ensure new entity has as much visibility within market as possible – as with IPO

Avoid re-compliance if possible

– If your aim is to avoid re-compliance with Chapters 1 and 2, develop an acquisition

strategy and communications with ASX that implement ASX guidance to that end

Time vs cost

– Analyse why you are proposing a back-door listing as opposed to an IPO, including

time value of wasting/holding asset, speed to market vs premium paid

Advantages and Disadvantages of Back-Door Listings

  Back Door IPO

Faster way to be listed Yes (maybe) No

Access to shareholder base Yes (maybe) No

Full control of destiny No Yes

Easier to price Yes No

Skeletons in the closet Yes No

Ready reference point for brokers to price capital raising

Yes No

Opportunity for uplift Yes Yes

Selling pressure from legacy shareholders

Yes No

Schematic - Typical Back-Door Listing

Equity Crowd Funding - ingogo raising

Financial Review, 30 September 2014 -

– "Crowdsourcing adds $1.2m to start-up ingogo's $9.1m raising"

– "New funding mechanisms are starting to take off"

– 50 investors invested $1.2M via VentureCrowd

Platform allows sophisticated investors to invest $25,000 in each company on

platform

– Was over-subscribed and closed in 3 days

– VentureCrowd part of fundraising package

"democratisation" of investment process

Area of significant interest globally – high grass roots involvement

Confluence of booming social network and internet economy boom, with post-GFC

financial markets reforms

Equity Crowd Funding - State of Play

Country Current scope for crowd funding

           

• No tailored crowd funding exemption • May 2014 CAMAC report proposal: aggregate $2 million over 12 month

period, max. $2,500 investment per issue and max.$10,000 aggregate investment over 12 months • Longstanding small scale personal offers exemption ($2m, 12 month

period, 20 Australian resident investors)

             

• Equity offers through online intermediaries to be exempt from registration and prospectus delivery requirements under Title III of the Jumpstart our Business Startups (JOBS) Act

 • Aggregate $1 million over 12 month period, maximum individual

investment limit $100,000 over 12 month period 

• SEC delays in bringing Title III into force – fear of excessive regulation and compliance risk – watch this space

Equity Crowd Funding - State of Play

Country Current scope for crowd funding

           

• Specific crowd funding exemption in Saskatchewan since December 6, 2013, six other provinces considering similar measures

 

• Investor cannot invest more than $1,500 per offering • $150,000 per offering, maximum 2 offers in 12 months, no offers longer

than 6 months, aggregate total up to $300,000

            

• Tightened equity crowd funding rules applicable from April '14 • Individuals without specialist knowledge cannot invest more than 10% of

their available assets• 2012 crowd funding exemption limited to ‘innovative’ start-ups, a

sophisticated investor must take up at least 5% of capital offered, maximum raise of €5m

 

• First EU country to enact regulations for equity crowd funding

Equity Crowd Funding - The New Zealand Position

Much heralded new category of ‘licensed intermediary’

Simplified disclosure

– Offers through licensed intermediary platforms exempt from normal

disclosure/governance requirements

– Limited provision of issuer information via licensed intermediary platform

– Simple rules for issuers e.g. being honest about the information they provide about

how they will use the money

Individual investor unlimited

– No limit on how much an investor may invest

Entity annual limit

– The most an issuer can raise in aggregate from equity crowd funding $2M in a 12

month period

Regulatory Arbitrage - Australian Issuers raising capital in New Zealand

Complex legal jurisdiction issues, but…

The Opportunity -

– There is view that Australian issuers can make offers in NZ lawfully

– Accessed by a global investor base

Licenced platform interested in exploration offer

– One of the platforms in NZ is keen to do an exploration offer

– They can target investors interested in sector

– They can syndicate with foreign platforms

– Cost: $NZ10K to get deal onto platform

Brent Van StadenPartnerbvs@cbp.com.au+61 7 3002 8767

Brent Van Staden is a partner in the corporate team at CBP in Brisbane.

Brent has considerable experience in all aspects of equity capital markets,

corporate and mining law, both in professional practice in Australia, the

United Kingdom and in South Africa and as in-house counsel for one of

South Africa's large companies. He has recently advised clients on initial

public offerings, takeovers, placements, mergers and acquisitions, bond

issues and other corporate transactions.

Brent holds a Masters of Law in Taxation, a Master of Commercial Law and

a Diploma of Legal Practice. He is admitted to practice in Australia, England

and Wales and South Africa.

Areas of expertise•Corporate advisory•Capital markets•Mergers and acquisitions•Joint ventures•Mining services•Procurement•Due diligence•Energy and resources•Private equity