The ASX is set to implement a series of restrictions likely to block many early-stage startups from listing in an effort to maintain the market’s “quality and integrity”.
On the back of a series of potential listings by tech companies with little revenue, the ASX has released a consultation paper proposing to increase financial thresholds and changing the spread test to require proven investor interest.
Under the proposals, startups wanting to list on the ASX will need to have a market capitalisation of $20 million – double the current minimum – and net tangible assets of at least $5 million, an increase from the current $3 million threshold.
The ASX is also exploring imposing a minimum float requirement and requiring all entities to provide audited accounts for the last three financial years unless they have special permission not to.
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According to the paper, the changes are aiming to “ensure that the ASX market continues to be a market of quality and integrity, and remains internationally competitive”.
The changes will also apply to backdoor listings, a controversial method often employed by early-stage tech companies.
According to the Australian Financial Review, there have been 105 tech listings in the past two years, with nearly half of these companies having revenue less than $1 million. Of six listings that are currently in the works, four of the companies have revenue less than $140,000.
“A disaster waiting to happen”
Australian angel investor Shelli Trung welcomes the changes, saying this proliferation of early-stage startups trying to go public with little proven market value or revenue is a “disaster waiting to happen”.
“Having the ASX littered with unqualified and poor quality listings is a concern for the budding tech investment community,” Trung tells StartupSmart.
“Investing in early-stage startups is very risky and most of these companies will fail.”
“Having a lot of listings is only good for headlines, and over the longer term is a poor return for investors and will negatively impact future entrepreneurs.
“You risk extinguishing the tech investment community before it has had a chance to take off.”
The recent popularity in going to the ASX for early-stage capital may be due to the global freeze in private tech investment, Trung says.
“The funding environment has changed,” she says.
“It has been a much more difficult time globally for startups to raise funding the last six months.
“I see a lot of decks where money has been unwisely burnt through with no business model in sight and valuations that are poorly thought out and unjustified.”
She says the proposed changes will help reduce risk for uneducated investors and the integrity of the market.
“Many of these startup investments sound speculative, with investors who lack understanding of the industry and want to invest in the next hot thing to make a quick buck,” Trung says.
“When you are an early-stage investor all you see is risk. When you are listing on the ASX with no revenue and a valuation of 200 times that, this tells me people aren’t investing, they’re gambling.”
It’s a sentiment shared by one of Australia’s most successful entrepreneurs, with Atlassian co-founder Mike Cannon-Brookes previously slamming backdoor listings as “shady”.
“The quality of the market seems suspect,” Cannon-Brookes said last year.
Potentially stunting growth
The founder of US startup ShareRoot, which listed on the ASX early last year, says that while it’s important to ensure the market doesn’t become flooded, imposing these restrictions could potentially stunt the growth of the next unicorn.
“One of the negative impacts when the tech hits a boom is there are a lot of companies flooding the market, some of which maybe don’t have much of a vision of potential longevity and a viable business model attached to them,” ShareRoot CEO Noah Ableson tellsStartupSmart.
“There is a potential for these limitations to have a positive effect but if they’re too crippling then you risk limiting yourself.
“Limiting companies that are in their early-stages risks them not having the opportunity to achieve their full potential.”
The Silicon Valley-based startup listing on the ASX through a backdoor takeover and looked to raise $10 million.
Prominent Australian entrepreneur Steve Baxter has also criticised the proposed changes, saying he is “gob smacked” by the restrictions.
“Let investors decide,” Baxter tweeted.
The ASX is now taking feedback and submissions on the proposed changes.