The ASX wants to block risky tech startups from listing

Photo: Jonathan Daniel/Getty Images.

Early-stage tech companies with limited revenue could soon be blocked from listing on the Australian Securities Exchange to raise money, under new admissions laws being considered by the ASX and the corporate regulator.

In the past two years there have been 105 tech company floats on the ASX and 45 per cent of these companies have had revenue of less than $1 million.

A source at the ASX said the consultation paper, which will also likely suggest changes to do with the breadth of shareholder registers and other financial thresholds, would be released as early as next week.

The trend towards early-stage tech listings has escalated recently, with four of the upcoming six tech company listings on the ASX having less than $140,000 revenue.

However similar, high-risk companies could soon be pushed out of the market if the ASX proceeds with plans to tighten the financial requirements of companies wanting to list.

PEAK Asset Management executive director Niv Dagan said the consultation paper addressed concerns that companies were listing on the ASX too early in their development, without significant funds behind them.

“There is speculation the ASX will increase the net tangible assets test,” he said.

“It means that companies will need to raise more money, not just $2 million or $3 million to list, probably around $10 million and that means their market capitalisations will have to be greater. This will remove the very early stage companies.”

IMPACTING TECH

The existence of the ASX consultation paper was first revealed by Street Talk last week, and its reception will be closely watched by Australia’s burgeoning tech s start-up sector.

Tech company investors see appetite for IPOs (initial public offerings) as a crucial exit opportunity for their early-stage punts, but are equally concerned that a spate of failed listings could poison the well and raise broader fears of a tech bubble.

The Australian Financial Review understands the proposed changes would apply to both standard IPOs and the increasingly popular backdoor listings, where tech companies inhabit the shells of poor performing (usually mining) companies.

The ASX source said one of the main reasons for the consultation paper was for the exchange to ensure the standard of its listed companies remained high.

Select Equities analyst Mark Southwell-Keely said tech companies were opportunistically seeking to list, that the sector was seen as as a hot spot by many investors.

“Normally the demand for these kind of businesses on the market is very low, but in a hot market where investors have experienced some strong capital gains and there’s been some high profile examples, such as Freelancer, it draws in a stack of ‘me too’ listings,” he said.

WARNING SIGNS

Smart home software company Koolsee New Media Group and Shark Mitigation Systems have both recently filed prospectuses to list, but neither company has recorded any revenue.

Despite this, Koolsee is raising $16 million for a valuation of $220 million and Shark Mitigation is raising $4 million for a valuation of $17.7 million.

EM Advisory managing director Natasha Mandie, who has been advising successful tech company Redbubble on its ASX listing, said this type of exuberance in a sector was nothing new, but that early-stage companies were better off not listing too early, so that they could work through their business model without the scrutiny of the public markets.

“To be a listed company I think you should have a certain level of maturity in the business, governance and management team,” she said.

“Building a business takes time… every company goes through challenges, and sometimes you just need a bit of anonymity to work through that detail. That anonymity gives you permission to make changes, be it to the team, business model or product -it lets you pivot.”

LONG-TERM VIEW

HR tech company Reffind listed on the ASX last year with revenue of $3000. The IPO had looked like the best of the year, the stock up 880 per cent by late October, but it has since fallen back to below its 20¢ issue price.

Fellow HR tech stock 1-Page also listed with a relatively low revenue of $224,000. Even now it only posted $412,629 in revenue in its preliminary results for the full 2015 calendar year.

At one point, the stock was trading above $5.00 before falling to its current share price of about 81¢, which still gives it a market value of more than $130 million.

“With some of these companies it’s about their potential, their valuation is always around what they could achieve,” Ms Mandie said.

Mr Southwell-Keely said while many investors were aware of the risks of buying into a stock with low revenue and no forecasts, some were naïve.

“The reality is for investors that most of these listings will fail, either completely or partially, but fail. Only about 20 per cent or less will be a success,” he said.

“There is a mixed level of understanding … I don’t think some investors think about the pricing that much, some just look at the concept and the opportunity and take a punt.”

Other upcoming floats with low revenue include LiveHire and Drone Shield. HR tech company Apply Direct is also set to debut and while its revenue is more sizeable than the aforementioned companies, it is still under the $1 million threshold.

The only sizeable technology company float currently tabled for later this year is Redbubble, which had $71 million in revenue in financial year 2015 and will list with an issue price of $1.33 and a valuation of $268 million.

“Ultimately the law of investments always apply, be that after six, 12 or 18 months. If they don’t deliver it’s all over,” Mr Southwell-Keely said.

This story first appeared in The Australian Financial Review. Read it here or follow the Financial Review on Facebook.

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