ASX will be highlighting this development at the Ausbiotech conference in Melbourne next week, a significant industry forum for which ASX is a major sponsor.
The change to the rules recognises the important role of Venture Capitalists in fostering the growth of emerging enterprises by removing a disincentive to invest in them in their early stages of development.
ASX's listing rules provide that in certain circumstances securities issued to investors before a public float are "locked" in escrow for a prescribed period after the float to ensure that persons involved in the promotion of the float, and whose involvement is a factor in the pricing of the securities, cannot walk away with a quick "stag" profit once the company lists.
An unintended consequence of these provisions was that genuine venture capital equity interests were caught. As a result, a five-year investment for the venture capitalist became a seven-year investment, which included two years of market risk. The effect was that Venture Capital providers were forced to urge companies to pursue the trade sale route of exiting their investment, even if in price terms everyone would have been better off with a float. In some cases the trade sale route meant the loss offshore of valuable Australian intellectual capital. ASX recognised the treatment of Venture Capital could be unfairly inflexible and arbitrary and in many cases did not appropriately reflect the role played by venture capitalists in the pre-float development period.
The change puts genuine venture capitalists on the same footing as other seed capital investors - in determining the escrow period, recognition is given to the length of the investment in the pre-float period.
In taking this important initiative, ASX has worked closely with the Australian Venture Capital Association (AVCAL), the Australian Venture Capital industry body, to find a formula to encourage venture capital investment vital to Australia's future, without compromising market integrity and investor protection.
The change to encourage venture capital-supported companies to come to market followed the earlier listing rule reform in 1999 that repositioned some entry requirements to enable new technology companies to list on ASX.
The eligibility criteria recognised that new and emerging technology companies may well attract significant investor interest, notwithstanding the fact that many were "start-ups" without three years' earnings history and that their chief asset would often be a technology application or other intellectual property that might not necessarily satisfy the net tangible assets test for admission.
Known as "commitments test entities" (in that they are admitted on the basis of commitments to spend the capital raised), about 200 have listed this way on ASX - companies that might otherwise have struggled to attract capital, been forced to pay far more for it, or might have left Australia to develop their business.
