Equity Capital Markets Update May 2008

Contents

In this edition, we consider:

• a new class order issued by ASIC which facilitates non-traditional rights issues without a prospectus or PDS, and
• an update on the application of the Anti-Money Laundering and Counter Terrorism Finance Act to offers of securities.

New ASIC class order – non-traditional rights issues

In previous editions of the Equity Capital Markets Update, we discussed the changes to the fundraising provisions of the Corporations Act 2001 (Corporations Act) introduced in mid 2007. One of the key changes was the ability to undertake a rights issue without a prospectus or Product Disclosure Statement (PDS). ASIC subsequently released a consultation paper seeking submissions as to whether ASIC class order relief should be granted to enable ‘non-traditional’ rights issues to be conducted without a prospectus or PDS. Non-traditional rights issues are generally those where institutional or wholesale investors can participate (and receive their securities) prior to the close of the retail component. Freehills was involved in making a submission to ASIC in response to the consultation paper.

ASIC has now released a class order in relation to the changes to the Corporations Act. Class Order [08/35] facilitates the conduct of non-traditional rights issues without the need for a prospectus or PDS. Importantly, ASIC have not required that retail investors have the opportunity to receive securities at the same time as institutional investors (although this requirement will still apply in relation to managed investment schemes due to Class Order [05/26]). The only timing restraint is that the issue to retail investors must be made no more than two months after the issue of securities to institutional investors. ASIC’s approach has allowed one of the key attractions of non-traditional rights issues to be retained, ie the ability to receive a significant proportion of the offer proceeds (that is, the institutional component) within a very short period (as little as three to five business days).

In addition to these provisions in relation to non-traditional rights issues, the class order provides greater flexibility in dealing with a shortfall under a rights issue undertaken without a prospectus or PDS provided it is dealt with within two months after the first offer of securities. One further limitation applies—retail investors are not able to take up any shortfall unless they are already investors in the issuer. This means that issuers seeking to make the shortfall available to public (retail) investors will need to use a prospectus or PDS.

ASIC have also clarified that a rights issue need not be extended to all non-Australian or non-New Zealand investors. If the rights can be assigned (that is, because there is rights trading on market), those rights must be sold by a nominee and the proceeds remitted to ineligible holders—this is consistent with the requirements of the ASX Listing Rules for a renounceable rights issue.

Finally, ASIC have fixed a few anomalies in the legislation. One of those anomalies was the need for more than one cleansing statement to be issued—one at the time of the offer (under the undocumented offer regime) and one at the time of issue (or issues) of the securities the subject of the offer (under the already existing exemption generally used for placements). An issuer will only need to lodge a second cleansing statement if, before the securities to be issued under the rights issue (including any shortfall) have been issued, it becomes aware of:

• any information that it would have needed to include in the first cleansing statement had it been available at that time, and
• a material change to the potential effect of the offer on the control of the issuer or the consequences of that effect.

Application of the Anti-Money Laundering and Counter Terrorism Finance Act to offers of securities.

AUSTRAC has recently made rules under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AMLCTF Act) in relation to on and off market securities dealing.

The changes are particularly relevant to dealings in interests in managed investment schemes and stapled entities which include a managed investment scheme.

Managed investment schemes

As we noted in our December 2007 Equity Capital Markets Update, the AMLCTF Act has potential application to capital raisings. The AMLCTF Act does not apply to the issue by an entity of securities in itself, however a responsible entity does not issue securities in itself where a managed investment scheme is undertaking a capital raising. The AMLCTF Act therefore treated capital raisings by a companies and managed investment schemes (or stapled entities which included a managed investment scheme) differently and considered that an issue of units in a managed investment scheme was a ‘designated service’ and therefore subject to the AMLCTF Act, while an issue of shares in a company (by the company) was not.

This anomaly has been addressed in part by the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2008 (No. 2) (Rules) which came into effect on 2 May 2008.

The Rules provide that an issue of an interest in a managed investment scheme (including an option in an interest) will be exempt from the AMLCTF Act where the interest is quoted or to be quoted on a ’prescribed financial market‘ (which includes ASX) and is issued in accordance with ’relevant requirements in the Corporations Act pursuant to fundraising‘. It specifically includes an IPO or rights issue (whether pursuant to a PDS or using the undocumented approach outlined in our first article).

We expect this will be broad enough to cover placements and security purchase plans (SPPs) undertaken in accordance with the relevant ASIC Class Order. The new rules specify that if securities are already quoted, then an issue in accordance with ‘relevant requirements in the Corporations Act pursuant to a dividend or distribution plan‘ will also be exempt. It is not clear why AUSTRAC felt it necessary to specifically refer to DRPs (which are covered by the fundraising provisions of the Corporations Act and related ASIC Class Orders) but did not do so in relation to SPPs.

On-market trading in securities and derivatives

The Rules also provide that the issuing or selling of a security or derivative on a prescribed financial market (which includes ASX) is not a ‘designated service’ under the AMLCTF Act. This exemption is regarded by AUSTRAC as necessary because the operation of such exchanges means that issuers and sellers do not have knowledge of the identity of the subscriber or buyer.

Trading by agents

The Rules have also changed the application of the AMLCTF Act to disposals of securities or derivatives through an agent (for example, through a broker). The Rules provide that where the AMLCTF Act applies to an agent’s disposal, then the AMLCTF Act will not apply to the principal in relation to that disposal. This is intended to prevent both the agent and the principal having to identify a person acquiring the security or derivative.