The Great American Dream? Some US-based ASX small caps are finding it tough to make it Down Under
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In recent years the ASX has stepped up its efforts to attract foreign companies to the bourse, and the United States has been one of its key targets.
The ASX is home to a handful of US-headquartered companies that have opted to list Down Under.
And there are advantages to listing here rather than in the states. Australia’s mandatory superannuation system means there’s no shortage of funds, which provides for a more liquid market with greater publicity than the American exchanges.
Also, sometimes Aussie investors are more educated on particular business models, such as buy now, pay later.
Sezzle (ASX:SZL) CEO Charlie Youakim told Stockhead last year that US investors had to first be educated on how Sezzle’s business model worked, but Australian investors already knew and went straight to asking how the company was different to its already listed peers.
Specifically for tech firms, inclusion in the ASX All Technology Index is a possibility and a far cry from being listed on the NASDAQ, where they could potentially be lost in the sea dominated by tech giants.
But while there are benefits, there are also a number of drawbacks. One downfall is the restrictions placed on US investors.
In the last 12 months the average US-based small cap has lost over 40 per cent.
While some of this can be attributed to COVID-19, some saw declines prior to the crisis — such as Life360 (ASX:360), which has never reached its $4.79 IPO price since listing.
This list has gained four new members in the last year, including Sezzle and Life360 as well as employee experience tech stock Limeade (ASX:LME) and document management software stock Nitro Software (ASX:NTO).
And medtech stock GI Dynamics (ASX:GID) is also about to depart the ASX, informing shareholders of its decision last week.
GI blamed challenges raising money from potential American investors because they were precluded from investing in a US incorporated country listed on a foreign exchange. And when it put to these investors the proposition of going private, they were all ears.
While GI Dynamics has not responded to Stockhead’s requests for comment, Stockhead spoke to a couple of senior legal experts about these regulations.
Dan Scotti from Minter Ellison said in GI Dynamics’ case it was likely the individual investors’ criteria that precluded them.
“It’s interesting the way [GI Dynamics] expressed it. But what they were talking about indicates some sort of mandate issues where these funds will say you can’t invest in this,” he told Stockhead.
“The [broader US investment] issue is slightly different and that is a thing that is caused by the intersection of US Securities Laws and the way the Australian market operates.
“An offering of securities [to US persons] has to be registered under [section 5 of] the US Securities Act and you have to prepare an equivalent prospectus under the SEC unless an exemption applies.”
Yes, to avoid the ire of the SEC, your choice is to either prepare multiple prospectuses or say American investors aren’t welcome.
Regulation S of the Act exempts certain offers made outside the US. But one of the qualifications for an offshore transaction is if there are “no directed selling efforts” in the US.
This is why you will often see at the top of capital raising prospectuses declarations it is not for sale in the US or to US persons. In many cases, an investor has to verify they are not a US resident to be able to view and download a prospectus from a company’s website.
Investors which make the cut as a Qualified Institutional Buyer (QIB) under Rule 144A are exempt. But such investors need to manage at least $US100m ($155.5m) in securities of issuers that aren’t affiliated with the entity.
In relation to potential reform, Scotti said “it’s not a question for the ASX or Australia, it’s totally a US Securities Law question”.
Meanwhile, a senior partner from Ashurst who did not want to be named, told Stockhead the restrictions on US buyers and investment mandates were different but inter-related issues.
But he also noted there was a third issue that was relevant to cases like GI Dynamics — specifically the depth of Australia’s trough for investing in early stage companies.
And he knows, having witnessed the rise and fall of OnMarket (ASX:OMN) which was once a Westfield subsidiary. When Unibail bought Westfield for $US24.7bn, it wouldn’t accept the tech start up as part of the package, so the Lowy family spun it out and listed it Down Under.
“We listed [OnMarket] on the ASX but got no support, so in the end we closed down and returned the cash because there was no investor interest,” he said.
Pointing to the botched IPO of start-up music streaming service Guvera, which the ASX initially allowed then refused due to related party issues, the Ashurst senior partner said it was tough for early stage startups generally but moreso for foreign firms.
“I think Guvera was a deeply troubled business model and [Guvera’s collapse] led the ASX to crack down on early stage start-ups in Australia,” he said.
“So when we wanted to list OnMarket we had to be insistent we wanted to list and we had a high profile board led by Steven Lowy. Ultimately we convinced the ASX to list but that was an exemption rather than the rule.
“There was much commentary when Atlassian listed in the US that Australian markets are not flexible enough to facilitate those sort of investments, but I don’t think there’s truth in that.
“There are a variety of views but as a general proposition the Australian capital markets are shallower for investment.
“If you’re an early stage market, the capital markets are shallow and there’s not an appetite to put in.”
So while the ASX may not be the best place for early stage start ups, the bourse is still pursuing American firms beyond that stage.
Last year the ASX saw six US firms list, with three (Limeade, Life360 and Nitro) raising over $100m or more. The ASX also went on a roadshow to America last June to encourage firms to list Down Under.
And its pursuit is set to continue for the foreseeable future. A spokesperson for the ASX told Stockhead last week the US “remains a top 3 market”.
The spokesperson noted that even with few Americans but QIBs being able trade freely, 25 per cent of institutional investment in ASX300 stocks came from the US.