Are restricted offers right for you?

Posted by OnMarket BookBuilds 29 May 2017 @ 12:00AM

Are restricted offers right for you?

In our ongoing quest to bring you more investment opportunities, OnMarket has just launched its Restricted Offers dashboard for certain OnMarket members.

So, you may be asking yourself what exactly are these so-called ‘restricted’ offers and who are these ‘certain’ members?

Restricted offers are offers that are only available for section 708 investors as described in the Corporations Act 2001 (Cth).  Section 708 investors are classified as either sophisticated, professional or experienced and are generally considered to be more experienced and able to evaluate opportunities without needing a prospectus or other regulated disclosure documents. However, it could be the case that the issuing company decides to only offer shares to sophisticated and professional investors, but not to experienced investors.

Restricted offers are broken into three categories: pre-IPOs, IPO pathfinders or placements.

1. Pre-IPO

A pre-IPO is exactly as it sounds; it is a raising undertaken by a company in the lead up to an IPO.  It can happen anytime from about 3 months to 18 months prior to the company’s planned listing on a stock exchange. Mining start-ups are well known in the pre-IPO arena – they typically need a few rounds of seed funding to build up enough assets for an IPO.

There is significantly higher risk involved with a pre-IPO, as there is no guarantee that the company will actually float on the stock exchange. Or it could be a couple years before this happens, meaning any funds you invest are tied up until then. Add ASX’s escrow provisions and it may mean that pre-IPO investors cannot sell their shares for the first 12 to 24 months even after listing on the stock exchange.

Another risk factor is the lack of regular, formal investor communication from pre-IPO companies, due to the fact they are still private entities and are not bound by ASX’s continuous disclosure requirements.

To account for this risk and lack of liquidity, pre-IPOs are usually priced at a discount to what investors will pay at the time of the anticipated IPO. Overall, as the offer is usually done without a prospectus, these offers are restricted to section 708 investors.

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2.  IPO Pathfinder

When an IPO is marketed to institutions and brokers before the prospectus has been lodged with ASIC, this is done via a ‘pathfinder’ prospectus. The pathfinder is distributed to a select few, usually consisting of underwriters and institutional investors, allowing them to consider the company and IPO prior to lodgement of the prospectus with ASIC. What this does, is enable the issuing company to create demand and assess market interest before setting the price for the IPO. Generally, a pathfinder does not seek subscriptions or contain the final offer price.

To minimise the risk of inappropriate access by retail investors, pathfinders are restricted to sophisticated or professional investors, and possibly experienced investors, under section 708.

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3.  Placement

When a company wants to raise additional funds, it can either increase borrowings or issue new shares (also known as raising equity capital). When a listed company issues new shares to a number of targeted investors, this is called a placement. To attract investors, they are usually priced at a slight discount.

Companies are not required to issue full disclosure documents such as a prospectus when conducting a placement. Although this can make placements a quicker and less costly way of raising capital, it also means that only certain investors under section 708 will be eligible to bid.

The bidding process in placements is the same as bidding for IPOs, with the key difference being the short time frame that the offer is open (could be a few hours, although it is more likely to be a couple of days). Once these new shares are settled and allotted (i.e. created), they trade equally with the pre-existing shares of the company.

 

Overall with these restricted offers, it is highly recommended to do your due diligence and get your hands on as much information as possible before investing. This could even include contacting management of the issuing company to answer any questions you might have.

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