By Kate Thorley
The wave of capital raisings since the great lockdown is another example of the raw deal for Australian retail investors.
More than 60 Australian corporates collectively raised $8.9 billion in April, the greatest monthly total since the 2008 global financial crisis. In the 12 years since the global financial crisis (GFC), retail investors are still locked out of discounted capital raisings. Now is the time to level the playing field.
The distinction between retail and wholesale investors is drawn in Section 708 of the Corporations Act 2001 (Cth). Companies are required to issue new securities under a prospectus unless the issue falls within one of the specified exemptions under Section 708.
Exemptions include the issuance of securities to sophisticated investors, professional investors, or financial services licensees broadly defined as “wholesale investors”.
The Corporations Act defines these individuals as those with net assets greater than $2.5 million, or those who earn gross income of $250,000, or a superannuation fund with net assets of at least $10 million.
Of course, holding greater assets does not confer financial literacy and failing to meet the Corporations Act’s wealth threshold should not preclude retail shareholders’ fair participation in the equity market.
Our anecdotal experience undermines the logic of this blunt benevolence. Investing is a career in retirement for many of our shareholders and they are knowledgeable and passionate.
Australia is fortunate to have a strong retail investment community. Retail self-managed superannuation funds represent 99 per cent of the Australian superannuation sector by number and $746.2 billion by value. The financial system should provide them with greater respect.
Retail shareholders are significantly disadvantaged when their wholesale counterparts are issued securities at a discount to the prevailing market price. They are excluded from the opportunity to buy shares at a discounted price and their shareholding is diluted.
Retail investors have been excluded from more than 60 capital raisings conducted at a discount of at least 9 per cent in April 2020 alone.
The ASX listing rules allow listed companies to issue up to 15 per cent of new equity on a non-pro rata basis a year, with a concession for smaller companies to raise new equity of up to 25 per cent with prior shareholder approval.
A temporary emergency capital raising relief decision made by the Australian Securities Exchange at the end of March will allow companies to make placements of up to 25 per cent of their shares on issue, rather than the previous limit of 15 per cent.
In our experience as an institutional investor companies raising capital under these rules will typically do so by undertaking a private placement to wholesale investors.
The cost for a company to issue a prospectus to retail investors is considerable both in terms of direct expenses, management and board time. In most circumstances, these factors make it prohibitive for companies to access the retail market.
This is particularly the case for smaller capital raisings and for small-to-medium sized organisations where balance sheets and management resources tend to be constrained.
The Financial System Inquiry of 2013 to 2015 failed to address wholesale investors’ advantage over retail investors. The coronavirus crisis provides an excellent opportunity for the federal government, the ASX and the Australian Securities and Investments Commission to address this disparity.