Editor’s note: This is general educational information about how an Australian float is priced and allocated. It is not investment advice and does not describe any particular company, offer or security. It draws on the ASIC reports and guides and the ASX Listing Rules listed at the end.
Analysis: what the two-track structure really allocates
The usual explanation for the split is administrative, that running a live auction across tens of thousands of small applicants would be unworkable. The documents point at something more specific. ASX calculates the free float and the value of a qualifying parcel using the offer price under the prospectus, and the spread test requires 300 identified holders with parcels above a set value. Those tests need a fixed number and a countable register before quotation, which a moving retail price cannot supply. The fixed retail price is what makes the admission arithmetic possible.
The more interesting asymmetry is not price, it is discretion. A retail applicant’s outcome is determined by a document lodged with ASIC and by conditions with statutory deadlines. An institution’s outcome is determined by a recommendation built on criteria that ASIC lists as discretionary, prepared under time pressure, and settled in conversation with the issuer. Report 605’s finding that existing security holders generally received better allocations than non-holders, but not always, and did not always receive a pro rata allocation, is a description of judgment being exercised rather than a formula being applied.
That is also why ASIC’s first-day trading observation is worth reading carefully. It says that on average issued securities trade above their issue price shortly after the transaction and that this may suggest issuers do not always obtain the best absolute price. It does not say the pricing is wrong, and the report is explicit that an issuer’s objectives can include the composition of its register and liquidity in its securities, not only the highest number. A reader looking at a float would learn more from the disclosure document’s stated allocation policy and the identity of any cornerstone investors than from the width of the indicative range.
What the documents say
A retail applicant in an Australian float fills in a form for a fixed number of dollars at a fixed price and waits. An institution does something different: it gives a licensee a price and a volume, and that bid becomes an input into a document nobody outside the deal ever sees, the allocation recommendation. The two tracks are not a market convention that grew up by accident. One of them is shaped by the disclosure rules in Chapter 6D of the Corporations Act, the other by the commercial discretion of the licensees running the raising, and ASIC has examined the second one in detail.
What the bookbuild actually is, in the regulator’s description
ASIC’s Report 605, published in December 2018, sets out the sequence. Marketing usually commences with a licensee’s equity capital markets team briefing its sales desk, or the sales desk of related entities, with details of the transaction and a deal summary sheet. The sales desk then contacts investors to seek bids for the transaction, and it is that solicitation of bids that the report calls the bookbuild. For an initial public offering, ASIC notes that bids may also be received from the general public.
Bids come back through a range of methods, including electronic order systems, spreadsheets or in writing. They are passed to the equity capital markets team, which compiles them and prepares the allocation recommendation, and which must strip out duplicate bids that arise when each joint lead manager receives the same order. Report 605 also observes that floats carry a longer marketing period than secondary raisings, that once a bookbuild commences licensees aim to secure interest as quickly as possible to minimise market risk, and that allocation recommendations are therefore often prepared under time pressure.
Before any of that, select institutional investors may be approached to see whether they would invest, including by agreeing to act as a cornerstone investor or a sub-underwriter, which ASIC describes as a way of reducing the market risk of a transaction. Investors also give feedback to the licensee and the issuer, and ASIC says that feedback and bidding may assist with the price discovery process.
Allocation is a judgment, not an auction result
The part that most descriptions of a bookbuild leave out is that the book does not allocate itself. ASIC found that licensees consider a range of discretionary criteria when making allocation recommendations, including the desired composition of the register, the suitability of the investor, the treatment of existing security holders, the price and size of the bid, and any role the investor played in the price discovery process. Price is one factor among several.
The issuer is not a bystander. Report 605 found that the level of engagement by issuers in the allocation process depends on their experience and on whether they hold strong views about allocations to particular investors or groups. Once final allocations are agreed with the issuer, the board approves the issue of the new securities to those investors.
ASIC also recorded a result that bears on how the final price is judged. It found that receiving an allocation can provide a benefit to investors in both initial and secondary capital raisings, because on average the price of securities issued in a transaction trades above the issue price shortly after the transaction, and it wrote that this may suggest issuers do not always obtain the best absolute price. The review behind those findings covered 16 transactions between September 2017 and September 2018, spanning floats, placements and shortfall bookbuilds.
What the retail leg is bound by instead
A retail applicant applies on the terms in a lodged disclosure document, and those terms carry statutory deadlines that have nothing to do with the book. Under the quotation condition in section 723(3), the issuer or its directors must apply for admission to quotation within seven days of the date of the disclosure document, and the securities must be admitted to quotation within three months of that date. Where an offer contains a minimum subscription condition, a statement that securities will not be issued unless applications are received for a minimum number, that condition must be satisfied within four months of the date of the document. ASIC’s guidance is that an issuer should not issue securities to applicants until there is a high degree of certainty they will be admitted to quotation, and must not issue at all until a minimum subscription condition is met.
The content of the document is governed by the general disclosure test in section 710, alongside the requirement in section 715A to word and present it in a clear, concise and effective manner, the specific disclosures in section 711, and the prohibition on misleading or deceptive statements in section 728(1). ASIC’s Regulatory Guide 228 asks for an investment overview as the first substantive section after the chair’s letter, highlighting a meaningful summary of information key to a retail investor’s decision and providing balanced disclosure of the benefits and risks.
The exchange adds its own gates on top. To be admitted as an ASX Listing, an entity needs a free float of at least 20% at admission and at least 300 non-affiliated security holders each holding a parcel of the main class worth at least $2,000, and ASX says a spread obtained by artificial means does not count. It must also pass either the profit test, requiring aggregated profit from continuing operations of at least $1 million over the last three full financial years and more than $500,000 in the twelve months to a date no more than two months before the application, or the assets test, requiring net tangible assets of at least $4 million after fundraising costs or a market capitalisation of at least $15 million. Under Chapter 2, the issue or sale price of the securities seeking quotation must be at least 20 cents in cash.
