Is the ASX shutting out retail investors?

The ASX is proposing to make some changes that could see retail investors locked out of some investing in more companies listing on the exchange in an IPO.

The Australian Shareholders’ Association (ASA) is up in arms over it, as is online IPO site OnMarket BookBuilds, with both believing that the changes are negative for retail investors.

As Geoff Bowd, director of the ASA told Fairfax media, “It is narrowing the opportunity for retail investors to participate in IPOs. It’s not in the interest of many retail shareholders.

We should point out that retail investors are still excluded from many floats on the ASX, unless they are professional or sophisticated investors, are employees, have inside contacts with the company or happen to have a broking account with the right broker.

The ASX published a consultation paper in May, listing all the changes, and while many are fairly inconsequential for retail investors, some aren’t in our best interests.

The most controversial proposal is to reduce the minimum number of shareholders under the ASX’s spread test.

Currently, the minimum number of shareholders required is 300, each holding a parcel of shares worth at least $2,000  – and in some cases as many as 400 individual security holders are required. But the ASX proposes to change that to as low as 100 security holders if the listing entity has a free float of $50 million or more, and 200 if it is less than $50 million.

The ASX says the primary purpose is to demonstrate sufficient investor interest in an entity to warrant listing. The regulator also appears to propose increasing the value of securities to be held from $2,000 to $5,000 for each security holder.

However, in this day and age when most investors have digital access to the markets, easing the requirement for companies to attract more than 300 different investors appears to be a backwards step.

If a company can’t attract 300 investors, it rightly doesn’t deserve to be listed on the exchange, but reducing that to have just 100 shareholders could mean retail investors completely miss out on investing in more floats than we already do.

We’d prefer to see the ASX go the other way and follow in the steps of the Hong Kong and Singapore exchanges which rule that a certain percentage of each float must be available for retail investors, or open up each float to every investor who might be interested, rather than selling the majority of the shares to the select few favoured clients of the investment bank running the IPO.

It seems the ASX has forgotten that the self-managed super fund (SMSF) sector holds around $600 billion in assets and is becoming a major player. Excluding that sector from IPOs could be hurting companies, so the ASX should really be looking at how to tap into that market better. Reducing the required shareholder count is not the right way.

Foolish takeaway

The ASX is certainly not the benchmark by which retail investors should judge a stock exchange, and these changes could exclude retail investors from even more floats that we already are.

If you want to sign a petition against the changes, OnMarket BookBuilds has set one up here.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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