How to Navigate ASX Listing Rule 7.1 and 7.1A Placements

The ability to issue equity quickly without shareholder approval is one of the key advantages of being ASX-listed. ASX Listing Rules 7.1 and 7.1A establish the framework. Used well, they enable nimble capital raising. Misunderstood, they create breaches and lost capacity. Here is a practical guide.

The 15% rule (Listing Rule 7.1)

Listing Rule 7.1 prevents a listed company from issuing more than 15% of its issued capital in any 12-month rolling period without shareholder approval. The 15% is calculated against the company's issued capital at the start of the 12-month period, with adjustments for certain prior issues.

The rule is designed to balance two interests: the company's need for capital flexibility, and the protection of existing shareholders against material dilution without their say.

The additional 10% (Listing Rule 7.1A)

Listing Rule 7.1A allows certain eligible companies to issue an additional 10% of capital, taking total capacity to 25%, but only:

• With prior shareholder approval at an AGM (renewable annually)
• For cash consideration only
• Within a 12-month period from the date of approval
• At a price that is no more than 25% below the company's volume-weighted average price (VWAP) over the 15 days prior to issue

The eligibility requirements are important. Listing Rule 7.1A is only available to companies that are not in the S&P/ASX 300 Index and that have a market capitalisation of $300 million or less at the time of the AGM.

What counts towards capacity?

The capacity calculations capture most equity issues, including:

• Placements
• Issues to vendors as consideration for acquisitions
• Conversions of convertible securities
• Issues under employee share schemes (subject to specific carve-outs)

Certain issues are excluded, most notably issues under a pro-rata rights issue or under a Share Purchase Plan that meets the relevant exemption criteria.

Common mistakes

Mistake 1: Forgetting the rolling 12-month period. Capacity is not reset annually. It is calculated continuously, looking back 12 months from each new issue.

Mistake 2: Using 7.1A capacity for non-cash consideration. This is a hard rule. Securities issued under Listing Rule 7.1A must be issued for cash. Issues for the acquisition of an asset or as payment of a fee cannot use 7.1A capacity.

Mistake 3: Pricing below the 25% discount limit. Even a small breach of the pricing limit invalidates the use of 7.1A. Calculate VWAP carefully and apply a buffer.

Mistake 4: Issuing under 7.1A without holding a current approval. The 12-month approval window expires. Companies need to renew at each AGM or risk losing access.

Mistake 5: Not tracking capacity in real time. Companies that wait until they need to raise to check capacity often discover they have less than they thought. Monitor capacity month by month.

Mistake 6: Using up capacity unnecessarily. Issuing securities under Listing Rule 7.4 (issues approved by shareholders) preserves 7.1 capacity. So does a properly structured rights issue. Tactical use of approval mechanisms can preserve flexibility.

A worked example

Suppose a company has 100 million shares on issue. Its 7.1 capacity is 15 million shares, and (if eligible) its 7.1A capacity is an additional 10 million.

• A placement of 12 million shares uses 12 million of the 15 million 7.1 capacity, leaving 3 million.
• A subsequent placement of 6 million shares would breach 7.1 unless the company has 7.1A approval.
• With 7.1A approval, the second placement is permitted (using 3 million of 7.1 and 3 million of 7.1A).
• Both issues remain in the 12-month rolling window, so capacity for further placements is reduced accordingly.

Strategic considerations

Boards should think about Listing Rule capacity as a strategic asset. Key actions include:

• Seeking 7.1A approval at every eligible AGM, even if no immediate raise is contemplated
• Using rights issues for larger raises to preserve 7.1 capacity
• Structuring acquisitions so that consideration shares are issued under 7.4 (approved) where possible
• Coordinating with brokers on the timing of placements relative to capacity

How Luma Legal can help

We advise listed companies on capacity management, placement structuring and shareholder approvals. We work with company secretaries and corporate advisers to plan ahead and avoid capacity surprises.