Raising capital while you hold inside information: wall-crossing, sequencing and the announcement that has to come first

Most placements involve telling someone something the market does not know. That is the point of a wall-crossing, and it is lawful if it is done properly. The failures are rarely about the placement itself. They happen when a company sitting on other undisclosed material information tries to raise around it, and discovers at the cleansing stage that it cannot.

Two categories of information

Separate them at the outset, because they behave differently.

• The raising itself. The existence of a proposed placement is usually market sensitive. Disclosing it to prospective investors under confidentiality, before it is announced, is standard practice and sits within the Listing Rule 3.1A carve-out for incomplete proposals and negotiations.
• Everything else. Undisclosed exploration results, a transaction under negotiation, an earnings downgrade, a covenant issue, the loss of a material contract. This is the category that stops raisings, and the answer is almost never to raise around it.

The Listing Rule 3.1A conditions do the work

Listing Rule 3.1 requires immediate disclosure of market sensitive information. Listing Rule 3.1A switches it off only where all three of its limbs hold at the same time: one of the listed situations applies; the information is confidential and ASX has not formed the view that it has ceased to be confidential; and a reasonable person would not expect the information to be disclosed.

The confidentiality limb is the fragile one. A wall-crossing is consistent with Listing Rule 3.1A while confidentiality actually holds. The moment it does not, whether through a leak, an unexplained movement in price or volume, or simply because the circle got too wide, the carve-out fails and the disclosure obligation revives immediately. Confidentiality is a factual condition the entity has to keep monitoring, not a status conferred by signing an NDA.

The insider trading overlay

Section 1043A of the Corporations Act 2001 (Cth) prohibits a person in possession of inside information from applying for, acquiring or disposing of the relevant securities, from procuring another person to do so, and from communicating the information to another person where they know, or ought reasonably to know, that the other person would deal.

That last limb is what the wall-crossing protocol exists to manage. A wall-crossed investor becomes an insider. Until the information is public, they cannot trade in the entity’s securities. The restriction has to be documented and agreed before the information is disclosed, not after the investor has heard enough to work it out.

• Ask before you tell. The call opens with the question of whether the person is willing to be wall-crossed and restricted, and it stops there if the answer is no.
• Document it. A confidentiality agreement with an express trading restriction, and, where the counterparty is or could become a substantial holder, a standstill.
• Keep the circle small. Every additional recipient increases leak risk and enlarges the population that has to be cleansed.
• Keep the log. Who was approached, when, what they were told, whether they accepted the restriction, and when they were cleansed. That log is the evidence if ASX or ASIC asks, and there is no reconstructing it afterwards.

The sequencing that works

• Establish what the entity is sitting on. Before anything else, the board confirms whether there is any undisclosed material information other than the raising. Minute the answer.
• If there is, deal with it first. Announce it, or complete the negotiation and announce the outcome, and then raise. A company that announces its result and raises into the reaction has a clean structure. A company that raises with the result undisclosed does not.
• Halt rather than suspend. The suspension day count in section 708A is unforgiving.
• Wall-cross, bookbuild, announce, allot. The announcement precedes the allotment.
• Cleanse within five business days of issue.

Where it comes unstuck: excluded information

A cleansing notice under section 708A(5) must state that the entity has complied with its continuous disclosure and reporting obligations, and must set out any excluded information, being information withheld under a Listing Rule 3.1A carve-out that investors and their professional advisers would reasonably require to make an informed assessment of the entity, together with its effect.

That requirement collapses the strategy of raising around undisclosed information. If the entity is relying on Listing Rule 3.1A for an incomplete negotiation, it has three options: put the information in the cleansing notice, which makes it public; delay the raising until the information is announced or ceases to be material; or accept that it cannot validly cleanse. Lodging a clean notice while holding excluded information is not a technicality. The relief was never available, the placement shares were never freed for on-sale, and the exposure runs to the entity and to its officers.

Points that are easy to miss

• The lead manager is inside the wall too. So is the underwriting syndicate, the registry, the printer, and every employee who sees a draft of the announcement.
• Directors and employees cannot trade. Close the trading window and confirm it in writing. A director trade during a wall-crossed period is a problem that will be found.
• Sophisticated investor status is not a defence. Relief from disclosure under section 708 has nothing to do with section 1043A.
• A prior wall-crossing does not expire quietly. An investor cleansed in relation to one matter remains restricted in relation to another matter mentioned in the same call.
• Extended reliance on the Listing Rule 3.1A carve-out is a pattern ASX notices. The carve-out is for information that is genuinely incomplete, not for information the entity would rather not announce yet.

How Luma Legal can help

We structure and document capital raisings for ASX-listed entities, including the continuous disclosure analysis, wall-crossing protocols and confidentiality agreements, the announcement package and cleansing. The question that governs the whole timetable is whether the entity is holding anything the market does not have, and it is worth answering honestly before the broker starts making calls.