Developments in SME Financing in Australia: Wallis Report Findings and
Corporations Law and Stock Exchange Initiatives
School of Commerce
Flinders University of South Australia
Research Paper Series: 00-4
ISSN: 1441-3906
Developments in SME Financing in Australia: Wallis Report Findings and
Corporations Law and Stock Exchange Initiatives
Mr Anthony M. J. Stanger
Lecturer, School of Commerce
The Flinders University of South Australia
Telephone
(08) 8201 2764
GPO Box 2100
Fax
Adelaide, SA 5001
Email Tony.Stanger@flinders.edu.au
(08) 8201 2644
Abstract
Key policy and private sector initiatives since 1996 impacting upon the debt and equity
financing of small and medium size enterprises (SMEs) in Australia are reviewed. The
initiatives include the submissions, findings and recommendations relating to SMEs of the
Financial System Inquiry (Wallis Report) into the Australian financial sector; developments
in the Australian Corporations Law (ACL); and the advent of the Australian Stock Exchange
(ASX) Enterprise Market and the Newcastle Stock Exchange (NSX).
The Wallis Report finds that on the financing supply side, in terms of sources of competition
in SME financial products, with the exception of term loans, banks are the primary suppliers
of SME financing products such as transaction banking, overdrafts, commercial bills, leasing,
and credit card merchant facilities. In terms of marketing practices by product bundling,
SMEs have access to convenience-based bundling, but less access to rewards-based bundling.
With new delivery mechanisms (electronic and Internet banking), a physical branch presence
is declining in importance. Regional banks outperform major banks in fees and charges, but
not with regard to loan interest rates. SME access to debt capital is adequate while obtaining
equity capital is more difficult.
Access to equity capital is likely to be improved through ACL changes, which provide relief
from onerous prospectus requirements through Offer Information Statement, small scale
offerings and sophisticated investors exemptions. The ASX Enterprise Market provides a
stepping stone to main board listing and is internet-based capital market for non-listed entities
needing to raise capital through the issue of various debt and equity securities without the
need for a prospectus. The NSX aids fundraising by SMEs due to a small minimum issue
quantity and scope to avoid the preparation of a prospectus. Both equity and debt security
issues can be listed by way of an offer to the public to subscribe to new securities and an offer
to the public of securities already issued or agreed to be subscribed.
These initiatives have also created other benefits for SMEs and their owners, and have
expanded the assistance and advisory role of accountants to SMEs.
INTRODUCTION
This paper reviews policy developments and private sector initiatives impacting upon the
financing of small and medium sized enterprises (SMEs) in Australia since 1996. First, the
Financial System Inquiry (Inquiry), also known as the Wallis Report, is reviewed for
submissions, findings and recommendations on the financial sector in relation to SME
financing. This is followed by an expose of developments in the Corporations Law, the
Australian Stock Exchange’s (ASX) Enterprise Market and the Newcastle Stock Exchange
(NSX), that provide SMEs with some relief from the onerous burden of prospectus
requirements.
As accountants are the universally most used source of assistance and advice by SMEs
(Roffey et al, 1996), awareness of these recent developments amongst accounting
practitioners is imperative. In addition, practitioners are able to benefit commercially through
direct participation in the fundraising process as a sponsor or advisor, as well as indirectly
through the marketing generated in the process.
THE WALLIS REPORT
The terms of reference of the recent Financial System Inquiry do not specifically mention
SMEs, however they have been given due consideration in addressing the following terms:

The effects of deregulation of the Campbell Report (1981) on the range, quality and cost
of financial services available to consumers and other users;

The development of the financial institutions and their products; and

Regulatory arrangements affecting the operation of the financial system with regard to
promoting the most efficient and cost effective services for users (Financial System
Inquiry Final Report (FSIFR), 1997).
The interim report of the Inquiry, the Financial System Inquiry Discussion Paper (FSIDP)
(1996), discusses the role of the financial markets in providing debt and equity financing to
SMEs. At the time of the Inquiry SMEs experienced some relief from the Corporations Law
requirements on equity issues with the relaxing of prospectus rules applying to some small
offers made to less than 20 persons and individual offers to wholesale investors of over
$500,000. However, ASX listing rules tended to exclude most SMEs due to the minimum
1
size limit of an issue. Despite changes in the prudential requirements of the Reserve Bank of
Australia (RBA) allowing banks to make long-term investments in non-financial firms,
relatively little equity investment in SMEs has been made. It is estimated that in the mid 90’s
SMEs had approximately $46 billion in debt financing and just $2 billion of institutional
equity financing.
Submissions to the Wallis Report
The views presented in submissions from interested parties to the Inquiry are described in the
FSIDP (1996) in five broad areas.
Information Problems and Market Failure in SME Financing
From the demand perspective, it was suggested ‘that many SMEs do not yet appreciate the
market value of quality information or may not have an appropriate corporate governance
structure’ (FSIDP, 1996, p. 144). From the supply side perspective, ‘the market has not
delivered mechanisms to capture, process and deliver information widely’ (FSIDP, 1996, p.
144). In terms of equity financing, this has been manifested by a lack of research into
incorporated SMEs and a preference by institutional investors for listed companies or those
rated by rating agencies. It was suggested that search, information and transaction costs be
lowered, matching services facilitated and alternative equity exchanges developed. Banks
have provided the main source of SME debt financing. This is due to the comparative
advantage banks have in information collection derived from their on-going relationship with
SMEs and credit analysis. Competition between major banks and between major and regional
banks has been beneficial in terms of the provision of new products and services and an
increased rate of loan approval from 70 to 80 % a decade ago to 90% currently (FSIDP, 1996,
p. 145).
Amendments to Corporations Law to Improve SME Access to Equity Finance
Submissions received by the inquiry from Thinkbank and Austock Brokers suggested that
prospectus rules should be less onerous by:

Increasing the number of persons to whom an offer can be made without a prospectus
from 20 to 50;

Reducing the minimum amount of an excluded offer from $500,000 to $250,000;
2

Allowing security dealers to invest in SME securities without a prospectus both as agents
for clients and as principals; and

The ASX requirement of a minimum of 500 shareholders should be reduced.
Additionally, it was suggested that the Corporations Law amendment no longer requiring the
lodgement of financial reports to the former Australian Securities Commission (ASC) could
result in reduced visibility of small companies to the market (FSIDP, 1996, p. 146).
Cost of New Debt and Equity Capital to SMEs
The cost of new debt and equity is higher for SMEs, compared to other incorporated firms,
because of higher underwriting and prospectus costs due to their fixed cost nature. Table 1
below provides the results of a study commissioned by The National Investment Council on
the costs of capital raising on the ASX. It can be seen that the costs of smaller capital raisings
are higher than larger capital raisings for both new (or initial) issues and other (or subsequent)
issues. Additionally, the cost of new capital raisings for smaller firms is significantly higher
than subsequent offers due to the lack of information on the firm in the market place
(Marsden Jacob Associates, 1995, p. 37).
Table 1:
Capital Raising
Costs of Capital Raising on the ASX in 1994
Underwriting
Costs
%
% of Gross capital On Offer
Prospectus
Total Capital
Costs
Raising Costs
%
%
All Surveyed firms
Average
3.3
Over $10 million
2.7
$10 million and below
3.9
New Offers
Average
3.7
Over $10 million
3.3
$10 million and below
4.6
Other Offers
Average
2.8
Over $10 million
1.3
$10 million and below
3.5
Source:
Marsden Jacob Associates, 1995, p. 37.
3
3.3
2.6
3.9
6.6
5.3
7.8
4.0
3.3
4.7
7.7
6.6
9.3
2.3
0.9
2.7
5.1
2.2
6.2
With regard to debt financing, the Australian Chamber of Commerce submitted that twothirds of its respondent members indicated their loan financing arrangements were either
satisfactory or very satisfactory. However, a large proportion of respondents also indicated
that improvement in the area of interest rates, and fees and charges could be effected. It was
also submitted to the Inquiry that bankruptcy laws have the effect of discouraging debt and
equity financing of SMEs (FSIDP, 1996).
Potential for Securitisation of SME Debt
The Department of Industry, Science and Tourism expressed concern about the suitability of a
government backed securitisation scheme such as that in the US where the Federal
government scheme guarantees from 70 to 90% of SME loans.
However, it supported
consideration of a SME debt securitisation program which could involve, for example, the
issue of securities backed by receivables. Securitisation has the potential to reduce the cost of
debt and lead to better products (FSIDP, 1996, p. 148). However, in order for securitisation
to work, it was suggested that a system for rating securitisation issues would be needed in
order to establish a market for lenders. It is unclear whether such a scheme should be a
government or private sector initiative. The private sector would be unlikely to establish a
securitisation rating facility unless it was commercially viable.
Potential for Secondary Markets in SME Equity
A number of submissions from Austock Brokers and Australian Business Chamber canvassed
the idea of developing exchanges for SME equity securities. The form of these suggested
exchanges included:

An exempt stock exchange;

Re-establishing second boards;

A ‘start-ups’ stock exchange; and

Seed funding for the development of an information registry of venture and development
capital users and suppliers (FSIDP, 1996, p. 148).
At the end of the interim reporting phase of the Inquiry, the stated objectives for the final
reporting stage in regard to SME financing were:

‘the extent of information failures in the SME debt and equity markets;
4

impediments to the development of secondary markets in SME debt and equity securities;
and

the changes which may be required to the regulatory environment and to legislation to
facilitate the development of such markets’ (FSIDP, 1996, p. 149).
Wallis Report Findings and Recommendations
Demand Issues – Consumer Purchasing Behaviour
On the issue of price sensitivity, the Australian Chamber of Commerce and Industry (ACCI)
noted that SMEs appear to be quite price sensitive i.e. the greater the potential savings, the
more SMEs are price sensitive. In an ACCI survey of its members, it was found that 59.3%
of respondents had sought a different lender during the 3 years before the survey. The main
reason given for this was pricing i.e. fees and charges.
About 1% had not considered
changing their lender in the 3 year period (FSI, 1997, p. 438). The Inquiry also considered the
extent to which consumers bundle some of their financial products. However, the data was
not disaggregated at the SME level.
Supply Substitutes
In examining the supply side of SME financing, the Inquiry considered the sources of
competition for individual products and the marketing approaches of financial institutions.
1.
Sources of Competition
The Inquiry considered the sources of competition for a number of individual financial
products used by SMEs.
These products included transaction banking, overdrafts,
commercial bills, term loans, leasing and credit card merchant facilities. With the exception
of term loans, banks (major, regional and foreign) primarily provided the above mentioned
SME business products. Consumer products were provided by a broader range of institutions
comparatively. In terms of the potential for future non-bank providers of products, greater
scope for the provision of consumer products by non-bank institutions was reported compared
to SME products (FSI, 1997, p. 441, Figure 10.5).
Findings on the main type of financial institution used by small business in 1995 indicate that
there is little competition to banks in the provision of small business banking products:

78% used major banks;
5

20% used other banks; and

2% used other financial institutions (Yellow Pages, 1995 in FSI, 1997, p. 443, Figure
10.6).
It was also reported that the majority of SME owners use a single financial institution, with
just 15% having accounts with more than one financial institution (FSI, 1996, p. 442). This
evidence supports the contention that regional banks are the only source of competition to
major banks for small business loans.
The Inquiry also found that banks were the main source of non-startup finance for small
business with:

53% using a secured bank loan;

16% using personal funds;

3% finance company loan;

3% family or friends;

2% overdraft;

2% business profits; and

28% did not require additional financing (Yellow Pages, 1995 in FSI, 1997, p. 444, Figure
10.7).
2.
Marketing of Products
The Inquiry also considered the second supply-side issue of marketing practices of different
institutions in terms of product bundling. Convenience based bundling involves linking
accounts for the sake of convenience e.g. credit cards, transaction facilities and cheque
accounts. Rewards based bundling involves for example, the waiving of fees or offering
more competitive interest rates. Convenience based bundling is likely to apply to small
businesses that happen to have the products being bundled in this way. Rewards based
bundling of small business products was found in just two cases in a review of 127 brochures
from the major banks, 3 regional banks and 1 credit union in late 1996. The Inquiry also
suggested that institutions would continue to bundle some, but not all, products.
The Inquiry concludes that small business finance and other SME products are likely to be
factors included in the assessment of any future merger proposals due to the limited number
6
of non-bank product substitute suppliers.
Thus, recommendations on policies on the
assessment of mergers in the financial system focus on the retail sector, which includes
banking for households and SMEs. The wholesale sector is considered to be competitive and
mergers within the sector less controversial.
Geographic Market Considerations
In considering the geographic dispersion of the market, the Inquiry addressed the basic
question of ‘how important having a physical branch presence is to doing business in a
region’ (FSI, 1997, p. 447). With regard to attracting new business lending from small
business, it was recognised that a branch presence has traditionally been an important factor.
With at least one regional bank offering centralised processing of small business loan
applications, the importance of a branch presence may decline. It was suggested that while
the market for SME products is not yet national, it might become national in the future. With
new delivery mechanisms on the supply side in place (including electronic and Internet
banking), the uptake of these is likely to make the market more national and decrease small
business’s preference for dealing with suppliers with a physical presence.
Importance of Regional Banks
On the role of regional banks, the Inquiry reports the annual Bank of the Year awards run by
Personal Investment Magazine indicate that between 1991 and 1996, regional banks have
outperformed the majors for 5 of these years across a broad array of products, including
business accounts. Awards were based on interest rates on the main products as well as fees
and charges. In terms of overall (business and non business) customer satisfaction, credit
unions and building societies head both major and regional banks. However, perhaps the
most telling indicator is that of interest rate comparisons for business loans. Major banks had
the lowest rates, followed by building societies, regionals and credit unions (FSI, 1997, Figure
10.12, p. 458). To engender further competition between various providers and to be able to
take advantage of products offered by building societies and credit unions, small business
owners and consumers generally need to be aware that these institutions have similar
prudential regulations and thus are comparably safe, offer a wide range of products and are
nationally accessible (FSI, 1997, p. 458).
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Improving Market Information
The Campbell Report (1981) and subsequent inquiries into the availability and cost of capital
for SMEs have found SMEs have adequate access to debt financing. Financial deregulation
has enabled banks to provide a greater range of financial products and extend loans to more
small business clients (FSI, 1997, p. 628). However, equity capital has been more difficult to
obtain (p. 509). Possible reasons provided for this finding include:

Scale – a large proportion of SMEs seek growth finance of less than $500,000. The fixed
cost nature of searching, assessing and monitoring a loan or equity investment results in
disproportionately higher cost of funds.

Risk – SMEs are likely to be perceived as being more risky with startup and high growth
firms often lacking a track record.
One submission indicated that capital adequacy
requirements might actually understate the true risk of loans made to SMEs.

Reporting – SMEs
tend to not prepare good financial reporting information with
alternative information sources such as credit rating agencies and the ASX being
unavailable (FSI, 1997, p. 510).
The Inquiry considered the information needs of the financial markets with regard to SME
debt and equity financing requirements.
1.
Debt
Consistent with findings of earlier research, the Inquiry notes the heavy reliance of SMEs on
bank loans. The Inquiry found evidence that SMEs face higher loan costs and more onerous
loan conditions than larger businesses. These differences attributed, at least in part, to greater
risk, smaller scale of loan and demand for more flexible, and commensurately more expensive
financing such as bank overdraft. Although the Inquiry did not find evidence of any serious
deficiency in the SME debt markets, increased competition in the bank sector will help
improve the cost and flexibility of debt finance to SMEs (p. 511).
2.
Equity
The Inquiry noted that many SMEs were not suitable for external equity investment as they
lacked growth prospects, owner-mangers may not be willing to accept dilution of their control
(and possibly increased accountability that follows) and the personal affairs of the ownermanager(s) may not be separate from the business.
8
Although a number of submissions to the Inquiry suggested that superannuation fund
investment in SMEs be mandatory, the Inquiry specifically recommends against such a
requirement (Recommendation 97) due to the possible detrimental impact on capital market
efficiency. The Inquiry was also skeptical of calls for the development of an alternative
equity due to the lack of probity associated with some companies listed on the Second Boards
in Australia between 1984 and 1992, and the lack of liquidity and share price volatility
associated with low market capitalisation firms (FSI, 1997, p. 515). Finally, the Inquiry
supported steps taken by the ASC in 1997 to reduce the onerous requirements on prospectus
and advertising for matching services for investments up to $5 million.
3.
Improving Information on SMEs
The Inquiry recognised the importance of improved information on SMEs in suggesting that
‘data collection on SMEs should consider the needs of rating agencies and fund managers’
(Recommendation 98) p. 517. In achieving this, Government SME data collections should
balance reducing business costs through less onerous financial reporting imperatives on
SMEs, with ABS data collections. It also believes that potential private sector investors of
SMEs, such as fund managers and venture capitalists, have adequate commercial incentive to
develop necessary benchmarking and performance measurement data on SME investment
pools (p. 516).
DEVELOPMENTS SINCE THE WALLIS REPORT
Developments in SME financing since the Inquiry are reviewed below and include changes to
Corporations Law, the ASX’s Enterprise Market and the Newcastle Stock Exchange.
Changes to the Australian Corporations Law
Recent changes to the Australia Corporations Law (Corporations Law) have their genesis in
the Corporate Law Economic Reform Program (CLERP) announced by the Coalition
Treasurer in March 1997 (Treasury, 2000a). The overall aim of CLERP is to improve the
efficiency and competitiveness of the business environment. With regard to fundraising by
SMEs, consideration was given to reforming the prospectus requirements. This is consistent
with recommendations of the Inquiry which either directly or indirectly impact upon
fundraising (namely Recommendations 4, 9 and especially 10) (Treasury, 2000b).
9
At the time of the CLERP Proposal for Reform: Paper No.2 – Fundraising (CLERP, 1997), a
number of exemptions to the prospectus requirement in offering securities in SMEs, as in
other corporations existed:
1. Up to 20 investors may be offered securities in a 12 month (20 offers of securities in 12
months exception). Relief to this exemption was provided by Class Order [CO97/2329]
which did ‘not require other categories of excluded offers [e.g. public meetings] to be
counted towards the twenty’ (ASIC, 1998, p. 6); and
2. Investors investing at least $500,000 in an issue (sophisticated investor exemption)
(CLERP, 1997, p. 50). This ‘sophisticated investor’ exemption is based on a person’s
‘ability to obtain pertinent information from the issuer because of their bargaining power
and proximity [to the issuer]’ (CLERP, 1997, p. 59).
These exemptions also applied to introduction or matching services when used by issuers.
These services identify potential investors and issuers of securities by disseminating
information on investment opportunities by brochures, bulletin boards, internet and meetings
to the general public or subscribers of the service (ASIC 1998, p. 2).
The CLERP Proposal for Reform: Paper No.2 – Fundraising (1997) proposed that a
corporation (including SMEs) should:
1. Be able to raise up to $5 million using an Offer Information Statement (OIS) which would
explain why the funds are sought, disclose material information (including audited
accounts), warn investors of the risk of investing without a prospectus and the
conventional due diligence inquiries, and recommending independent professional advice
be sought. With an OIS, liability of the promoters would be modified in accordance with
the reduced disclosure requirements (CLERP, 1997, p. 57). This proposed modification
provided flexibility by allowing use of the single OIS to raise several tranches of funds
provided the total raised was no more than $500,000;
10
2. Not be required to prepare a prospectus or OIS ‘if no more than 20 issues of securities are
made in a rolling 12 month period, based on personal offers of those securities, and no
more than $2 million is to be raised’ (CLERP, 1997, p. 57).
This proposed exemption extended the preceding exemption by replacing 20 personal
offers in 12 months with actual issues to 20 investors. This would help SMEs attain their
funding target as 20 offers could be rejected.
Additionally, administration of the
exemption would be simplified as it is easier to determine when an issue is made due to
supporting documentation, as compared with an offer (Corporate Law Economic Reform
Program, 1998); and
3. Be permitted to issue any amount of securities without a prospectus to persons who either:

Invest at least $500,000 and who may be regarded as a sophisticated investor (as
discussed above); or

Have net assets of $2.5 million or gross income for the last two financial years of
$250,000 or more (CLERP, 1997, p. 59).
To qualify as a sophisticated investor, an investor needs a certificate, dated in the last 6
months, from a ‘qualified accountant’ certifying an investor’s asset or income position.
Full members of the ASCPA, the ICA and the National Institute of Accountants are
recognised as ‘qualified accountants’ (Cockburn, 2000). The extension of the original
$500,000 minimum exemption previously discussed is aimed at overcoming problems of
when less than $500,000 is sought or where investors are unwilling to invest the relatively
large sum of $500,000 (Corporate Law Economic Reform Bill, 1998).
These developments can be found in the Corporations Law subsections:

709(4) - Offer Information Statement;

708(1) - small scale offerings (20 issues or sales in 12 months). Subsection 708(6)
modifies this provision for Managed Investment Schemes by disregarding issues and sales
made under certain conditions; and

708(8) - sophisticated investors.
11
In addition to these prospectus relief exemptions relating specifically to SMEs, the ACL
continues to offer prospectus relief of fundraising provisions to business activities that SMEs
may possibly undertake. These include ‘small scale’ horse racing syndicates and breeding
schemes, film investment schemes, property trusts and property syndicates (ASIC 2000).
Applications for relief to new fundraising provisions may be made under Policy Statement 51
– Applications for Relief [PS 51]. These fundraising provisions may be modified as the
Australian Security and Investment Commission (ASIC) continues to review its policies in
regard to fundraising (Cockburn, 2000).
ASX Prospectus Requirement Changes - Enterprise Market
The Enterprise Market, commonly referred to as e.m, commenced in March 1998 and is an
internet-based capital market for non-listed entities needing to raise capital. The types of
entities involved include unlisted public company, proprietary company, partnership, joint
venture, trust or cooperative and in certain circumstance a proprietary subsidiary of a publicly
listed parent company (ASX, 1999a).
The types of securities that may be issued by
businesses entering Enterprise Market include shares, options, debentures, convertible notes
and convertible preference shares (ASX, 2000).
It has been estimated that some 10,000 such businesses were seeking equity financing to
commercialise an idea or to grow their business in 1998/99 (ASX, 1999g & 1999h). By May
1999 there were over 250 subscribers to the online service (Stewart, 1999) and $21 million
had been raised by businesses through the Enterprise Market as at the 31 July 1999 (ASX,
1999i).
The Enterprise Market is a useful intermediate step towards a business owner
attaining ultimate Main Board listing on the ASX. In particular, it has been suggested by
leading I.T incubator centres that the Enterprise Market has an important role to play in the
development of high technology industry in Australia (ASX, 1999g). Developments in the
Enterprise Market since implementation include the Commonwealth Bank bringing bank
customers to the Enterprise Market in order to raise equity capital in place of $15 million of
debt currently held with the bank (ASX, 1999i). Additionally, the Tasmanian and NSW
governments have agreed to strategic joint ventures with Enterprise Market to act as advisers
for SMEs to access the Enterprise Market (ASX, 1999i).
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Advantages for Capital Raisers
Raising capital through the Enterprise Market provides a general exemption from the onerous
prospectus requirements of the ACL.
In this way, the Enterprise Market facilitates the
detailed description of a business to a potentially wide audience of investors without the need
for a prospectus which can cost in the range from $200,000 to over $500,000 (ASX, 1999j).
In order for a prospectus not to be required with such a capital raising activity, the information
presented in the Enterprise Market must ‘not constitute an offer, contain specific pricing
information of securities or include an Application Form for shares’ (ASX, 1999a, p. 1). The
need to prepare a prospectus may also arise once Enterprise Market is no longer in use and
parties commence negotiating an investment, notwithstanding the ACL prospectus
exemptions previously described.
The detailed information provided by Enterprise Market can be entered by a promoter of the
business, or through the assistance of an advisor. The Enterprise Market provides examples
of the information required in order to prepare an entry and maximise the likelihood of
securing financial backers/investors.
The type of information provided includes basic
business profile, current situation, financial summary and sponsor certificate or endorsement
(ASX, 1999b).
The sponsor provides validation of some of the information in the documents submitted to the
Enterprise Market. A list of registered Sponsors is maintained by the Enterprise Market and
in order to be listed the sponsor needs to have current accreditation with the relevant
professional body or industry association. Examples of the type of information that may be
sponsored include historic and current business accounts, business plans, testimonials,
intellectual property, and management skills and competencies (ASX, 2000). The sponsor
certificate may be the business’s accountants and/ or auditors who attest to the financial
statements and that their preparation is consistent with accounting principles and comment on
the audit results of the last two or three years. The Sponsor’s endorsement is in the form of a
document which is attached to the other documents of the business in the Enterprise Market.
The identity of the sponsor and their opinion on the information provided on the business is
attached and cannot be altered. Should the Sponsor have reason to believe the business’ entry
contains misleading information, the endorsement can be withdrawn and the entry is deactivated and inaccessible to investors until the problem is resolved between the business, the
sponsors and the ASX (ASX, 1999d). The Enterprise Market provides warnings of the risk
13
associated with this market and the sponsor is not likely to be liable as long as it can be shown
reasonable steps were taken to ascertain the endorsement was valid (ASX, 1999d).
In order to satisfactorily provide the above information to attract an investor, guidelines on
making the business ‘investor ready’ or ‘investment ready’ are outlined in ASX (1999a).
These two states of readiness are cumulative. Basically, investor readiness generally relates
to smaller business or young businesses with growth potential and includes the requirement
that the owner has separated personal affairs from those of their business (ASX, 1999a).
‘Investment ready’ businesses may be described as those seeking reasonable amounts of
capital and are in a position to use the funds sought ‘immediately’ in order to grow the
business.
The firm may state the preferred investor involvement e.g. part or full time executive,
director, executive director or mentor (ASX, 1999b). In this way businesses are able to attract
the pecuniary and non-pecuniary participation of investors, who in the latter case, act as
mentors to the business (Stewart, 1999). Additionally, the firm provides an indication of the
total amount sought, the minimum investment and the preferred type of financing (i.e. debt or
equity).
The Enterprise Market allows the business identities to remain confidential, in which case an
interested investor or advisor can be put in touch with a nominated advisor, who can
investigate the bona fides of the investor before direct contact with the business owners is
established (ASX, 1999a).
Capital raisers can gain exposure on the Enterprise Market for 6 months for as little as $1,000
for $200,000 capital raising. For amounts above this up to $500,000 the cost is $2,000. Up to
$1 million $3,000 and $5,000 for over $1 million upto $5 million (ASX, 1999e). A change in
the information and a further 6 months exposure can be purchased for 10% of the initial fee
and subsequent to this for 25% of the original fee (ASX, 1999e). As the market grows and
advisors are able to use pro forma documents rather than prepare one-off documentation, fees
are likely to become even more cost effective (ASX, 1999h).
Should an investor wish to sell-down or dispose of their entire investment, the Enterprise
Market can also assist, unlike typical matching services. The business need only list on the
14
Enterprise Market again to sell the investment, rather than raise new capital. While this does
not provide the liquidity of the Main Board, it does provide a mechanism for contact with
potential investors.
Benefits for Investors
The Enterprise Market helps overcome the problem of investors in non-listed companies of
finding businesses matching their area of interest and/ or expertise (ASX, 1999c). And
although investment in non-listed businesses is relatively riskier due to the absence of listing
requirements of the ASX Main Board stocks, returns can be commensurately higher and
investors are able to personally involve themselves in the business management (ASX,
1999c).
Annual subscription to the Enterprise Market costs $100 and can be made via the internet site
http://www.asx.com.au/e.m or by forwarding a signed General Subscriber or Advisor
contract, providing a profile of the prospective investor’s interests (ASX, 1999e). Prospective
investors may browse the SME entries in the Enterprise Market of their own accord or the
Enterprise Market may send an automatic message alert via email within 1 working day of a
matching investor profile and a new or changed business registration.
Once a potential investor is identified, the Enterprise Market provides the necessary
information on the company about operations and activities, possibly including accounts,
management details, business plan, market research, customer testimonials, management
assessments and geographical data (ASX, 1999, p. 1). This is equivalent to the rather onerous
‘due diligence’ process that otherwise may have to be undertaken and which could possible
scare potential investors away. While the ASX does not validate or guarantee the information
supplied by a business, the endorsement of a sponsor such as accountant, auditor, lawyers,
stockbroker or investment advisors may be arranged by the business to ensure the information
provided has been scrutinized by a reputable professional (ASX, 1999c). The ASX provides
an Enterprise Market newsletter that contains information for investors (and capital raisers)
about recent developments in the Enterprise Market and successful matches.
The Role of Advisors
The ASX does not provide services directly to SMEs considering the Enterprise Market. It
relies on and promotes the services of advisors listed on its public website for both capital
15
raisers and investors. An advisor’s function is to assist a business to prepare for raising
capital, and may be an individual or firm that has signed an Enterprise Market Advisor
Agreement.
Accountants, as the most widely used source of advice and assistance by SMEs and with welldeveloped professional networks (ASX, 1999j), can contribute and benefit greatly through
their involvement in the Enterprise Market. Through their contribution in the preparation and
audit of accounts, accountants are ideally placed to assist less experienced and skilled
business owners/promoters with: documentation for entry into the Enterprise Market;
preparation of a business plan; verifying the accuracy of some of the information provided in
a sponsoring role; realistic valuation of a business prior to the equity raising; and separation
of owner’s personal affairs from that of the business (ASX, 2000, p. 18).
These services can be provided cost-effectively as the volume of such activities increase with
Enterprise Market activity and accountants are in a position of being aware and able to access
government programs that may exist to subsidise their fees (ASX, 1999j). Advisors are
expected to charge a fee, which may be taken in part as equity in the business. Advisers can
also benefit from the exposure they receive through involvement in the Enterprise Market
public web-site both as general Enterprise Market Community Members as well as Advisors
to registered SMEs (ASX, 2000). Such Advisors are likely to be the first point of contact by
interested investors.
Advisors may also act on behalf of investors (buyers), along with other groups such as
stockbrokers, accountants, lawyers, financial planners and merchant banks, by introducing
clients to investment opportunities in non-listed businesses on the Enterprise Market.
However, care should be taken where potential conflict of interest may arise in acting as
advisor to both businesses in Enterprise Market and investing clients.
Under the prospectus exemptions applicable to the Enterprise Market, advisors should
recognise they have legal responsibilities under the Corporations Law:
1. Ensuring the prospective investor understands the importance of gathering their own
information on the investment, possibly from an independent professional advisor; and
2. The prospective investor is aware of the inherent risks of the investment and that the entire
investment could be lost.
16
3. Avoid fraudulent, misleading or deceptive practices and defamation (ASX, 1999j).
Newcastle Stock Exchange
The Stock Exchange of Newcastle Limited (NSX) was reactivated on 21 March 2000 after a
10 years of inactivity (Williams, 2000). Approval for recommencement of operations was
received in February 2000 after three years of effort in obtaining regulatory approval,
negotiating a strategic alliance with the ASX and drafting listing business rules. Trading on
the NSX is through the Newcastle Electronic Trading System (NETS) which operates under
license from the ASX and is based on its successful Stock Exchange Automated Trading
System (SEATS) trading platform (NSX, 2000e). These transactions are efficiently and
securely settled electronically on CHESS (Clearing House Electronic Sub-register System).
‘The principal function of the Exchange is to provide a fair, orderly and efficient market from
the trading of securities issued by issuers which have either a primary or secondary listing on
the Exchange’ (NSX, 2000a, rule 1.2). Listing Rules ‘comprise both requirements which
have to be met before securities may be granted a listing on the exchange (such as the
minimum requirements for listing, application procedure and fees payable, the contents of any
prospectus published by the issuer and the requirement for a new applicant to be sponsored)
and continuing obligations with which an issuer must comply once a listing has been granted
(even if its listing is suspended) and also the powers of the Exchange with regard to the
suspension and/or cancellation of a listing’ (NSX, 2000a, Rule 1.2).
The NSX aids fundraising by SMEs due to a small minimum issue quantity and scope to
avoid the preparation of a prospectus. Both equity and debt security issues can be listed on
the NSX by way of an offer to the public to subscribe to new securities (primary market) and
an offer to the public of securities already issued or agreed to be subscribed (secondary
market), by placement, rights issue, bonus issue and the exercise of options, warrants or rights
(NSX, 2000a, rules 2.11 – 2.17). This applies to both new applicants seeking a listing as well
as listed issuers (i.e. issuers with a security already listed in the NSX). In the former case, the
new applicant for listing must be sponsored by a Participating Organisation registered on the
Exchange’s approved list of sponsors. The responsibilities of the sponsor include providing
guidance and advice on the application of the Listing Rules, completion and lodgement of
necessary documentation to the NSX and maintaining communication with the NSX
17
throughout the application process (NSX, 2000a, rule 2.2). In the latter case, a listed issuer
must appoint a nominated advisor who may be on the NSX’s list of approved nominate
advisors, its sponsor or with NSX consent, two members of the issuer’s senior management
(NSX, 2000a, rule 2.4).
In order to attain a listing of equity or debt securities, an SME issuer must be a corporation
and both the issuer and its business must be considered suitable for a listing by the NSX. In
the case of a new applicant, it ‘must have an adequate track record [at least two years unless
the offer is fully underwritten] under substantially the same management which must be of
known character and integrity’ (NSX, 2000b, rule 3.6; and NSX, 2000c, rule 3.6). In the case
of equity issues:
1. A minimum of 25% of securities must be held by the public at all times, with a minimum
of 50 shareholders (NSX, 2000b, rule 3.9); and
2. A new applicant must have an expected minimum market capitalisation for all securities
of $500,000 (NSX, 2000b, rule 3.10).
In the case of debt issues:
1. There must be a minimum of 25 security holders at all times from the public (NSX,
2000c, rule 3.9); and
2. If the issuer does not have equity listed on the NSX, it must have a minimum $2 million in
net assets and a minimum nominal amount for each class of debt securities seeking listing
of $500,000, unless otherwise deemed by the NSX (NSX, 2000c, rule 3.10).
Applications for listing of either equity or debt securities requires the preparation of a
prospectus unless:

The applicant has not raised any capital in the last 3 months and does not expect to raise
any capital in the next 3 months; and

The security ownership spread complies with Rule 3.9; or

In the case of a listed issuer, a prospectus is not required to be lodged with ASIC in
accordance with the ACL (NSX, 2000b & 2000c, Rules 4.4(2)).
In lieu of a prospectus, the issuer is required to prepare an information memorandum (also
called a letter of application) containing information including: the securities to be issued;
share capital and ownership; business history and nature, earnings and balance sheet history
18
(last three years if possible); child entities; dividend record in the case of issued equity
securities; properties of applicant and child entities; litigation history for the past 5 years;
management; and sponsors and banks (NSX, 2000b & 2000c).
OVERVIEW
The developments in SME financing described above have brought relief to SMEs attempting
to raise finance in Australia.
Firstly, the further relaxation of onerous prospectus
requirements has been brought about by changes to the Corporations Law. Furthermore, the
establishment of the ASX’s Enterprise Market and the NSX has facilitated the process of
matching issuers and investors, thus facilitating the issue and subsequent sale of securities in
the primary and secondary markets respectively. Additionally, fund raising has been assisted
through small minimum issue quantities. Other advantages for SMEs and their owners
include the ability to fund business growth without the traditional need for security, an
intermediate step to public listing, improved financial reporting and control, improved
financial structure stability and the associated benefits on a firm’s credit rating, access to
management expertise, encouraging directors to focus on strategic direction and the ability for
owners to realise wealth tied up in the business (Raby, 2000).
These initiatives serve to only further the contribution accountants can make to SMEs
attempting to raise finance through the advisor and sponsor roles that have been created as
well as the certification of ‘sophisticated investor’ asset or income positions.
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