Navigating unit pricing in listed fund capital raisings

The Corporations Act and fund constitutions impose unit pricing restrictions on fund capital raisings that do not generally apply to listed company capital raisings. These restrictions generally peg the capital raise pricing to market price or net asset value. As issuers will often look to raise capital by issuing units at a discount to net asset value or the market price, these restrictions need to be considered by issuers in the context of particular capital raising structures (with different pricing discretions applying to those different structures).

As is the case with any listed securities, there are various factors that influence whether an unlisted fund will trade at a discount or premium to its net asset value, including:

• valuation cycles (particularly where the market is discounting certain asset classes before formal valuations are undertaken);
• the market perception of the fund’s future earnings potential and distributions;
• perceptions of management and likely future performance; and
• investor supply and demand fluctuations.

While these factors are common across listed stocks more generally, the nature of listed funds as registered schemes and resulting valuation requirements mean that the difference between the net asset value and trading price can often be more readily determined by investors.

The general rule under section 601GA(1)(a) of the Corporations Act is that the constitution of a registered scheme must make adequate provision for the consideration that is to be paid to acquire an interest in the scheme. Given the potential uncertainty around the concept and given it could vary for different raise structures and fund types, ASIC has granted relief permitting certain issuer discretions in relation to unit pricing. This relief is set out in the ASIC Corporations (Discretions for Setting the Issue Price and Withdrawal Price for Interests in Managed Investment Schemes) Instrument 2023/693 (Instrument) for both unlisted and listed registered schemes (with different regulations applying to each).

For a responsible entity (RE) to be able to rely on the Instrument, the constitution of the fund must:

• include provisions reflecting the content of the Instrument; or
• incorporate the content of the Instrument by referring to it (whether expressly, or by general reference to ASIC relief).

Under the Instrument, a listed fund constitution does not have to make ‘adequate provision’ for the amount to be paid for units in the fund to the extent that it contains provisions which will enable the RE to set the price under one of the following capital raise structures (among other circumstances):

• rights issues - where the RE offers interests or where interests are to be issued under an offer to existing members in proportion to the value of each member’s interest;
• distribution reinvestment plans (DRPs) - where units are issued under DRPs;
• institutional placements - for institutional placements permitted under the ASX Listing Rules; and
• securities purchase plans (SPPs) - where units are issued to existing investors under a securities purchase plan.

Additional flexibility to exercise unit pricing discretions outside of a capital raise context are also permitted by the Instrument, such as including where the RE applies differential fee arrangements permitted under the ASIC Corporations (Registered Schemes - Differential Fees) Instrument, and for technical relief for different components of stapled securities.

Each of the above raises is separately regulated by the ASX Listing Rules and/or other ASIC instruments, and so other protections exist for investors (for example, dollar value participation for SPPs and placement capacity limitations for rights issues and institutional placements). For additional information on some of these conditions, see our article Raising capital without a PDS: what listed funds need to know. Attaching pricing discretion to these capital raises means that even if significant discounts were proposed by the issuer or lead managers, the existing regulation would limit the extent to which they could be dilutive to existing investors without prior approval being obtained.

For the above capital raises, the constitution may provide a formula or method to determine the unit price that gives the RE discretion to determine:

• a matter affecting the value of a factor included in the formula;
• a matter that is an aspect of the method; and
• the amount of an adjustment to the amount determined by the formula.

For ASX listed funds, that discretion must be exercised:

• based on the market price of the interests at or around the time of issue;
• consistent with ordinary commercial practice and must produce a price or value that is reasonably current at the time of issue;
• only if it is reasonable to do so; and
• in accordance with the RE’s current unit pricing policy or otherwise documented in a written explanation of how the discretion was exercised and why it was reasonable.

In addition, where discretionary pricing is available to the RE, the fund PDS must include statements to the effect that copies of documents relating to discretions about pricing are available at no charge.