Plenty has been written about Guvera’s failed attempt to raise funds and list on the ASX. By now the basic facts are well known; the music streaming start-up’s challenging business model, the lofty valuation, heavy debt burden – which all led to ASX exercising their discretion to politely decline Guvera’s listing application.
For many, ASX’s unprecedented exercise of that discretion was surprising and almost “ASIC-like” in its application, but the question is whether Guvera should have seen it coming. Here are five reasons why I think the music streaming company should have.
1. I can feel it coming in the air tonight (Phil Collins: 1981)
There is no doubt that both ASIC and ASX have been concerned over the number of internet / tech start-ups with limited (or no) revenue seeking to hit the ASX market over the last couple of years. This is particularly so where those companies are listing via the back-door (by way of a reverse takeover, and in many cases by selling their business to a mining exploration company), but increasingly also where these start-ups are listing via traditional IPOs. Just this year, ASIC has issued stop orders on a variety of companies seeking to list including Afterpay Holdings, Bitcoin Group, Visual Amplifiers, DomaCom, 9 Spokes, Reliance Worldwide – to name but a few.
The point here is that market participants were on notice - the spotlight was well and truly on these types of IPOs – and given some of the factors relating to Guvera’s listing noted above, the level of regulatory interest should not have come as any real surprise.
2. 'Cause we are living in a material world and I am a material girl (Madonna: 1984)
True – but this view of the world would argue that, provided a prospectus contains adequate disclosure of all of the risks (even if they are significant or potentially unsurmountable), the market should be left to decide whether or not to invest. There is, of course, a significant amount of money to be made (and lost) investing in high risk companies – so why should we stop this practice? It is a material world after all.
But there has to be limits - and that is what we learn from the Guvera case. In fact, by Guvera even getting to the stage where ASX was forced to make a call on whether to admit it to the market indicates that there was at least tacit approval by ASIC that they were happy with the level of disclosure made by Guvera in its (albeit replacement) prospectus.
Somewhat sensibly, ASX is saying that even if your disclosure is perfect, to protect the market, they won’t allow a company to list that may be doomed to fail within a short period.
3. Islands in the stream, that is what we are (Bee Gees: 1979)
Here we need to consider the nature of Guvera’s streaming business.
Online music streaming is not new and it is certainly not only the domain of start-ups. As we all know, the opposite is almost true – Apple Music, Spotify, Google Play Music, iHeartRadio, Pandora and Rhapsody amongst a variety of others – are all currently competing in a variety of markets. Competition is tough, and some of these companies are amongst the biggest in the world – remember that Spotify boasts some 30 million paying subscribers, but still posts losses. So part of ASX’s thinking may be an assessment of whether, in light of the competition in the sector, Guvera is likely to be able to succeed. Without the deep pockets of Apple or Google, and without the runs on the board of Spotify, presumably ASX’s view was that success was unlikely.
4. Don't pay the ferryman; Don't even fix a price (Chris de Burgh: 1982)
Valuation. This was always going to be a problem.
Guvera was seeking to list on a valuation of A$1.3 billion, after seeking to raise a relatively paltry A$40 to 80-odd million - and this was against previous year’s losses of A$81 million. The problem was the valuation (or at least the expectation of a valuation) had been “fixed” by a series of pre-IPO fundraisings at ever increasing prices. In fact, the company had raised over A$190 million in capital over the past six years and had amassed more than 1,000 shareholders in the process. That is an impressive feat for any company – let alone one that had very modest revenue and significant losses.
The question for ASX was therefore – was the valuation reasonably set by the market, or was it being artificially enhanced by the legacy of multiple capital raisings which had created a valuation expectation? Objectively, this might be seen to be a tough position for ASX to take. Ultimately, all valuations on listing are artificially set by the promoters, but presumably the sheer size of the disconnect between the valuation and the relevant business metrics (revenue, profit, etc.) meant that ASX had to draw the line.
5. Blame it on the rain (Milli Vanilli: 1989)
Guvera see the reasons for the ASX decision differently, as you would imagine. A promoter for the company labelled the ASX’s decision “small-minded” and reflected a “lack of knowledge” around tech companies in this country. That is probably an understandable reaction, but I disagree.
It is easy to blame the market or blame the regulator, but as can be seen from the analysis above, not all floats are created equally. Indeed, our firm has recently floated a fintech start-up on ASX – ChimpChange Limited. That raising was fully underwritten, successfully completed (without ASIC intervention) and managed to avoid the pitfalls identified above.
I’d argue that the ASX and the Australian market is the perfect platform for a small, tech start-up. There are lots of success stories. The lesson is to do your homework and learn the (tough) lessons of those that have come before, like Guvera.
For more information or discussion, please contact HopgoodGanim Lawyers' Corporate advisory and governance team.
Title credit: Travis (1999)