Following on after the ASX’s latest compliance update, listed companies eyeing cryptocurrency treasury strategies (CTS) face a high-stake test in balancing substance over spin. Locate Technologies, the last-mile delivery start-up, joined a small number of ASX-listed companies pursuing bitcoin treasury strategies this year. Steve Orenstein, Locate’s chief executive officer, admitted it was divisive, but stated to the Sydney Morning Herald:
“The risk is actually in holding fiat currency today… If you really understand that, then you aren’t concerned about the volatility in bitcoin.”
Locate’s bold move seemingly paid off as bitcoin hit a record high shortly after their investment, and Locate’s share price more than doubled in the six weeks since their announcement.
However, in light of the ASX’s recent Compliance Update, crypto treasury strategies will face closer scrutiny and may trigger requirements for shareholder votes, readmission hurdles or halts in trading. The ASX has warned companies dipping into crypto-assets could alter the risk profile of their companies, requiring new disclosures.
CTS can quickly become a regulatory minefield. We summarise some of the key considerations to help navigate the tightrope.
1. Significant changes to the company
A CTS may involve a significant change in either the nature or scale of the company’s activities or a change in the company’s main undertaking. ASX’s rule of thumb for significant changes are:
- If CTS affects more than 25% of assets, revenue, EBITDA or profit, it may be considered a significant change to the company’s scale.
- If the CTS becomes more than half of the company’s business, it may be considered a change in the entity’s main undertaking.
Additionally, under ASX Listing Rule 7.1, the company cannot issue more than 15% of its capital in 12 months without shareholder approval. Capital raising to fund CTS may trigger this rule.
Companies exploring a CTS will need to consider:
- Does the CTS represent a major shift in what the company does (e.g. switching from trading in financial products to strategic long-term investments in a particular sector)?
- Is the scale of the CTS large enough to materially affect the company’s operations or financials?
2. Maintaining a suitable structure
ASX expects listed entities to maintain appropriate structure and operations, in line with the ASX listing principles.
ASX has indicated that a CTS can have regulatory pitfalls, such as:
- If a company’s principal activity is investing in crypto-assets, this is likely to raise issues with structure and operations under ASX Listing Rule 12.5.
- A company cannot have 50% or more of its assets in a form readily convertible to cash. Crypto-assets may be treated as cash-equivalents, though ASX has not made a definitive ruling.
If breached, ASX may suspend trading until assets are reinvested or applied to business operations.
ASIC has made clear, through INFO230, that the admissibility of entities offering crypto-asset exposure hinges on meeting standards for permissible assets, pricing and disclosure, aligning them with the safeguards applied to exchange traded products.
3. Meet disclosure obligations
Any information likely to affect the share price must be disclosed to ASX immediately, such as a material acquisition or disposal, under ASX Listing Rule 3.1. ASX guidance states that information is market sensitive if it would influence persons who invest in securities to either acquire or dispose of the company’s shares. ASX expects companies to monitor the value of their crypto holdings and disclose any changes, and will closely review misleading CTS ramping announcements, especially where speculative crypto purchases are mischaracterised as treasury strategy.
4. Substance over form
Broadly, ASX takes a view to assessing CTS with a ‘substance over form’ approach. Even if the CTS is labelled as a “treasury strategy”, it will look at the real impact regardless of how the strategy is designed.
An alternative structure to holding crypto-assets, as mentioned by ASIC in INFO225, is the Listed Investment Company (LIC) model. Rather than holding its own Australian Financial Service Licence (AFSL), an LIC typically appoints an external investment manager who holds an AFSL. Where the LIC provides investors with a material exposure to crypto-assets, regulators expect it to follow the same standards as a registered managed investment scheme.
The latest guidance and increasing in interest in CTS in Australia and other markets signals that listed companies are again exploring putting crypto-assets on the balance sheet. Invariably, this will also mean stablecoins in years ahead. Any CTS will require robust risk controls and adherence to listing and regulatory requirements. The ASX’s recent guidance makes it clear that CTS remains a high-risk approach to capital diversification that requires careful management, clear disclosure and ongoing monitoring of compliance obligations.
