Tim Boreham, The Australian, May 23, 2016
AFR Business Summit

Atlassian co-founder Mike Cannon Brookes. Picture: David Geraghty

Virginia-based drone detection outfit Droneshield is the latest US entity to chance the ASX back door listing route, with a $7 million raising in progress. It’s a well-worn path given Droneshield’s Virginian neighbour and fellow counter-drone specialist Department 13(D13, 10c) debuted in January after a $4m whip-around.

Other Silicon Valley tech emigrants are the hot-but-now-not recruitment play 1-Page(1PG, 69c) and social media content acquirer ShareRoot(SRO, 3.9c).

Criterion gathers there’s no shortage of ongoing interest in heading to the Antipodes on the part of the boffins and the spruikers. But there’s a ‘‘cloud’’ over the sector and we’re not talking about software-as-a-service: the ASX’s proposals to raise the bar on the size of putative listings.

In its current consultative process, hopefully the ASX taps the global views of offshore enterprises that have braved a listing.

Predictably, they caution against quashing the entrepreneurial spirits of the newcomers, but concur more can be done to winnow the legitimate players from the chancers.

“We have seen the effects over the last 12 months of what happens when a sector catches fire on the ASX,’’ says ShareRoot chief Noah Abelson.

He contends that of the 100 or so new tech listings, “only a small percentage are legitimate companies with a road map, model and vision to get there’’.

From your columnist’s view, the problem is that they all claim to be within this small percentage. But we can’t argue with Abelson’s assertion that if the new rules are too onerous, “a lot of the early stage companies that have the potential to be large high growth entities will never get off the ground’’.

Having done business with the Singapore, Frankfurt and Nasdaq exchanges, US entrepreneur Dion Sullivan reckons the ASX provides the right mix of rigour and accessibility.

Sullivan’s listed digital entertainment play Megastar Millionaire (MSM, 12c), “a cross between Eurovision Song Contest and America’s Got Talent”, listed in January after raising $7m.

“The ASX is a perfect vehicle for small emerging companies,’’ Sullivan says. “It is a top 10 exchange, it’s heavily regulated and stable and with good volumes.’’

Having said that, Sullivan is receptive to some regulatory nipping and tucking, arguing our regulators have become bogged down dealing with sub-scale wannabe IPO. “I think a $5m minimum raise is legitimate,’’ he says. “Anything below that would be considered to be angel investing.’’

But a vaunted raising of the $20m minimum market cap (from the current $10m) looks too harsh: “I would go to a $5m minimum raise on a $15m valuation,’’ he says. “A one-to-three ratio makes more sense.’’

Droneshield’s motivation to list here was not so much about the cheaper cost, but was integral to locating the business to Sydney. “Australia has good talent with the right engineering skills,’’ CEO James Walker says. “You don’t have the problem with Silicon Valley wages and staff turnover issues.’’ He reckons the equivalent boffin is 30-40 per cent cheaper here than in the US.

Walker’s not a fan of the bourse’s proposed tightening — especially the measure to increase a minimum individual subscription from $2000 to $5000.

“I’m a bit disappointed,’’ he says. “The prospectus and disclosure laws are already fairly detailed. People are well informed and not treating them as smart investors would be counter-productive.’’

As with Sullivan, Vancouver-based Jason Tomkinson has global experience with fundraising, but opted for here after Hong Kong investors suggested the company take a Captain Cook at the local market.

Tomkinson heads the cybersecurity play Zyber(ZYB, 2.2c), which had to pedal hard to raise its minimum required $3m after the tech sector got the jitters in late 2015. Zyber eventually relisted in February through the shell of Dourado Resources.

Tomkinson says the Vancouver exchange has already seen the effect of a rule-tightening regimen, followed by a relaxation that “sucked the last remnants of capital out of a very fatigued capital base.’’

He says: “the more we looked the more we saw you guys were doing lots of things right which we weren’t in Vancouver, quite frankly.’’

One tick for us is not succumbing to the allure of a separate board, which have a habit of becoming irrelevant, for the minnows.

Sullivan suggests ASX and ASIC do more due diligence upfront “to separate the contenders from the pretenders’’ and expedite the listing process.

He also counsels them to invest in some digital expertise “to ask the harder questions of American companies trying to do what we did’’.

Not surprisingly, there’s little support for the views of Atlassian co-founder Mike Cannon Brookes, who told our colleague David Swan that backdoor listings were a “horrible idea” because they were a raising of last resort.

An Australian provider of construction industry software, Atlassian turned the tables by listing on the Nasdaq after raising a chunky $US430m.

Zyber’s Tomkinson says while his company managed to raise $3m through the back door, the process was harder than envisaged.

A key lesson was handling the expectations of the ‘‘acquired’’ shell shareholders, who expected things to happen faster than management could deliver. “Part of the challenge of doing a backdoor listing is you are buying a set of investors,’’ he says. While Tomkinson discovered local investors demand a higher level of communication and disclosure, “frankly, I would do it again.’’

Meanwhile, Megastar’s Sullivan found dealing with the ASX in Perth was “notoriously difficult” but ultimately the process was easy enough.

Undeterred by the road humps along the way, he’s pondering another reverse takeover after the ASX’s new rules become clearer.

The global tech brigade is praying the new world order will raise the standard without stymieing innovation.

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not own any of the stocks mentioned.