Scalare Partners backdoor listing on the ASX hits a snag

Scalare is targeting a reverse takeover (RTO) of the defunct listed shell company Candy Club Holdings in a bid to raise funds for new and follow-up investments, as well as an expansion of its Tech Ready Women initiative both in Australia and the USA.

The company is unlike most funds in that more than half its revenue currently comes from its support services division, comprising a mix of activities including advisory work, founder problem-solving sprints, the Australian Technologies Competition, and Tech Ready Women which is aimed at helping non-tech female founders.

Scalare's $10 million-plus portfolio includes the likes of retail-tech Brauz and regulatory-tech scale-up FrankieOne, with 27 investments made since founding in 2020.

But the Australian Securities and Investments Commission (ASIC) wants more information on the underlying investments in the portfolio, "including how each of the underlying investments will be valued and how a dollar value will be attributed to qualitative valuation measures".

In response to this and other concerns, ASIC has placed an interim stop order on the prospectus for the offer which in its draft form was planned for opening on 29 August.

A spokesperson for Scalare has confirmed the offer still hasn't opened but is due to open shortly, but a shareholder vote on the matter will continue as planned on 23 September. 

ASIC wants to better understand Scalare’s proposed expansion into the United States, including "information regarding potential risks of the proposed expansion and whether Candy Club needed to raise further capital in order to fund that expansion".

The interim stop order prevent Candy Club from offering or issuing any securities in relation to the prospectus, while a target market determination (TMD) interim stop order prevents it from dealing with interests in Candy Club, giving a prospectus or providing financial advice to retail clients under the existing TMD.

The orders are valid for 21 days unless revoked earlier.

ASIC noted that Candy Club had not prepared a TMD for the offer, and even after it provided a TMD for review the regulator believed it was deficient and did not comply with Part 7.8A of the Corporations Act, which relates to design and distribution obligations (DDO).

The corporate watchdog made the interim stop order to protect retail investors from potentially investing in an offer that may not be suitable for their financial objectives, situation or needs.

"ASIC was concerned that it would not be reasonable to conclude that, if the product were issued to a retail client in accordance with Candy Club’s distribution conditions, that it would be likely that the retail client falls within the company’s target market," the regulator stated in an update.

A Scalare Partners spokesperson responded to the interim stop orders with a statement predominantly focusing on how the business model works rather than the substance or consequences of the regulatory action.

"The company is currently providing the regulator with more information on growth plans in the US and how its companies are valued as part of the normal regulator interaction at this stage of the listing process," the spokesperson said.

"Scalare will be the first ASX-listed tech accelerator that provides scalable startups with the sector’s broadest ecosystem through investment, expert advice and services, a diagnostic platform, and community programs to spur their growth. It has 27 total investments, with the intention of investing in eight per year.

"Through its eight targeted fractional services—spanning commercialisation, capital raises, finance, marketing, product development, governance, operations, and people & culture, Scalare provides early-stage tech companies with expert support precisely when they need it, without the burden of full-time hires. It also runs the Australian Technology Competition and Tech Ready Women initiatives. This allows founders to focus on what matters most, innovation and growth.

"Scalare sources revenue from multiple streams including investment returns from its portfolio of companies, gains from business exits, fees for conducting fractional products and advisory services, memberships for its events and organisations, and capital raising."