Have you ever received legal advice on pre-prospectus IPO marketing that is either couched in qualifications or seemingly inconsistent with the apparent spruiking that you read in the papers that morning?
If the answer to that question is "no", then you are either not an Aussie capital markets participant or your legal advice is naïve.
The law on pre-prospectus advertising in Australia is very broad and restrictive, even potentially when it comes to marketing to sophisticated and professional investors. What does the market want? Our assessment is that if your pre-IPO information is not misleading or deceptive and is only accessible by people whom the law deems sophisticated enough to make up their own minds – you should be able to go for it. It probably also grudgingly accepts the current reality that if the audience is retail – issuers need to stay away until the prospectus is lodged with ASIC. But there is also an argument that, if it is impossible for retail to apply for securities without first getting a prospectus (the law is clear on this one), isn’t there room for the dissemination of information, and journalist discussion in the media, about pending IPOs?
Helpfully, ASIC have again taken the initiative of producing guidance, this time in the form of a report which discusses its views on marketing IPOs. We think there is a way to go in this area (and frankly the initial focus of some commentators on social media is missing the main point), but ASIC has done its homework and is well positioned to engage in the debate ahead.
And that debate is this: if (and it's an important if) retail can't subscribe without first having being provided with a prospectus, why shouldn't issuers be entitled to market their companies as they see fit, and the media comment on them, as long as issuers are not being misleading or deceptive? And on a related point – surely issuers should be able to interact with existing shareholders about their potential sale decisions, and with employees about the progress of IPO preparations and potential implications of an IPO for them (in each case without providing financial advice encouraging purchasing stock in the IPO) without troubling ASIC for permission to do so?
We'll keep you updated on where this goes, but for now, here is an update on ASIC's latest report on marketing practices in IPOs released on 19 September 2016.
We said ASIC has done its homework. Along with a general review of marketing practices, ASIC conducted a targeted two-stage evaluation. In the first stage of its review, ASIC examined the online and social media marketing of 23 prospectuses lodged with ASIC over a six-week period. In the second stage, ASIC selected seven of these for further inquiry, including contacting the advisers and reviewing marketing documents.
ASIC's main areas of concern
The report cautions advisers and issuers to market IPOs within legal limits, to avoid misleading investors. ASIC Commissioner, John Price, has commented that "we are seeing new interactive methods of communication and marketing used … while we embrace such innovation, we also want to remind [advisory] firms and issuers to ensure that their marketing practices comply with the advertising and publicity restrictions in the Corporations Act".
ASIC acknowledges that some good practices have been adopted, however REP 494 highlights the following main areas of concern:
- oversight weaknesses;
- failure to monitor and inadequate controls on access to information; and
- investors receiving misleading or incomplete information.
The key takeaways for advisers and issuers
Improve oversight of communications with investors
REP 494 stresses the need to represent the investment opportunity in a fair and balanced manner, and emphasises that a prospectus must be the primary source of information about an IPO for retail investors. ASIC's recommendations include:
- Use standardised scripts and keep records of telephone calls;
- Do not include financial forecasts in communications without also including a discussion of the underlying assumptions or risks involved;
- Be careful not to misstate ASIC's role in an IPO;
- Ensure that communications are only based on factors connected to the merits of the individual IPO – in particular, avoid the "risky practices" of messaging seeking investors to assist with meeting spread requirements, or comparing an IPO to past IPOs that are not in fact directly comparable; and
- Avoid unbalanced messaging in emails, which risks creating a misleading impression about the investment opportunity.
Ensure consistency in messaging across all marketing channels used
REP 494 stresses the need to ensure that marketing is accurate and consistent with the prospectus, regardless of the medium employed. It also emphasises the need to update marketing materials according to any changes made throughout the IPO process, and remain conscious of the prohibition on providing information to the media before the prospectus is lodged.
Use social media cautiously
Traditional marketing methods, such as telephone calls, emails, presentations and publicly available websites, remain the primary channels used to market IPOs. However, REP 494 notes increasing use of more innovative and creative channels like social media, especially by small- to medium-sized advisers. ASIC reminds the market that social media use should be closely monitored.
Improve controls on access to information
Marketing to retail investors differs considerably from marketing to institutional investors. Usually, extra material is made available to institutional investors, namely pathfinder prospectuses, offer summaries, roadshows including management presentations, and occasionally "investor education" research. REP 494 emphasises the need to carefully restrict access to roadshows and pathfinder prospectuses to AFS licensees and institutional investors respectively. ASIC recommended that advisers educate an issuer's employees regarding these limits and the surrounding legal framework, and more strictly control the dissemination of these materials.
Further reviews by ASIC are likely
ASIC has indicated that it will continue to monitor the marketing of IPOs, while conducting further examination into investor behaviour and decision-making, to ensure that marketing practices do not mislead investors or breach publicity and advertising prohibitions and restrictions.
ASIC acknowledges that recommended compliance processes and the strict wording currently required to be included in advertising materials may not be compatible with modern marketing techniques such as social media. This suggests a potential for reform in this area; however, it remains to be seen how broad these reforms may be. For now, compliance with the current law, regardless of incompatibilities with newer marketing channels, is, of course, necessary.
Where to from here?
REP 494 confirms our view that while marketing is a critical component of any IPO process and presents a great opportunity to inform and attract investors, it needs to be carefully planned and reviewed by experienced advisers, to ensure that it paints a fair and balanced picture of the IPO.
ASIC's report is thorough, and there is much to discuss. But one thing that would help is an understanding of what are the really sensitive issues that will be policed in the future, and what standards issuers will be held to.
If you have any queries regarding REP 494 or IPO processes generally, please don't hesitate to get in touch with us.