Following a 12 month investigation period, ASIC has released its much awaited proposals on improving prospectus disclosure for retail investors. The proposals are set out in Consultation Paper 155 - Prospectus Disclosure: Improving Disclosure for Retail Investors (CP 155) and the accompanying draft Regulatory Guide: Prospectus Disclosure: Improving Disclosure for Retail Investors (Draft RG).
ASIC has identified some key concerns with the current approach to disclosure:
- the front sections of prospectuses are dominated by marketing statements / photographs;
- risk disclosure is often too general and not balanced;
- there is too much descriptive information without analysis of its relevance;
- prospectuses are too long and repetitive; and
- complex information and jargon is included without proper explanation.
CP 155 and the Draft RG seek to address these key concerns.
The goal is to make prospectuses much easier for retail investors to use and understand and to improve the quality of information included in prospectuses.
ASIC will not prescribe the content of prospectuses or adopt a checklist approach to complying with the legislative content requirements. Instead, ASIC will give guidance on the form and content of prospectuses, including how to word and present them in a ‘clear, concise and effective’ manner.
The Draft RG mainly applies to full (eg IPO) prospectuses. However parts of the Draft RG apply to other corporate communications made to retail investors, including transaction specific prospectuses, takeover documents, explanatory statements and offer documents for rights issues.
The proposals cover the following 8 discrete areas:
- ‘clear, concise and effective’: guidance on how to achieve ‘clear, concise and effective’ disclosure (including some specific communication tools and encouraging incorporation by reference to reduce the length of prospectuses);
- investment overview: use of an upfront investment overview with information that is key to an investor’s decision to invest, as opposed to a summary of the document or marketing information;
- business model: disclosure of the issuer’s business model and strategies for making money and generating capital growth, including the underlying assumptions to the model;
- risks disclosure: must be specific to the issuer and be more prominent, detailed and logical;
- financial information: summary of 3 years of audited accounts and prescribed formulae to calculate financial ratios;
- directors and management: more detailed disclosure of their role, how they will manage the business, their experience, any previous convictions and whether any companies they previously managed entered into external administration or insolvency;
- benefits and related party transactions: wider disclosure regarding the benefits flowing to directors, proposed directors, promoters, advisers and underwriters (including “indirect” benefits) and wider disclosure of related party transactions; and
- disclosure on the effect of and terms and conditions of the offer.
A more detailed summary of the proposals is attached to this email.
Our initial assessment
The Draft RG is an important step forward in promoting better disclosure decisions when preparing prospectuses and making other corporate communications. More clarity around the ‘clear, concise and effective’ requirement of the Corporations Act 2001 (Cth) is welcome and helpful. The Draft RG will allow issuers to drop repetitive “Q&A” disclosure that was developed in response to the introduction of the ‘clear, concise and effective’ requirement. Guidance on risks disclosure is thoughtful and gives specific examples for consideration. However, there are some specific proposals which will cause concern for some issuers and others involved in preparing prospectuses.
A call for shorter prospectuses is a good initiative. But in places the Draft RG is inconsistent on this point. There is a suggestion that documents can be reduced by excluding contract summaries or incorporating information by reference. At the same time, ASIC is calling for increased disclosure of certain benefits or business model components and associated risks, increased use of glossaries and explanations of commonly used investment terms and inclusion of certain details about key contracts (arguably summaries). The consultation process should sort these inconsistencies out.
The Draft RG requires disclosure of certain elements of an issuer’s business model and strategies for generating income and capital growth, and acknowledges that this could require disclosure of confidential and commercially sensitive information. As well as creating commercial sensitivity, this could also require disclosure of forward looking information and opinions, raising the issue of needing a reasonable basis for such strategies and reasons for adopting them before they can be disclosed. This potentially leaves issuers in a position where it may be difficult to get comfortable with making disclosure around business model strategies and the underlying assumptions.
The prescriptive approach taken by ASIC to the use of certain marketing tools such as photos, has already raised interest in the media. It shows ASIC is clearly concerned that prospectuses should be used as information tools with less emphasis on marketing, and it seems to reflect some assumptions as to the capabilities of retail investors to whom such disclosure is made.
ASIC is advocating greater reliance on the incorporation by reference provisions in the Corporations Act to help make prospectuses shorter. To use these provisions, the Corporations Act requires issuers to assess what information is necessary for retail investors rather than professional investors. No quick solution is offered to help with this assessment. Rather, when in doubt, ASIC has encouraged more detailed disclosure of ‘sufficient information’ of the incorporated document - this may not help to reduce the length of prospectuses.
There is limited guidance on the distinctions between initial offering and transaction specific prospectuses and other disclosure documents. One focus of the consultation process should be to indicate what information is more relevant to, or can be left out of, the various disclosure documents. ASIC has asked, as part of the consultation process, whether the Draft RG should apply to lo-doc rights issue disclosure as well, but surely the imposition of quasi-prospectus disclosure standards would undermine the purpose of introducing that regime.
ASIC warns that compliance with the guide will not necessarily be sufficient to ensure compliance with the ‘clear, concise and effective’ requirement of the Corporations Act and that issuers will have to critically analyse how ASIC’s guidance applies to their disclosure document. Accordingly, the difficulty for issuers to determine whether they satisfy the clear concise and effective requirement remains.
ASIC is proposing to prescribe formulae that must be used when calculating certain financial ratios that it considers must be disclosed in a prospectus. While a consistent approach is (at least superficially) desirable, there should be scope for divergence from these formulae so long as there is an adequate explanation of the reasons for divergence.
ASIC will be receiving submissions as part of its consultation process until 7 June 2011 and the final regulatory guide will be released in December 2011.
A copy of CP 155 and the Draft RG is available here.
The Mallesons debt and equity capital markets teams will be involved in providing submissions in response to CP 155 and the Draft RG and would welcome your views.