ASIC yesterday released its consultation paper ‘Prospectus disclosure: Improving disclosure for retail investors’ (CP 155). This consultation paper is a follow up to ASIC’s 2006 consultation in which ASIC first sought to set out its views in relation to clear, concise and effective disclosure, following the introduction of section 715A of the Corporations Act in 2004. However, regulatory guidance was never finalised following that consultation process.
CP 155 considers matters beyond ‘clear, concise and effective’ as it also generally seeks to provide guidance on how issuers can satisfy the Corporations Act requirements when preparing a prospectus.
CP 155 covers issues that have been of concern for ASIC for a number of years and are regularly discussed with them in relation to IPO prospectuses (both before and after lodgement with ASIC). We welcome the release of CP 155 which sets out in some detail ASIC’s views as to how prospectus disclosure can be improved. These can now be considered by industry with feedback provided to ASIC resulting in a final regulatory guide that addresses the concerns of ASIC, issuers and their advisers.
Some aspects of the draft guidance should receive wide acceptance while others are more controversial.
The draft regulatory guide in CP 155 sets out ASIC’s proposed guidance. Key points to note include:
- ASIC considers that the ‘investment overview’ is key to retail investors and should be the first substantive section of a prospectus. ASIC’s view is that the investment overview should highlight and provide a meaningful summary of information key to a retail investor’s investment decision, including balanced disclosure of benefits and risks. The draft guide suggests that no photographs should be included, which (if the investment overview is to be the first section, and not follow a separate glossy ‘investment highlights’ section) would involve a significant departure from current practice.
- A focus on incorporating documents by reference as a means of keeping prospectuses shorter – it is, however, of note that ASIC comments that incorporated documents must themselves comply with the prospectus provisions. This requires such documents to be clear, concise and effective.
- The importance of explaining the issuer’s ‘business model – ie how it proposes to make money, its sources of general income or capital growth or how it will otherwise meet its objectives. This is intended to enable retail investors to assess the risks and returns associated with an investment in the company.
- In disclosing risks, issuers should seek to identify the key risks facing the business and include an explanation why. Risk disclosure needs to be specific and tailored and should not simply copy the risk disclosure from another company’s prospectus (even if the business is subject to similar risks). Key risks should be included in the investment overview and be given more prominence in the risk section of the prospectus.
- Current financial information, being not more than eight months old, should be included in a prospectus. The extent and basis of any pro forma financial information should be clearly disclosed and explained.
- From the point of view of presentation, ASIC’s view is that photographs should be kept to a minimum. As with previous guidance, the importance of lack of repetition, cross referencing and Q&A sections (without repeating the investment overview) is highlighted.
- Full names of each director and key manager, and their qualifications/relevant experience should be included. If the person has been an officer of a company that was subject to external administration due to insolvency either while that person was an officer or within 12 months of them ceasing to be an officer, that information should be specifically disclosed (as should things like relevant criminal convictions).
Submissions to ASIC
ASIC requests responses to CP 155 by 7 June 2011. Freehills is proposing to make a submission to ASIC in relation to the draft guidance and would be pleased to incorporate any views you may have, or to assist you in preparing an independent submission.