ASIC’s recent review of marketing activity shows it is willing to move with the times to accommodate social media and other new promotional methods for IPOs. But new methods need new approaches to monitoring – and some of the traditional promotional routes still have compliance gaps…

On 19 September 2016, ASIC reported on its latest review of the marketing of initial public offerings (IPOs) to retail investors.[1] The review looked at both traditional and non-traditional methods of IPO marketing – such as social media and other platforms – by firms of all sizes. It followed ASIC’s July 2016 review, which identified flaws in the due diligence process and resulting disclosure for many IPOs.[2]

The Review: Key Focus Points

This latest review gives a snapshot of how firms’ marketing efforts are complying with the disclosure requirements in Chapter 6D of the Corporations Act.[3]

Some parts of the review examined marketing activities targeting certain high net worth (‘sophisticated’) investors. The review closely focused on compliance with section 734 – which prohibits advertising or publicising offers of securities that require a prospectus (unless a relevant exception applies) – and the general prohibition on misleading or deceptive conduct in section 1041H. The review also looked at circumstances which might result in false, misleading or deceptive statements, or misleading or deceptive conduct.

The review puts firms and entities launching IPOs on notice to:

  • maintain adequate compliance procedures;

  • understand the provisions governing who can receive differing information or promotional activities; and

  • continually monitor and update information across all platforms.

Contraventions of sections 734 and 1041H come at a price – and not just the remedial action ASIC may require during the IPO promotion (which often causes logistical problems). Breaches of section 734 are criminal offences, exposing offenders to fines of up to $4,500 or six months’ imprisonment. Liability can extend to any person who is ’involved’ in a contravention. Breaches of Section 1041H also bring exposure to civil claims.

The traditional methods of IPO marketing include:

  • telephone calls and emails to firm clients;

  • retail roadshows/management presentations;

  • publicly-accessible websites; and

  • advertisements, both online and in print.

The review found that these methods were used much more often than non-traditional methods, and mainly by larger firms.

Smaller firms involved in IPOs were more likely to use non-traditional marketing methods – mainly social media, including Twitter, WeChat, LinkedIn and video presentations on YouTube. These firms often had a different client base (i.e. a different type of entity which is floating and seeking investment) and targeted a different type of investor.

ASIC: Moving with the times

To some extent, ASIC’s report shows that there is nothing new under the sun – there are risks of contravention with both new and old promotional methods. However, ASIC found that where new methods were used there were more incidents that caused it concern. That said, ASIC is not discouraging the use of new media to market IPOs.

ASIC recognises that using social media to market an IPO may be difficult, given the advertising restrictions in section 734. Further, the strict wording that must be included in any advertising about prospectuses may be incompatible with some forms of social media.

The report invites firms and issuers who wish to use forms of social media that may at first sight be incompatible with the obligations of section 734 to explore with ASIC ways of meeting the section’s policy aims without requiring strict compliance with its terms.

ASIC wants to move with the times.

It has previously recognised the unreasonable and uncommercial restraints on issuers that the legislation can impose and has adapted (e.g. the ASIC Corporations (Market Research and Roadshows) Instrument 2016/79 and other applications for relief from the advertising restrictions, which are considered on a case-by-case basis).

The Report Card: ASIC’s Findings

Overall, the review paints a healthy picture of the marketing process, but sends a clear message that there may be gaps in compliance and monitoring procedures, leading to exposure for the firms and marketers of an IPO.

With both old and new media, it is essential to plan appropriately, develop compliance plans, and monitor procedures to ensure compliance. This is generally easier with ‘old’ marketing methods, as the procedures have been bedded down for longer and the compliance gaps are easier to identify.

6 Key Takeaways

In its report on the review, ASIC identified a number of compliance gaps for traditional promotional routes that anyone marketing an IPO should be wary of. These included:

1. Telephone communications

ASIC found that standardised scripts for telephone pitches were not commonly used, nor were detailed records made of communications with potential investors.

The risk here is that people may go beyond permissible bounds when making statements or representations about the IPO. This may give an inaccurate or unbalanced picture of the investment opportunity. This risk is mitigated when those making the phone call have the standard template email sent out to potential investors available to them. This can be used as a form of script.

Best practice is to provide standard telephone scripts, record and routinely review phone calls, and keep detailed records of all phone promotions.

2. Marketing an IPO other than on its merits

ASIC also identified a number of cases in which not all marketing was based on factors relevant to the merits of the individual IPO. For example, statements that the underwriting firm’s previous IPOs have been successful, or that taking up offers would help satisfy the ASX’s spread requirements.

3. Prominence of forecasts

Be wary of referring to forecasts without also adequately identifying the underlying assumptions or qualifications. There is a large body of case law confirming that a statement can be misleading or deceptive if the necessary qualifications are not conveyed with it. ASIC noted it was also concerned about the increased frequency of short term forecasts being promoted by issuers, yet downgraded shortly after listing.

4. Marketing used by emerging market issuers

ASIC identified severalcases where marketing materials prepared in the language of the emerging market of the issuer included material mistranslations or misdescription of ASIC’s role. These led to ASIC ensuring that corrective action was taken.

5. Failure to update material

ASIC noted thatalthough there was generally good updating of websites to include supplementary disclosure documents, it did identify some cases where collateral marketing material – such as videos or other content – had not been updated to accommodate the additional information or changes contained in the supplementary disclosure documents.

6. Inadequate controls on access to information

ASIC noted thatcertain types of information – such as pathfinder prospectuses or institutional roadshows – cannot be made available to retail investors. Websites such as NetRoadshow are a secure, password-protected platform for making these types of documents available only to the classes of investors permitted to receive them.

In some cases, ASIC found that inadequate security was placed around a password (for example, by circulating it via email rather than telephone). This created a risk that retail investors might access material they were not permitted to view.

The pathfinder prospectus exemption allows that document to be given to sophisticated or professional investors before the prospectus is lodged. ASIC identified that some firms may be confusing the exemption with the access restrictions that would apply to institutional roadshows before a prospectus is lodged.

Institutional roadshows are accessible only to AFS licensees and their representatives. Some cases were identified where dial-in details for institutional roadshows were circulated by email, with the risk that they could be made available to those not permitted to join in.