After the ‘first round’ of IPOs in the second half of 2009 and with an expectation of more to come in 2010, a few themes have emerged from our interactions with ASIC in relation to the content and structure of prospectuses. These are summarised below:
- First, ASIC continues to have a focus on the requirement that prospectuses be clear, concise and effective. ASIC has indicated that further guidance on the meaning of ‘clear, concise and effective’ will be provided to the market in 2010.
In the meantime, a prospectus should be as short as practicable, avoid unnecessary duplication, in particular of the benefits of the offer/business, avoid lengthy marketing sections and unnecessarily technical descriptions of things such as key contracts. In a recent speech ASIC Commissioner Belinda Gibson noted that ‘readability’ is key for investors, and that clear and concise wording is part of the solution but design and layout are other factors which may assist.
- Second, a balanced disclosure of the risks in investing in the relevant securities is required—with more balance of the promotional aspects of the offer. One way of addressing this is where there is ‘marketing’ related information in the prospectus (whether it be in the ‘glossies’, the chairman’s letter or the investment highlights), it should be matched with balanced disclosure of the risks—bearing in mind the point above that there should be less repetition of the benefits. Risks should be tailored towards the issuer’s specific circumstances and, where a particular part of the prospectus relates to a risk, there should be a cross-reference to the relevant risk in the risks section.
- Third, in relation to forecasts, the prospectus must comply with Regulatory Guide 170, Prospective Financial Information. This means that the underlying assumptions behind financial forecasts must be set out in sufficient detail to enable investors to form their own view on the reasonableness of the forecast assumptions. Whether the assumptions are clear, concise and effective is likely to come under greater scrutiny as the assumptions go to the risk of the forecast being met.
- Finally, ASIC has indicated that clear disclosure is required of the factors that the issuer and its advisers will take into account in determining how securities will be allocated.
While there is not a lot new in the above points, issuers and their advisers, particularly in IPOs, should be on notice that these issues need to be considered and addressed. It is not as simple as having a shorter document or less glossy pictures; the real requirement is that the prospectus properly inform potential investors having regard to the particular circumstances of the issuer and the offer.
As always, open lines of communication with ASIC are important to assist in the smooth progress of a prospectus. We hope that ASIC would recognise the benefit to investors in working with issuers and their advisers, including before a prospectus is lodged, to achieve better disclosure but also to understand that different offers require different disclosure and that in many cases the issuer is best placed to decide what disclosure, and in particular what detail, is necessary.