The mining and exploration industries comprise a substantial part of the Australian equity market, representing over 25% of all ASX-listed entities. On 5 December 2019, the Australian Securities and Investments Commission (ASIC) released Report 641: An inside look at mining and exploration initial public offers (Report 641) detailing ASIC’s areas of concern with respect to the conduct of IPOs following its review of 17 mining IPOs that took place between October 2016 and September 2018. Importantly, ASIC states that the concerns raised in the report are relevant to all prospective issuers, directors and lead managers involved in IPOs conducted in Australia.
ASIC identified six key areas of concern in which they expected lead managers and companies to review and implement better practice recommendations:
- lead managers giving preference in IPO allocations to investors in the lead manager network, with the result that:
- retail investors not associated with a lead manager network have limited access to IPO investment; and
- registers become ‘tightly held’ and vulnerable to a greater level of influence by the lead manager;
- lead managers being (arguably) overly involved in all stages of the IPO process, including transaction origination and the inception of the issuer company, in order to generate a pipeline of transactions and associated fees, with the risk that many decisions at the early stages of the IPO process are effectively made by transaction originators without sufficient scrutiny by company officers;
- lead managers in typically smaller professional advisory firms acting for both the issuer company and investment clients, which lead to increased conflicts of interest where the lead manager is unable to identify for whose interest or in what capacity they are acting.1 This is especially concerning given the lead managers’ obligations as an Australian Financial Services licensee, including the obligation to have in place adequate arrangements for managing conflicts of interest;
- materials used to promote IPOs (including term sheets2, investor presentations, posts on investor forums/platforms and sponsored content on quasi-news platforms) not being subject to appropriate quality and disclosure compliance controls to ensure as far as possible that the material does not and is not likely to mislead prospective investors;
- lead managers influencing companies’ share registers by, amongst other things:
- closely monitoring and questioning investors selling securities shortly after listing;
- prescribing daily volumes that could be traded by brokers and advisers of AFS licensees who had received allocations under the IPO; and/or
- communicating expectations that shareholders allocations to hold securities after listing,any of which could amount to market manipulation; and
- lead managers adopting strategies for information release designed to inflate market interest in the issuer company in the short term post-listing, before the company has delivered on the business plan identified in its prospectus.
We outline some key takeaways and “better practice” recommendations detailed by ASIC in Report 641 below:
- The issuer company’s prospectus should clearly disclose the involvement of lead managers and professional advisers in the transaction’s origination, including interests in the asset being listed or assets being acquired. Prospectus disclosures should also clearly set out the total aggregate benefits payable to lead managers, including contingent remuneration and “trailing commissions” (where no additional services are to be provided), and clearly set out the services provided in exchange for the benefits.
- Directors who are independent of mineral asset vendors, lead managers and other professional advisors should be appointed as early as possible in the IPO process. Professional advisers should only be engaged by directors after considering alternatives. Directors who engage advisers in return for their appointment as a director may risk contravening their directors’ duties.
- Pre-IPO funding with an incentive element should be clearly disclosed in the prospectus and, where there are preferential allocations, this may need to be disclosed as a potential conflict or as remuneration if issued to a director, adviser or promoter.
- When drafting and distributing promotional materials, company directors and lead managers need to be cognisant of and apply the disclosure standards required for an IPO, including the requirement for balanced disclosure and compliance with industry standards for disclosure of technical information. Directors should review and approve all public messages made on behalf of the issuer company in the pre and post-IPO process. Specifically, term sheets and presentations should not be used to make disclosures that could not be made in a prospectus.
- Lead managers should have policies in place for managing allocation recommendations that ensure a fair and efficient allocation process and minimise conflicts of interest. In particular, lead managers should take care to identify investors with an interest in the company’s activities, as opposed to identifying investors on the basis of an allegiance to, or the influence of, the lead manager or another adviser. Issuer companies should understand and engage with the allocation process and hold lead managers accountable to their allocation policies. Further, issuers should disclose the availability of the IPO offer to general retail investors and clearly identify the process for applying for securities under the IPO.
As noted above, while these better practice recommendations and key takeaways arise from ASIC’s review of common practices in the mining IPO space, they are expected to be implemented across the board.