Yesterday, ASIC released its much anticipated regulatory guide on improving disclosure in prospectuses. This follows from an extensive industry consultation period after the release of its Consultation Paper 155 on the same topic earlier this year. The new regulatory guide is ASIC Regulatory Guide 228 titled “Prospectuses: Effective disclosure for retail investors” (“Regulatory Guide”).
The Regulatory Guide will change the way prospectuses look (and some other kinds of corporate disclosure). If you've been in any doubt about ASIC's views on some key disclosure issues, this Regulatory Guide makes a lot of them clear. You might not agree with all of them - but you won't die wondering. Will it make prospectuses better? Probably, but it is unlikely to make them shorter. While the market adjusts to this guidance, due diligence and drafting processes will need special focus to consider the disclosure points that the Regulatory Guide emphasises.
What types of transactions will the Regulatory Guide be relevant to?
The Regulatory Guide focuses on the content and form of prospectuses prepared under section 710 of the Corporations Act 2001 (Cwlth) (“Corporations Act”), i.e. full form prospectuses primarily prepared for floats.
ASIC has also nominated certain sections in the Regulatory Guide which it considers may apply to other documents commonly distributed to shareholders, which relevantly includes:
- transaction-specific prospectuses;
- bidder’s statements under takeover offers;
- explanatory statements for schemes of arrangement;
- offer documents for “low doc” rights issues; and
- independent expert’s reports.
However, the extent to which the Regulatory Guide is relevant to these types of documents will depend on the type of decision that shareholders are being asked to make and the information available in the market.
ASIC has also flagged that its guidance may assist in complying with continuous disclosure requirements.
What’s changed from CP 155?
Generally, the Regulatory Guide is quite consistent with Consultation Paper 155, but shows signs of ASIC being a little more flexible than the consultation paper. The guidance is couched in a reasonably balanced way. Instead of taking a checklist driven approach, ASIC often provides practical suggestions which should be assessed within the context of the particular transaction.
For example, ASIC has retained its fairly detailed guidance on “clear, concise and effective” wording. However, ASIC has emphasised that its suggested communication tools are not mandatory, but may be useful in ensuring that the document is not misleading.
ASIC has provided firm guidance on some key issues, including:
- (investment overview) the importance of including an investment overview section which provides a meaningful summary of information that is key to a retail investor’s investment decision and provides a balanced disclosure of benefits and risks;
(financial information) that an entity with an operating history should include an audited consolidated income statement showing major revenues and expense items, and profit or loss, including earnings before interest and taxes (“EBIT”) and net profit after tax (“NPAT”) for the last 3 years (or 2 1/2 years depending on the date of the prospectus). This seems to us to be inconsistent with current market practice in that:
- many issuers currently include less than 3 years’ historical financial information; and
- typically, information is presented to EBIT only (rather than to NPAT) as EBIT is generally the basis used for valuation purposes in Australia.
ASIC also seems to suggest that an issuer that has completed a significant restructure in the period covered by the historical financial information should potentially include financial information pro forma for the effect of that restructure for the full period - this is certainly not market practice and preparing 3 years of pro forma information on that basis would be time consuming and costly for issuers;
- (financial ratios) ASIC has not taken a prescriptive approach to the inclusion of financial ratios (unlike in its consultation paper relating to infrastructure entities released last year) and has made it very clear that it is up to the issuer to work out what, if any, financial ratios should be included in a prospectus. However, a prospectus which includes financial ratios should explain how they are calculated and any material assumptions;
- (director disclosure) that disclosure about directors and management should be balanced and may require disclosure on management of insolvent companies or legal and disciplinary action. However, ASIC has toned down its guidance on this point - for example, it notes that personal offences are not likely to be relevant unless they involve dishonesty, and that issuers do not necessarily need to disclose involvement in failed companies if the failure had nothing to do with the director (eg a supplier defaulted on a contract). Nonetheless, we remain concerned that the guidance on director disclosures could have unintended consequences of discouraging companies from appointing directors with valuable experience onto their boards;
- (underwriters) ASIC has deleted the requirement to specifically describe whether the underwriter is a shareholder in a company and the requirement to identify sub-underwriters (unless they are related parties);
- (incorporation by reference) importantly, ASIC notes that a document incorporated by reference does not itself need to be “clear, concise and effective” (unless it is prepared specifically for the purpose of incorporation);
- (commercial-in-confidence disclosure) ASIC has recognised that it may not always be appropriate to disclose commercially sensitive information or trade secrets (eg investors may need to understand how a key contract affects the issuer’s business model and earnings but they may not need the detailed pricing terms); and
- (risks disclosure) that risks disclosure should be specific and tailored to the issuer’s circumstances rather than generic and should be organised logically. In accordance with established practice, ASIC has confirmed its stance that it does not generally pre-vet prospectuses. ASIC has indicated that a company is best placed to determine what information should be included in its prospectus to meet Corporations Act requirements.
Whilst ASIC does not review all prospectuses following lodgement, it has indicated that it may adopt a form of risk rating to determine which types of prospectuses to review.
Is it useful?
There are mixed views on the benefits of ASIC’s guidance - the Regulatory Guide does give rise to some concerns that it will limit the practical use of prospectuses as selling documents. Some aspects of the Regulatory Guide may lead to a prospectus being less digestible. For example, ASIC has stated that limited photographs should be used and should only appear after the investment overview (ASIC has conceded that issuers can use photographs of celebrities if they can explain why the celebrity is relevant!).
Nonetheless, we think the Regulatory Guide is a useful practical document that helps to clarify a lot of murky ground relating to the content of prospectuses.