In the second half of 2016, there were a number of key developments in the fundraising space:
- Changes to the ASX Listing Rules on disclosure and admission requirements;
- ASIC updated its guidance on prospectuses with respect to disclosing forward looking statements in the mining and resources industry, business model information and the inclusion of historical acquisitions – Regulatory Guide 228: Prospectuses: Effective disclosure for retail investors (RG228);
- ASIC released a report on the marketing of IPOs focussing on risks from the use of non-traditional marketing methods such as through social media and foreign language publications by emerging market issuers – Report 494: Marketing practices in initial public offerings of securities (REP 494); and
- ASIC raised concerns with termination rights in underwriting agreements.
These are summarised in ASIC’s recent report: Report 512: ASIC regulation of corporate finance: July to December 2016.
In the 3 months to 31 December 2016, the ASX declined various requests for waiver of the ASX Listing Rules by companies seeking to extend the time for the issue of shares or other securities beyond the period 3 months after the date of shareholder approval required by ASX LR 7.3.2 and beyond the period 1 month after the date of shareholder approval required by ASX LR 10.13.3.
These are summarised in Listing and Waiver Application Declined by ASX 1 October 2016 - 31 December 2016.
Changes to the ASX Listing Rules
Recent changes to the ASX Listing Standards include:
- requiring entities seeking admission to the ASX under the assets test to disclose audited financial information (including for significant acquisitions up to 1 year before seeking admission) for a minimum of 2 years; (ASIC has affirmed that generally 3 years of audited financial information should be included in a prospectus in RG228. ASIC has also confirmed that at least 1 year of audited financial information should be disclosed for a “roll-up” listing where the listing includes many immaterial businesses acquired in the same sector.)
- increases to the prior year consolidated profits (for profits test admissions, from $400,000 to $500,000), the net tangible assets test (from $3 million to $4 million) and the market capitalisation test (from $10 million to $15 million); and
- a new minimum 20% free float requirement, single tier spread test (as opposed to the two tier approach originally proposed) and a $1.5 million standardised working capital requirement for entities admitted under the assets test.
Effective disclosure in prospectuses
ASIC clarified how prospectuses must effectively disclose:
- Business models – for retail investors to adequately understand their potential risks and returns, ASIC has clarified that prospectuses should include a substantive analysis of the components of an issuer’s business model including its main components, how they relate to each other, the issuer’s ability to make money as well as its associated risks and underlying assumptions. For further details, see (RG228).
- Forward looking statements – ASIC reissued Information Sheet 214: Mining and resources – Forward-looking statements (INFO 214) to clarify that production targets and forecast financial information can be published, as with other forward-looking statements about estimated mineralisation and funding prospects, so long as there are reasonable grounds for making the statements. ASIC explained that companies with no reasonable grounds for forward-looking statements should disclose all reliable and relevant information of a technical nature to properly inform investors are about its prospects.
- Disclosure of historical acquisition transactions – where a business the subject of the IPO has recently been subject to a private sale or takeover, the financial details of these transactions should be disclosed to provide a historical market value for the business.
- Due Diligence Practices – ASIC released its Report 484: Due diligence practices in initial public offerings in July 2016 and recommended:
- issuers adopt a more robust due diligence process taking a “substance over form” approach;
- directors to be engaged in the due diligence process to ensure the prospectus is not misleading or deceptive; and
- advisers be engaged on the basis they are competent and bring relevant skills, knowledge and experience to the preparation of a prospectus.
The ASIC is concerned that some issuers may not be providing sufficient disclosure on the potential control effects of a rights issue or the associated underwriting arrangements. ASIC recommends issuers disclose:
- the terms and rationale of any underwriting and subunderwriting arrangements including reasons behind the choice of underwriters and sub-underwriters;
- the stated intentions of any person who may obtain control of the issuer as a result of the issue including details of the influence they may have on the future direction and prospects of the issuer; and
- the terms of any allocation policy applicable to any shortfall facility and the potential effect this may have on control of the issuer.
Marketing of IPOs
While most firms still use “traditional marketing” methods to market IPOs, ASIC also looked at an increasing number of small to medium sized firms using social media. In its report, REP 494, ASIC identified a number of areas firms and issuers should be aware of:
- Oversight weaknesses – ASIC found certain firms lacked appropriate controls when marketing IPOs through telephone calls and social media which resulted in the dissemination of information that was inaccurate or out of date. To address this, ASIC recommended implementing compliance training and tighter reviews on staff. ASIC advised tightening controls on access to institutional roadshows, pathfinder prospectuses and public access to key IPO information before a prospectus is lodged with ASIC.
- Misleading communications – in general, ASIC uncovered instances of undue prominence being given to forecasts in marketing materials. In particular, ASIC identified a number of inaccuracies and ambiguities in the foreign language materials increasingly used by emerging markets issuers and recommended firms ensure any translators understand the material they are translating to minimise these issues.
Termination rights in underwriting agreements
In its report, Report 512: ASIC regulation of corporate finance: July to December 2016 ASIC called attention to a recent trend in underwriting where the underwriting agreement allows an underwriter to terminate the underwriting arrangement if the market price of the issuer’s shares falls below the offer price at any time during the offer. ASIC stated that offers made under these arrangements and described as “underwritten” are misleading, and discouraged the market from using them.
Corporate Advisory and JLMs
In its report, Report 486: Sell-side research and corporate advisory: Confidential information and conflicts, issued August 2016, ASIC made some observations on the use of research reports in the process of acting on the issue of shares for a company including:
- firms should restrict research analyst involvement in pitching for corporate advisory mandates;
- firms should prevent their research analysts from discussing their approach to valuation or indicative valuation ranges with their corporate advisory team, the issuer or other JLMs’ research analysts; and
- firms should not use research reports as a “de facto” mechanism to release prospective financial information to the market outside of the regulatory requirements for prospectuses.
ASX requires securities to be issued in a timely manner after shareholder approval obtained
The ASX Listing Rules require that securities approved by shareholders to be issued under LR 7.1 or LR 10.11 must be issued:
- within 3 months (LR 7.3.2), or
- within 1 month (LR 10.13.3),
of the date of shareholder approval.
In the 3 months to 31 December 2016, ASX declined to extend this period in a number of cases including in the following areas:
- the placement of shortfall securities following an under-subscribed pro-rata rights issue sought to be placed 3 months after shareholder approval;
- the issue of earn-out shares over a period of 3 years where the potential dilutive effect of the issue of such shares was not known because the number of shares to be issued was based on a formula linked to the future profitability of the business to be acquired;
- the issue of shares and options on conversion of bonds where the issue of the shares and options could occur 2 years after the issue of the bonds and the maximum number of shares to be issued could not be known as it was based on a fixed price or 80% of any future equity issue priced below the fixed price; and
- the issue of shares to satisfy the interest obligation on convertible notes over a 4 year period because the 4 year period was considered too long as too much could change over that period for shareholder approval to be considered informed and meaningful. In this case some of the notes were held by a related party and shareholder approval was required under LR 10.11.
On 12 April 2017 ASX released Response to Consultation on Reverse Takeovers, together with Exposure Draft Listing Rule Amendments. The proposed amendments to the Listing Rules will require a bidder to obtain shareholder approval under LR 7.1 for a reverse takeover.