A recent report released by ASIC (Report 484) provides some interesting insights on ASIC’s focus when reviewing an IPO prospectus and considering the background due diligence undertaken in the preparation of the prospectus. The report was based on ASIC’s review of due diligence practices for 12 IPOs, with 10 being for small to medium-sized issuers.
Some particular points of note are:
- Best practice involves establishing a due diligence committee (to meet on a regular basis), allocating responsibilities to appropriate committee members for preparation of the prospectus, and undertaking verification of all material statements in the prospectus. It is also important to ensure a continuation of the due diligence process throughout the offer period.
- ASIC’s main concern related to the quality of due diligence conducted by small to mid-sized issuers, which showed a trend for adopting fewer due diligence processes (e.g. convening a due diligence committee but nothing more) and with ‘less effort’ in consideration of the process.
- ASIC also indicated some instances of a ‘box ticking’ approach to the due diligence, rather than focusing on the disclosure in the prospectus and, in some instances, with little involvement by directors in the preparation of the prospectus.
- A number of concerns were raised in respect of emerging market issuers. For example, where prospectuses and other important documents are not being translated for directors that cannot read English, and poor oversight in respect of due diligence processes and inquiries conducted by foreign legal and other advisers.
- ASIC notes that a low-cost due diligence process may often lead to delays, further work and ultimately become more costly. ASIC goes further to note that even a more extensive due diligence cannot guarantee the quality of the process unless the directors are thoroughly engaged in the process.
- The report also sets out some good practice recommendations from ASIC, which reflect ASIC’s observations on due diligence processes and, in particular, the points noted above.
This report is a timely reminder of the responsibility of directors (and other parties involved in an IPO process) in ensuring that appropriate due diligence processes are put in place to ensure a prospectus is accurate and complete. Importantly, such processes, when implemented properly, should establish the statutory ‘due diligence defence’ - where the person relying on the defence proves they have made all reasonable inquiries and had reasonable grounds to believe that the statement was not misleading or deceptive, and that there was no omission from the prospectus - to provide directors with additional comfort should future issues arise with disclosures made as part of the initial offering.
Due diligence is an important process to get right and we are happy to discuss the ASIC Report in further detail with interested parties (as part of an IPO process or more broadly).