Australian fundraisers now have a new set of rules to follow when drafting prospectuses.
These changes, announced by ASIC today, are the biggest shake-up to prospectus rules in 20 years.
The core of the new requirements is a focus on the needs of retail investors.
The most obvious way this will manifest itself will be in the way prospectuses are structured. The press is also likely to seize on ASIC's warnings about the use of photos (particularly photos of celebrities).
Those, however, are not the real story. What's important is that prospectuses will not simply be judged by the amount of information that they contain.
Since 1991, when statutory checklists were abandoned, the key issue for anyone drafting a prospectus has been ensuring that there are no material omissions. This quickly led to complaints that prospectuses were too long for retail investors to get a handle on. Prospectus drafters responded that it was better to have too much information than to run the risk of inadvertently leaving out something material.
ASIC's new Regulatory Guide 228 aims to square that circle.
The result is more work for fundraisers, but better prospectuses for investors.
To put it bluntly, prospectuses will now have to explain why key information they contain is relevant to investors. They will also have to be structured so that that information is easy to find.
In this Alert, we summarise the key points of the Regulatory Guide, and then provide some comments based on our experiences with writing prospectuses under the new regime.
The big picture
There are seven key points in the new policy:
- "Clear, concise and effective": although this requirement has been around for years, there has been a lack of clarity about what it actually means. ASIC's new policy contains detailed tools that will help to produce a clear, concise and effective prospectus. These range from guidance on language (short sentences, active rather than passive voice, etc) to structural issues (present information in logical order, voluntarily lodge information with ASIC so that it can be incorporated by reference, etc).
- "Investment overview": the first substantive section of a prospectus should contain an investment overview for retail investors that highlights key information about the issuer and offer in a balanced way, and gives cross-references to more detailed information.
- Business model: the prospectus should explain the issuer's business model, or, in ASIC's terms, "how you propose to make money and generate income or capital growth for investors (or otherwise achieve your objectives)".
- Risks: the prospectus should explain the risks associated with the issuer (including the risks to the business model), the securities being offered and the offer itself. This is not a cookie-cutter exercise – the identification and treatment of risks must be tailored to the business and the offer, and relevant to the prospective investors.
- Financial information: the prospectus must include relevant financial information and any prospective financial information should only be included if it is based on reasonable grounds with all relevant assumptions explained.
- Directors and key managers, interests, benefits and related party transactions: the prospectus should set out the experience and background of directors and key managers, as well as information on interests and benefits that persons connected with the issuer or offer will receive, plus any related party arrangements.
- Effect and terms and conditions of the offer: the prospectus should clearly set out the effect of the offer on the issuer (including the proposed use of funds) and its terms and conditions.
But what does it mean?
This policy has not come out of the blue: ASIC flagged it with a very detailed consultation paper just over six months ago.
Having advised the issuers on the prospectuses released to date that reflected the guidance in the consultation paper, we can confidently say that the new rules require a fresh approach to drafting prospectuses.
Most importantly, the focus is on the target investors. The prospectus must do more than just give them the raw information on which to base their investment decision. It has to join the dots, by explaining why the information in the prospectus is relevant to their investment decision. In simple terms, testing information in the prospectus against the "So what?" test is helpful. The answer to the question should guide what information is conveyed to the target investors and how it is conveyed.
And it always has to be remembered that the key target audience is retail investors: this means that the language of the prospectus must be clear and (equally importantly) the amount of information provided must be appropriate. Repetition should be avoided, and fundraisers should be prepared to ditch information that isn't really required for an informed investment decision.
The new approach affects not only the way the prospectus is written, but also the process by which it is produced.
The first draft of a prospectus should not be regarded as an information dump, prepared using a few precedent prospectuses and an old business plan. The emphasis on disclosure of risks and the issuer's business model means that senior management need to be involved early in the drafting process. Management presentations on the business model and risks will play a large part in how those issues are dealt with and described in the prospectus.
Not just prospectuses
The new policy affects more than just prospectuses:
- bidder's statements and scheme booklets for scrip bids will be expected to comply with the Regulatory Guide in full;
- all bidder's statements and scheme booklets will be expected to comply with ASIC's guidance on "clear, concise and effective";
- transaction-specific prospectuses under section 713 to finance a transaction that involves a major change in the nature or scale of the entity’s business or finances will be expected to comply with the Regulatory Guide in full;
- all transaction-specific prospectuses under section 713 will have to comply with ASIC's guidance on "clear, concise and effective", risk disclosure, director and management information and disclosure of the effect and terms and conditions of the offer;
- offer information statements under section 715 will have to comply with the Regulatory Guide in full;
- offer documents for a rights issue under section 708AA will have to comply with ASIC's guidance on "clear, concise and effective"; and
- notices of company general meetings will have to comply with ASIC's guidance on "clear, concise and effective" (as will independent experts' reports).
As mentioned above, this is the most significant development in prospectus law since 1991 (when the concept of preparing prospectuses by reference to a statutory checklist was abandoned).
The content of prospectuses and the method of preparing them will now be even less a matter of relying on precedents and "market practice". That doesn't, of course, mean that every prospectus will be a matter of reinventing the wheel: given the unique nature of each prospectus, there will be an even greater emphasis on a strong and tested process for identifying and explaining the relevant issues.
(Oh, and if you're still curious, ASIC has backed away from its original position on the use of photographs of celebrities. Photographs of the bold and the beautiful will be still be allowed to grace prospectuses – provided there's an explanation of why the particular celebrity is "relevant".)