ASIC has released Report 567: ASIC regulation of corporate finance: July to December 2017, which gives ASIC’s observations from its regulation of corporate finance activity with the objective of increasing transparency on ASIC’s regulatory role.
ASIC’s report has been a regular half-yearly fixture since 2014 and contains some of ASIC’s key insights. In its latest report, ASIC continues to stress the importance of ongoing shareholder engagement and adequate disclosure in fundraising, takeovers and reporting.
In the period between July and December 2017, ASIC received 329 original disclosure documents, raising over $5 billion. This is a decrease in fundraising on the previous period (January to June 2017), and 2017 as a whole was down compared to 2016.
On the other hand, the number of IPO documents lodged (72) was up 20% on the previous period and matched the equivalent period in 2016.
Of the original 329 fundraising offers, ASIC raised disclosure concerns on approximately 24%, and made a final stop order on 2 offer documents.
Previous ASIC reports show that the percentage of disclosure documents which have raised concern has been relatively stable since 2014. However, the percentage of documents which are changed subsequent to ASIC raising concerns has consistently increased between July 2014 and December 2017, from 75% to 95% of the documents in question.
The concerns most frequently raised around disclosure were:
- Inadequate risk disclosure
- Inadequate disclosure of business model
- Unclear or insufficient detail on use of funds
- Disclosure insufficient or not clear, concise and effective
- Insufficient disclosure of directors’ history
Four of the top five concerns appear in the past three ASIC corporate finance reports. ASIC states that these issues are an ongoing area of focus.
ASIC has also been clear that companies and advisers should be aware of new developments in corporate fundraising, particularly drawing attention to new accounting standards, some of which commenced 1 January 2018. These standards are expected to have a significant effect on reporting of revenue, values of financial instruments, loan loss provisions, and the impact of lease arrangements.
ASIC also raised concerns with a trend identified in reconciling year-end announcements and prospectus forecasts. In some instances, issuers had to downgrade forecasts during a prospectus forecast period. In year-end announcements, some issuers stated that they had exceeded forecasts but failed to state that they had not actually met prospectus forecasts. ASIC has recommended that year-end announcements are reconciled to prospectus forecasts in addition to any revised forecasts in order to avoid misleading or confusing the market.
Listed company failure
The report provides a brief discussion of ASIC’s research into the failure of ASX-listed companies which listed between 1 July 2012 to 30 June 2017, defining “failure” as large loss (80% or more) of share value since listing.
Stand out statistics from the analysis include a failure rate of 1 in 9 new listings failing, rising to 1 in 3 for backdoor listings. ASIC also found that 15% of listed company failures included alleged transparency or legitimacy issues.
Mergers and Acquisitions
Overall the number of independent control transactions was consistent with the January to June 2017 period, however the total value of those transactions was considerably lower, at $4.5 billion down from $12.4 billion. This is consistent with an observed pattern of the overall value of control transactions being substantially lower in the second half of the calendar year than in the first half.
Among ASIC’s observations from regulatory oversight of change of control transactions are concerns about independent experts reports. Broadly, ASIC is concerned that experts may not be compliant with their AFSL requirements and ASIC’s policies on expert reports and transactions.
ASIC’s report raises concerns with disclosure issues in specialist reports, principally geology and mining reports prepared in accordance with JORC Code 2012 and Valmin Code. Disclosure of assumptions and industry code compliance must be adequate. In addition, reports must demonstrate a reasonable basis of the assumptions made and conclusions that specialists have come to.
Providers of independent expert advice have been reminded by ASIC that specialist reports accompanying independent expert reports are subject to the Corporations Act 2001 and ASIC’s policy guidance. Failure to critically assess specialist reports may result in ASIC taking review and surveillance steps.
ASIC monitors AGM season (between October and December) every year and has recently published its observations from the 2017 AGM season. Among other matters, such as environmental and social issues, ASIC continues to encourage companies to adopt strategies to enhance meaningful shareholder engagement and recommends that shareholder voting be carried out on a poll rather than a show of hands.
Between June and December 2017, ASIC received 309 related party approval notices to be put to members, numbers which are consistent with historical trends. ASIC urges companies lodging meeting materials to seek ASX comments before lodgements with ASIC, to reduce the amount of documents which require re-lodgement with ASIC.
ASIC has also reminded company directors of its view that companies should discuss environmental and sustainability risks in reports on the financial position, strategy and prospects of the company (commonly referred to as the operating and financial review), where those risks could affect the company’s financial performance or outcomes.
What can we learn from the report?
Companies are clearly being encouraged to enhance disclosure across the board, with protection of investors and shareholders at the forefront of regulatory action. As ASIC has highlighted, 15% of ASX-listed company failures involve some issues with transparency and legitimacy.
ASIC has also flagged issues with expert reports and has stated that surveillance of the expert advice sector will continue, with enforcement and licensing actions on the table. Investors and shareholders rely on expert reports and ASIC has reminded expert advice providers of their gatekeeper role in the financial system.
Finally, ASIC continues to encourage companies to engage more effectively with their shareholders, as well as give proper consideration to environmental and social issues which could affect company performance.