In the May 2011 edition of Acumen we reported on the issue by ASIC of Consultation Paper 155 (CP 155),which gave proposed guidance to assist issuers and their advisers to produce prospectuses that help retail investors to assess an offer and make informed investment decisions.
On 10 November 2011, ASIC issued Regulatory Guide 228: Prospectuses: Effective disclosure for retail investors (RG 228) following extensive industry consultation. RG 228 is largely consistent with CP 155, incorporating most of ASIC's proposals with some modification and additional guidance.
In this update, we summarise the key messages in RG 228 and identify the changes from CP 155.
RG 228 provides guidance on the content and form of prospectuses under section 710 of the Corporations Act 2001 (Cth) (Corporations Act). ASIC emphasises that guidance on 'clear, concise and effective' disclosure is relevant to a broad range of corporate communications (even where there is no statutory requirement), including:
ASIC also suggests that the guidance may also assist issuers to comply with continuous disclosure requirements.
ASIC emphasises that the guidance in RG 228 is general rather than prescriptive and that the Corporations Act places responsibility on issuers to comply with the disclosure requirements.
'Clear, concise and effective' continues to be an overriding principle. RG 228 provides guidance on what 'clear, concise and effective' means and suggests methods on how issuers can achieve a 'clear, concise and effective' document. ASIC reiterates that the methods are not mandatory, but may be useful in ensuring the document is not misleading.
ASIC has emphasised the need to keep prospectuses short by ensuring only relevant information is disclosed, avoiding repetitive summaries and incorporating information by reference. ASIC does not require that documents incorporated by reference satisfy the 'clear, concise and effective' requirement (unless they have been prepared for the purposes of incorporating information by reference).
Prospectuses should include an investment overview which explains what information investors need to focus on and provides clear cross references to more detailed information in the prospectus. Key information will include the business model, key risks, financial information, directors and key managers, interests, benefits and related party interests, offer details and use of offer proceeds. ASIC has emphasised the need for balance in the investment overview, particularly in relation to the disclosure of key risks.
ASIC has maintained its position that photographs should only be included after the investment overview section. Photographs should be meaningfully labelled and only included where they are relevant to the issuer's business or the offer. This guidance also applies to the use of photographs of celebrities.
A prospectus should explain the main components of the issuer's business model and how they relate to each other, the key assumptions underlying the model and the associated risks. This will also include disclosure relating to the issuer's financing arrangements, important contracts, corporate structure, industry and capital management policy. If an issuer does not intend to make money or generate income in the short term, this should be made clear and the issuer should explain its short term objectives and how it proposes to meet those objectives.
Risk disclosure should be specific rather than general and should be organised logically. The consequences of a risk occurring and the likelihood of the risk are factors that may be used to prioritise risks. Key risks will generally be those with a reasonable likelihood of occurring, that are difficult to mitigate and, if they occurred, would be likely to have a significant impact on the issuer's financial position and the value of a shareholder's investment.
A prospectus must explain the issuer's financial position, performance and prospects. There is a continued focus on pro forma financial information, including where there has been a significant restructure of the company in the last three years.
Disclosure about directors and management expertise and experience should be balanced and may require disclosure on management of insolvent companies or legal and disciplinary action.
A prospectus should explain the effect of the offer (including the proposed use of funds) and the terms and conditions of the offer.
ASIC has clarified that section 710 does not require issuers to automatically disclose commercially sensitive information or trade secrets. Such information may not be relevant to an investor's decision or it may be unreasonable for investors to expect this information to be disclosed where it could be used by competitors to harm the business. It will be necessary to weigh the usefulness of information to investors against the potential harm to the issuers business.
Guidance in relation to disclosure of the issuer's dividend policy has been broadened to disclosure of its capital management policy. This includes disclosure of how any surplus funds will be dealt with and the likelihood of needing to raise more equity or debt capital.
CP 155 proposed disclosure by an entity with an operating history of a summary of the historical audited financial statements for at least the three most recent financial years. RG 228 has provided further guidance and states that an issuer with an operating history should generally include in its prospectus an audited consolidated statement of financial position for the most recent financial year and an audited consolidated income statement for at least the three most recent financial years (two and a half years depending on the date of the prospectus). Where a significant restructure has occurred in the period covered, ASIC suggests that historical financial information should potentially include pro forma information for the effect of that restructure for the full period. ASIC intends providing further guidance on the use of pro forma financial information that is not prepared in accordance with accounting standards following Consultation Paper 150: Disclosing financial information other than in accordance with accounting standards.
ASIC has softened the previously prescriptive approach to the inclusion of financial ratios in CP 155. RG 228 makes it clear that it is up to the issuer to determine which ratios should be disclosed in their prospectus. Where financial ratios are included, ASIC encourages an explanation of what the ratios means and how they are calculated.
ASIC has softened guidance on disclosure of management of insolvent companies or legal and disciplinary action. ASIC notes that actions that concern a person's conduct in their personal capacity that do not involve dishonesty may not be relevant (e.g. driving offences, public order offences) and involvement in failed companies where the failure was not attributable to management may not be relevant (e.g. a major customer failing and defaulting on a critical payment).
ASIC has deleted the requirement to specifically describe whether the underwriter is a shareholder in an issuer and the requirement to identify sub-underwriters (unless they are related parties or a substantial holder).
ASIC says that it will use RG 228 as a general guide rather than a checklist, stating that issuers are generally best placed to determined what information the Corporations Act requires for a prospectus. However, we expect that issuers will closely follow the guidance in RG 228 to minimise the risk of ASIC action.
Questions which remain to be answered following the issue of RG 228 include whether:
Only time will tell. Nonetheless, RG 228 is to be welcomed and goes a long way to providing practical guidance for issuers and their advisers to meet the form and content requirements of prospectuses under section 710 of the Corporations Act 2001.
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