ASIC seeks to improve prospectus disclosure

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ASIC has released new guidance for issuers of disclosure documents, to assist them in producing documents which are “clear, concise and effective”.  The guidance is contained in Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors.

As a regular issuer of offer documents, One Investment Group welcomes the release of RG228 and the guidance and assistance it will provide to drafting and preparing quality disclosure documents.

RG228 is primarily concerned with disclosure relating to prospectuses issued under section 708 of the Corporations Act.  However, ASIC has stated that the guidance may, in certain circumstances, also be relevant to other documents such as bidder’s statements under takeovers, short form prospectuses and product disclosure statements.

Specific areas covered by RG228 include:

  1. Clear, concise and effective:  drafting tips are provided, e.g. avoid double negatives, use verbs rather than nouns, avoid overusing definitions or defining commonly understood terms, use navigation aids to assist readers to locate and identify information in the document and include information in a logical order.
  2. Investment overview:  ASIC emphasises the need to have a clear, concise and effective investment overview, which provides a meaningful summary of information that is key to a retail investor’s investment decision and provides a balanced disclosure of the benefits and risks.
  3. Business model:  a prospectus needs to explain how the issuer expects to make money and generate income or capital growth and an analysis of the issuer’s business model.  Topics that must be covered include: the nature of the business, significant dependencies, strategy and plans, corporate structure, how the entity is financed, competition and capital management policy.
  4. Risks:  a business must disclose its key strategic and operational risks.  The description of risks should be specific and tailored to the relevant business.  ASIC has advised issuers to ensure that the key risks are given greater prominence than less important risks and general risks.
  5. Financial information and ratios:  it is suggested that an entity with an operating history should include financial information for the last 3 years, which is longer than is normally provided under current market practice.  ASIC has also suggested providing financial information on a net profit after tax basis rather than on an earnings before interest and tax basis which is the current normal practice.  ASIC has not prescribed the use of financial ratios but where they are used an explanation as to how they are calculated and any material assumptions must be disclosed.
  6. Interests, benefits and related party transactions:  ASIC has sought to require greater disclosure on the background and track record of directors and key managers, particularly around legal or disciplinary action and involvement with insolvent companies.

Effect and terms of the offer:  a disclosure document must include details of the proposed use of the funds, the impact of the offer on the entity’s current financial position, the entity’s capital structure, the potential effect of the capital raising on the entity, the terms and conditions of the offer, the rights and liabilities of the security being offered, how and when investors pay for the security, the allocation policy and details of any underwriting agreement.