Five places your company can go wrong with its prospectus

The ASIC is cracking down on the way IPOs are marketed, writes Brad Thompson.

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What you can say, what you can’t say and how you say it: these are important issues in all relationships – and the same is true for companies trying to communicate with investors. And, it seems, there are plenty getting it wrong.

Australia’s corporate watchdog has made it clear that scores of companies are making errors in how they communicate when going to the market for funds.

The Australian Securities and Investment Commission (ASIC) accused some of deliberately withholding information, and others of inadequate disclosure when seeking to raise cash from investors.

ASIC looked at 340 original disclosure documents raising more than $7 billion that lodged in 2016, with the watchdog raising concerns with 24% of all fundraising transactions after reviewing prospectuses and other disclosure documents.

Subsequently, changes were made to about 90% of the documents where concerns were raised (or 22% of all fundraising transactions).

Where are companies going wrong?

ASIC’s top five disclosure concerns with prospectuses were:

1. Business model not fully and/or adequately disclosed
2. Unclear or insufficient detail on use of funds
3. Risk disclosures inadequate, insufficiently prominent and/or not tailored
4. Misleading or deceptive disclosure (misleading and/or unclear statement)
5. Not clear, concise and effective (insufficient summary, investment overview and/or key information)  

ASIC is also taking a long, hard look at the way IPOs are marketed to investors separately from the prospectus. They are investigating the potential for non-prospectus communication to cause investors to be misled or make less well-informed decisions.

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A focus is the use of social media and how firms and issuers are using it in marketing IPOs to retail and higher net worth investors.

How are IPOs being marketed?

ASIC found all firms used some form of traditional marketing method – phone calls, emails, roadshow presentations, websites and advertising – to market IPOs.

Some small to medium-sized firms have turned to social media (Twitter, Facebook, LinkedIn, WeChat  and YouTube), On Market BookBuilds, international crowd-sourced equity funding sites and other connecting platforms that link issuers directly with investors.

Overall, ASIC found social media was not heavily used in marketing IPOs. However, in cases where it was, there were examples of misstatements about the IPO as well as ASIC’s role.

Compliance staff at some firms were unaware of social media posts being made by colleagues.

ASIC recommended that firms educate staff in regard to compliance with the Corporations Act and vet any social media posts before they are posted.

The concerns raised by ASIC will add weight to the case for Australia to adopt something similar to the AIM system operating in the UK where companies rattling the tin, either through traditional marketing formats or social media, must have the content independently verified.

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