ASIC finds poor disclosure in IPOs

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by Mark Abernethy

The corporate regulator has scolded IPO issuers and their advisers for low quality due diligence of documents which it says results in defective disclosure.

Between November 2014 and January 2016, the Australian Securities & Investments Commission (ASIC) conducted reviews of the due diligence practices of 12 IPO issuers, ranging across small, mid-sized and larger offers and a sample of offers from emerging market issuers.

ASIC says its review – outlined in ‘REP 484’ – focused on the practices and processes adopted by issuers in producing a prospectus with the IPO.

“Due diligence is not a process prescribed in the Corporations Act 2001 (Corporations Act),” REP 484 states. “Rather, it has emerged as a market practice to ensure that the prospectus is accurate and complete.”

ASIC Commissioner John Price said the purpose of the review was to observe market practices. He said due diligence mitigated the risk of future liability from a poor-quality prospectus. Due diligence also ensured the prospectus was not misleading and included all information necessary to make an informed investment decision.

“There are clear benefits in conducting a thorough due diligence process and significant consequences for poor quality due diligence,” Price said.

The report makes it clear that while company directors have to stand by the accuracy of a prospectus in an IPO, their legal advisers must support the due diligence. “It is important for these parties to engage in a robust and thorough due diligence process supported by their advisers to satisfy themselves that this information is not defective.”

ASIC’s review concluded that the issuers who demonstrated poor due diligence practices produced prospectuses with defective disclosure, “such as misleading and deceptive statements with no reasonable basis. These prospectuses also omitted material information that would have been included had the issuer conducted all reasonable investigations.”

Even in instances where a number of due diligence processes had been adopted and followed, ASIC observed a number of issuers using a ‘box ticking’ approach to the due diligence rather than focusing on the disclosure in the prospectus.

The key observations of REP 484 include not only that poor due diligence practices often produced prospectuses with defective disclosure, but that low-cost due diligence may often lead to delays, further work and ultimately be more costly to an issuer.

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