By Iain Laughland & Jessica Au
NEED TO KNOW
ASIC releases final regulatory guide on prospectus disclosure
Continuing its crusade on enhanced and effective disclosure, ASIC has now released Regulatory Guide 228 ‘Prospectuses: Effective disclosure for retail investors’ (RG 228). Introduced on 10 November 2011, RG 228 is largely consistent with ASIC’s Consultation Paper 155 ‘Prospectus disclosure: Improving disclosure for retail investors’ (CP 155), which was released in April this year.
‘Clear, concise and effective’
Consistent with CP 155, RG 228 provides guidance on how issuers can achieve ‘clear, concise and effective disclosure’ and suggests various communication tools (for example, active voice, short sentences, use of tables etc) to help achieve ‘clear, concise and effective’ wording and presentation. RG 228 also provides guidance on how to satisfy the content requirements for prospectuses. The guidance in RG 228 is general rather than prescriptive – ASIC will use RG 228 as a guide when reviewing prospectuses but will not use it as a checklist.
Prospectuses should contain an investment overview that highlights key information to assist retail investors make an informed investment decision. This should be the first substantive section of the prospectus and will generally appear after the Chairman’s letter. The broad categories of key information that should generally be explained in the investment overview has not changed from CP 155 – the issuer’s business model, key risks and financial information, directors and key managers, interests/benefits and related party transactions, terms and conditions of the offer, and how the offer proceeds will be used.
Specific risk disclosure
RG 228 emphasises specific rather than general risk disclosure. It should be specific and tailored to the issuer’s circumstances rather than generic. ASIC makes the point that for this reason, it is not sufficient to copy risk disclosure from another company’s prospectus even if the issuer’s business is subject to similar risks. This is the case even for general risks – if you can only provide very general information about these risks – then ASIC queries whether these risks should be included in the prospectus.
Directors and management
Disclosure about directors and management should be balanced and may require disclosure on management of insolvent companies or legal and disciplinary action. ASIC’s guidance in RG 228 is less onerous than CP 155 on this point. For example, personal offences are not likely to be relevant unless they involve dishonesty. Involvement in failed companies may not require disclosure if the failure had nothing to do with the director (for example, a major customer fails and defaults on a critical payment).
Relevance for other transaction documents
Consistent with CP 155, ASIC states in RG 228 that its guidance should be applied to transaction-specific prospectuses prepared under section 713 of the Corporations Act, bidder’s statements and explanatory statements where securities are being offered as consideration under a takeover offer or a scheme of arrangement. ASIC’s guidance on ‘clear, concise and effective’ wording and presentation also applies to offer documents in relation to rights issues (including documents issued in connection with a ‘low doc’ entitlement offer), notices of meeting under section 249L and independent expert reports. RG 228 provides greater clarity on this point than CP 155 – the extent to which ASIC’s guidance is relevant will depend on the type of decision that shareholders are being asked to make and the information available in the market.
Effectiveness as a selling document
There may be concerns that RG 228 will limit the effectiveness of an issuer’s prospectus as a selling document. Photographs should only be included where relevant to the issuer’s business or offer – where the relevance of a photograph is not self-evident, an explanation may need to be provided.
Further, the prospectus should be as short as possible. Extraneous information should be omitted – the prospectus should only contain information that investors need to make their decision. It remains to be seen over time whether there is a real basis for any concerns over the effectiveness of prospectuses as a marketing document.
The majority of the market has been adopting the principles set out in the new ASIC guidance since the release of CP 155 earlier this year. To the extent they did not, they will need to do so now. ASIC has been encouraged by the change in documentation lodged with it so far but given market conditions there has not been a substantial number of disclosure documents that have been lodged. As markets recover and disclosure documents, particularly IPO prospectuses pick up, there will be a heightened focus on compliance with the new guidance, both at ASIC and in the