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Capital Markets Alert: ASIC releases consultation paper on prospectus disclosure - 28 Apr 2011

The Australian Securities and Investments Commission (ASIC) recently released a consultation paper proposing new guidelines for prospectuses, with the aim of improving disclosure to retail investors. While media attention has focused on photos of Jennifer Hawkins used in the 2009 Myer prospectus, the consultation paper has been issued in response to a broad-ranging review of prospectuses, complaints, legal commentary and consumer research reports since 2006, together with industry consultation.

The consultation paper proposes some significant changes to the content and format of prospectuses to address concerns that they are often unclear and difficult to read.

Here, partner Michael Hansel and associate Richard Hanel outline ASIC's key concerns and the main changes recommended in the draft guide.

What you need to know

  • ASIC's recommendations aim to ensure that prospectuses are presented in a clear, concise and effective manner. They have made a number of suggestions to help achieve this, focusing on two central recommendations and offering guidance in a number of specific subject areas.
  • While the formal regulatory guide will likely not be issued until December 2011, given ASIC's increased monitoring of prospectuses, we recommend that any prospectus prepared from this point on take into account the recommendations and guidelines contained in the draft regulatory guide. However, the guidance is not mandatory, and companies and their advisors will need to analyse how to best present the details of their offer.
  • The guide identifies a number of other documents where these guidelines will apply in varying degrees, including takeover documents, notices of shareholders meetings and independent expert reports. Primarily, this relates to guidelines for "clear, concise and effective" presentation, but some documents may also be subject to some of the other recommendations.
  • ASIC is seeking feedback on the consultation paper and draft regulatory guide (available to view online). Submissions close on 7 June 2011. HopgoodGanim will be coordinating a submission on the changes proposed, and we invite you to contact us if you would like to make a contribution to this submission.

Background: ASIC's key concerns

In releasing this consultation paper, ASIC hopes to address a number of key concerns they have about prospectuses in general, including:

  • Front sections of prospectuses are often dominated by photos and marketing statements rather than key information.
  • Disclosure of risk is too generalised and is generally not presented at the front of the document in conjunction with the benefits of the offer.
  • There is disclosure of simply descriptive information without an analysis of relevance or impact.
  • Repetition and unnecessary information contributes to unnecessary length.
  • Overuse of jargon and use of complex technical terms without proper explanation is confusing.

In addition, a number of key observations have been obtained from consumer research:

  • Prospectuses are difficult documents for retail investors to read.
  • Retail investors read the first few pages more thoroughly than the rest of the prospectus.
  • Retail investors want to see more categories of information at the beginning of the prospectus.
  • Professional and sophisticated investors place high importance on the details of the use of funds.

Ensuring clear, concise and effective presentation

ASIC's draft guide outlines tools which will enable prospectuses to be presented in a clear, concise and effective manner. Suggestions include the following:

  • Use an investment overview as the first substantive section of the prospectus (in place of multiple summary sections).
  • Use plain language.
  • Order the prospectus logically so it is easy to navigate.
  • Remove repetitive summary sections, general industry background that has little relevance to the business model, and marketing information that conveys little information.
  • Avoid long summaries of key contract terms (such as termination clauses of underwriting agreements) and incorporate by reference any information that is not key to assessing the offer, such as contracts, trust deeds, details of corporate governance policies, and secondary expert reports.
  • Don't use photos until after the investment overview, and limit them to relevant photos that are not misleading. Photos of celebrities should be avoided unless as an express endorsement.

While ASIC has provided a high level of detail as to how these requirements can be satisfied, the guidance is not mandatory.

Incorporating an investment overview

Incorporating an investment overview is seen as central to presenting a clear, concise and effective prospectus. Suggested content includes the following:

  • An explanation of the company's business model
  • The key risks to the business model
  • The key financial information and specified financial ratios
  • What significant interests and benefits will be received by directors and other personnel connected to the offer
  • Details of any significant related party arrangements
  • The proposed use of funds
  • The key terms and conditions of the offer
  • Express acknowledgement if the investment is speculative or if the achievement of objectives is high-risk

Again, this guidance is not mandatory, and the content of the investment overview and its corresponding length will depend on the requirements of the offer.

Specific content guidance

ASIC has also identified a number of areas within prospectuses which can be improved, suggesting that prospectuses include:

  • a clear description of the business model, identifying the key components and details as to how those components relate to each other;
  • better organisation and explanation of risks, with greater prominence given to key specific risks;
  • better presentation of financial information, with a more prescriptive approach so as to achieve a "standard" approach to the presentation of this information; and
  • a more balanced disclosure of information relating to directors and key management personnel, including disclosure of matters such as criminal convictions, convictions or disciplinary action under the Corporations Act, personal bankruptcies, and whether they have been an officer of a company that has entered into external administration because of insolvency.