Fundraising and CLERP 9

By Charles Rosedale.

Key Points:
CLERP 9 has a potential sting in the tail for investors who on-sell securities within 12 months of a placement.

Although not a major focus of CLERP 9, fundraising will face some changed rules under the new regime. These changes particularly affect three areas:

• on-sales of securities
• prospectuses;
• product disclosure statements (PDSs).

On-sale of securities

The on-sale of securities after an issue continues to be a problem area.

The Corporations Act has for several years contained various forms of anti-avoidance provisions with the object of limiting the use of private placements to by-pass the prospectus laws. The legislators' concern is that a company could issue securities to an institutional investor (which would not require a prospectus) with the intention that the securities would shortly afterwards be on-sold to retail investors without a prospectus. This would, in effect, be an indirect public issue.

As the Act now stands, if an issue without a prospectus is followed within 12 months by an on-sale, there is an effective presumption that the issuer and the seller intended to avoid the prospectus requirements - unless they can prove otherwise.[1]

The harshness of this regime was alleviated slightly by a Class Order made by ASIC in 2002. Some aspects of that Class Order have now been overtaken by CLERP 9.

There are two key elements to the CLERP 9 provisions. An on-sale within 12 months of issue will not require a prospectus if:

• the company issuing the securities did not intend that they be on-sold; and
• before they are on-sold, a potential purchaser has access to prospectus-level information about the securities.

The prospectus-level information can be made available by the issuing company by a notice to ASX or a prospectus. These informational requirements are outlined below. Other requirements include compliance with various provisions of the Corporations Act.

... notice to ASX

Within 5 days of the issue of the securities, the company can give ASX a notice:

• stating that the company has met all of its continuous disclosure and financial reporting obligations; and
• setting out any information that was exempted from continuous disclosure under the carve-out to the Listing Rules and which would be required to be disclosed in a prospectus.

This notice must be given to ASX before the securities can be on-sold.

... prospectus

As an alternative to an ASX notice, securities issued without a prospectus can be on-sold if, before an offer for on-sale, the company has issued a prospectus for securities in the same class.

The most important aspect of this exemption is that the prospectus must be live when the securities are offered for on-sale. In other words, at the time the securities are offered for on-sale, the company should have a prospectus under which it is offering to issue securities of the same class.

This relief will be of most use where an institutional placement takes place shortly before a more general offer.

... underwriter

If a public offer is underwritten, the underwriter can on-sell the securities, provided the underwriter has been named in the prospectus to the offer.

Prospectuses

Prospectuses will need to be worded and presented in a clear, concise and effective matter.

Non-compliance with this new requirement will not be an offence, but may result in an ASIC stop order.

An issuer will be able to lodge a replacement prospectus to replace a prospectus that isn't clear, concise and effective.

The "clear, concise and effective" requirement was first introduced for Product Disclosure Statements (PDSs) under the Financial Services Reform Act. In the initial stages of its application of prospectuses, ASIC will refer to its policy on PDSs.

Product disclosure statements

PDSs will be aligned with short form prospectuses for continuously quoted securities to the extent that a PDS will not be required to include information contained in:

• half year and annual financial reports lodged with ASIC;
• continuous disclosure notices.

Impact

The requirement that prospectuses be clear, concise and effective is unlikely to result in any practical change to existing legal requirements. It might focus the minds of those who write such documents to consider their audience more closely.

However, the new rules for on-sales have some seemingly unintended consequences which are likely to present difficulties in practice. The new provisions have the arduous effect that the notice to be given to ASX regarding compliance with continuous disclosure and financial reporting obligations must cover compliance by the company going back several years (to 1998 in the case of financial reporting obligations).

The ability to give this notice is likely to be important for the success of the placement as it has become market practice for investors subscribing under a placement to require the issuer to warrant it will lodge the relevant notice with ASX, thereby allowing the investor to on-sell the securities without a prospectus. In order to be able to make the representations required in the notice, listed issuers intending to undertake a placement of securities may need to conduct due diligence investigations in relation to their past compliance.

This impact of the new provisions may be alleviated to some extent if ASIC is prepared to grant relief to limit the period of compliance to be addressed by the notice to 12 months. This would be consistent with the prerequisite for the exemptions from the on-sale provisions, that the relevant securities are in a class that were quoted for 12 months before the relevant securities were issued. However, there can be no certainty that ASIC will adopt this view.

[1] This does not apply to small scale offerings under which a company may raise up to $2 million per annum by issuing securities to no more than 20 investors.

For further information, please contact Charles Rosedale.