13 Apr 2011

ASIC rewrites the rules on prospectuses

Hot on the heels of its proposed guidance for infrastructure prospectuses and use of non-complying financial information, ASIC is proposing a radical rewrite of prospectuses in general.

A proposal released yesterday afternoon aims to change both the form and, to some degree, the contents of all prospectuses.

Under the proposal, ASIC uses the statutory requirement for "clear, concise and effective" prospectuses as a springboard for the development of guidance on the structure and content of prospectuses. This guidance would also affect other fundraising documents, as well as takeover documents.

"Clear, concise and effective"

Since 2004, prospectuses and other equity fundraising documents have been required to be "clear, concise and effective" (section 715A). However, there has been little agreement or direction on exactly what this means in the context of prospectuses. Of course there has been no shortage of guidance from ASIC on what "clear, concise and effective" means for PDS disclosure for financial products – so this release could be viewed as an effort by ASIC to align disclosures in the way that the changes in 2004 were expected to do.

Its opinions are of more than academic interest, because section 715A empowers ASIC to issue a stop order on a disclosure document that is not "clear, concise and effective". Certainly, such guidance in the context of PDSs has created a standard which issuers make every effort to comply with.

The implications go beyond fundraising documents. ASIC believes that its guidance is also relevant to:

  • bidder's statements, target's statements and explanatory statements in scheme bids;
  • notices of general meetings; and
  • independent experts' reports.

ASIC's suggestions for achieving clear, concise and effective documents are wide-ranging. They cover:

  • the language used (ASIC's guidance is detailed, ranging from things like avoiding jargon to omitting boilerplate text where possible);
  • the structure of the document; as well as advocating things like the use of navigation aids, diagrams, etc, ASIC thinks that:-
         - there should be an "investment overview" (see below) and
         - there should be less use of photographs (see below);
  • the length of the document (it should be as short as possible and only contain information that investors need to make the investment decision);
  • greater use of incorporation by reference (of documents lodged with ASIC).

The investment overview

ASIC is particularly concerned that the front sections of prospectuses that are "dominated by marketing statements and photographs and do not include key information about the offer". So a key part of ASIC proposals is the inclusion of an "investment overview" for prospectuses.

This would have three features:

  • it would be the first substantive section of the document;
  • it would highlight and provide a "meaningful summary of information that is key to a retail investor's investment decision";
  • it would provide "balanced disclosure of the benefits and risks".

The investment overview would be subject to its own ASIC guidelines about form and content.

As regards to form, ASIC proposes:

  • cross-references should be used to allow retail investors to easily find further information within the document;
  • headings could be in the form of questions;
  • consideration should be given to presenting the investment overview in the form of a table;
  • benefits and risks should be displayed equally prominently;
  • the investment overview should be shorter than the prospectus, "but not so brief as to omit key information".

The suggested key information in the investment overview is:

  • Business model: How will the issuer make money and generate income or capital growth for investors (or otherwise achieve its objectives)?
  • Risks: What are the key risks associated with the issuer's business model, the security and the offer?
  • Financial information: What key financial information do investors need to know about the issuer's financial position, performance and prospects? ASIC says that this would generally include net profit after tax, the earnings per share ratio, a gearing ratio, and a discussion of the issuer's financial position and any commitments, events or uncertainties that might materially affect its liquidity. Issuers should also consider whether it was appropriate to include an interest cover ratio and a working capital ratio.
  • Directors and key managers: Who will be in control and do they have the appropriate expertise?
  • Interests, benefits and related party transactions: Who will benefit?
  • The offer: What will an investor get, how much will they pay, and what will the offer proceeds be used for?

ASIC provides detailed guidance on what it thinks each category of information should cover.

Prospectus contents

As well as setting out what should be in the investment overview, ASIC says that the same topics should be addressed in greater detail in the body of the prospectus itself. It also says that there should be a prominent explanation of any divergences from accepted industry guidelines covering specific types of issuers or disclosure topics.

What's the deal with photographs?

This one has been coming for a while. ASIC has been getting increasingly edgy about the creative use of photographs in disclosure documents.

Although it acknowledges that they can be useful to break up large sections of text, it wants some restrictions on their use:

"Photographs (other than those on the front cover) should only be included after the investment overview.

Photographs should be meaningfully labelled and only included where they are relevant to the issuer’s business or the offer. Photographs should not be used where they are likely to misrepresent the nature, stage or scale of your business. This is the case whether or not the photograph has a disclaimer."

It is also considering whether there should be restrictions on the use of photographs of celebrities and whether, if a celebrity's photograph is used, there should be disclosure of any benefits that the celebrity received.

But wait – there's more!

In addition to seeking comment on all of the above, ASIC has raised the following issues for discussion, with a view to taking further action:

  • transaction-specific prospectuses (section 713): are all of the guidelines above applicable to transaction-specific prospectuses, and should ASIC include further guidance in its existing regulatory guide on transaction-specific prospectuses (RG 66)?
  • low doc rights issues (section 708AA): although ASIC thinks that only its general "clear, concise and effective" guidelines are relevant to low doc rights issues documents, it asks whether they should also include an "investment overview" and whether it should provide separate guidance on the content of the offer documents used in such offerings; and
  • electronic prospectuses: would electronic prospectuses be used more often if ASIC issued more guidance or relief to facilitate their use?

What's the timeline?

The deadline for comments on these proposals is 7 June 2011. ASIC hopes to have the final guidance released in December this year.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.