The Australian Securities and Investments Commission (ASIC) has released its eighth report on the regulation of corporate finance issues in Australia: Report 567 ASIC Regulation of Corporate Finance: July to December 2017. According to ASIC, the report provides greater transparency about the role it plays in the regulation of corporations and corporate transactions in Australia through highlighting key statistical information and observations from its work in the regulation of fundraising transactions; mergers and acquisitions; corporate governance issues; related party transactions and financial reporting. ASIC's observations in relation to fundraising disclosure and conduct and corporate governance issues are discussed below.

Fundraising: Review of fundraising disclosure and conduct

In relation to fundraising ASIC reports that in the period:

• There were 329 original disclosure documents lodged with ASIC, raising over $5bn.  Of these 8.5% were lodged by emerging market issuers.  

• ASIC notes that there was a 20% increase in the number of IPO disclosure documents lodged during the period (72) as compared with the previous period (1 January to 30 June 2017).

• ASIC raised disclosure concerns in 24.3% of fundraising offers (80 of 329 original fundraising offers), extended the exposure period 39 times (11.9%) and issued 10 interim stop orders in relation to 6 offers (1.8% of all offers) and 2 final stop orders (0.6%) of offers. 

• The top five most frequent disclosure concerns ASIC raised about prospectuses were:

  1. Risk disclosure inadequate, insufficiently prominent and/or not tailored (raised 14 times).  And separately, Business model not fully and/or adequately disclosed (also raised 14 times).

  2. Unclear or insufficient detail on use of funds (raised 10 times)

  3. Summary, investment overview and/or key information insufficient or not clear concise and effective (raised 8 times)

  4. Insufficient disclosure of directors’ history (raised 6 times)

  5. Disclosure not balanced (raised 6 times).

ASIC states that these areas will remain areas of focus over the next reporting period. 

Other areas of focus: ASIC states that in addition to the ongoing concerns identified above, corporations and their advisers 'should be aware of several new developments in corporate fundraising activities' which it will monitor over the next period.  These include:  the introduction of new accounting standards and disclosure practices for historical and prospective financial information; reconciling prospectus forecasts (and any revised forecasts) and year-end announcements; restrictions on advertising; the need for more concise disclosure of mineral asset information; underwriters' obligations; emerging market issuer listings;  prospectuses for unlisted property developments.  

• Disclosure of financial information: ASIC notes that three new accounting standards are coming into force over the next two years which will impact the disclosure of financial information: Australian Accounting Standard AASB 9 Financial instruments (which applies from years commencing 1 January 2018); Australian Accounting Standard AASB 15 Revenue from contracts with customers (which applies from years commencing 1 January 2018); and Australian Accounting Standard AASB 16 Leases (which applies from years commencing 1 January 2019).  ASIC comments that in addition to ensuring implementation of the new standards it considers that 'companies and their advisers should be careful when preparing for any transactions that will require disclosure of historical and prospective financial information that overlaps the respective implementation dates'.  More specifically ASIC states that it will be 'closely reviewing disclosure practices for historical and prospective financial information' and suggests that companies and their advisers consider: providing appropriate disclosure of the future effect of the new accounting standards; the prominence given to financial information presented under the pre-existing standards and the new standards, taking into account the size and extent of the effect of applying the new standards; presenting historical and prospective financial information on a consistent basis, or presenting information on both bases for an overlap period; ensuring the effects on historical financial information are presented clearly by a general discussion, reconciliation of key items (such as profit and net assets), and/or line-by-line reconciliations for one or more years; disclosing key assumptions made when applying the new standards to forecast information; and clearly identifying whether the pre-existing or new standards have been applied to particular information.

• Reconciling prospectus forecasts and year-end announcements: To avoid misleading or confusing the market, ASIC states that it recommends that issuers reconcile their year-end announcements to their prospectus forecast, as well as any revised forecasts.

• Concise disclosure of mineral asset information: ASIC states that it observed an increase in the length of technical reports (some of which exceeded 150 pages in length) provided in prospectuses during the reporting period.  In addition, ASIC notes that many reports contained a high degree of 'technical jargon and technical detail'. ASIC comments that 'greater care is needed around these disclosures' and that to improve clarity, issuers could consider including technical reports in an appendix to the prospectus, rather than in between other sections of the document. 

• Restrictions on advertising of fundraising offers:  In relation to ASIC's continuing monitoring of advertising that is misleading, deceptive of is not compliant with Ch 6D of the Corporations Act, ASIC comments that it intervened in instances during the reporting period where there had been promotion of a pending IPO, distribution of misleading statements concerning the prospects of an IPO issuer and advertising published post-lodgement of a disclosure document that failed to comply with the requirements of s734(6) of the Corporations Act.  In such circumstances, ASIC notes, investors were in danger of making an uninformed investment decision based on unbalanced or potentially misleading advertising.

• Underwriter’s obligations: ASIC 'reminds issuers and promoters' of the restrictions on advertising in s734 of the Corporations Act, and to be particularly mindful of the prescriptive nature of the requirements of s734(6) once a disclosure document has been lodged.  ASIC states that it will continue to monitor advertising both before and during IPO offers, and take action (including requiring a cessation of advertising or corrective advertising) if contraventions of Ch 6D are identified.

• Emerging market issuer listings: Noting the increase in emerging market issuers lodging prospectuses during the reporting period, ASIC reiterates that it continues to review these prospectuses in detail.  ASIC adds that it focused particularly on the historical financial information contained in these documents, and the extent of work carried out by the independent accountants during the period.  ASIC adds that consistent with the assurance standards, its 'expectation is that the independent accountants thoroughly review the audit working papers of the local auditor, irrespective of their location or the language in which they have been compiled. In some cases, the independent accountant may need to re-perform some, or all, audit procedures for the financial information, including inquiry, observation and analytical procedures, and tests of details'.

• Prospectuses for unlisted property developments: ASIC states that it has observed a number of small property developers seeking funding from the public via the issue of preference shares and that the offers are structured in the following manner: 

1. 'Preference shares in a public holding company are issued to investors, offering a set rate of return once the development is successfully completed.
2. Funds are lent by the holding company to the development entity, which is a special purpose small proprietary company. The development entity obtains bank financing, constructs the project and, if successful, repays the loan with interest to the holding company'.

ASIC states that where this structure has been employed, to ensure there is transparency for investors when the project is under construction, it has required the prospectus to contain (or include by reference) documentation supporting the ownership of the property in question; evidence that a development application has been lodged; an expert opinion on the cost of construction and a valuation of the development on an ‘as if complete’ basis; and a gearing calculation; and financial accounts—irrespective of whether the development company is statutorily required to compile and lodge accounts, we will exercise ASIC’s powers under s294 to direct the production and lodgement of accounts. This is to ensure transparency for investors when the project is under construction, which may not otherwise be the case, given the loan arrangement between the holding and development companies.

Enforcement action: Conflicts of interest management

• ASIC highlights its action against Foster Stockbroking Pty Ltd (FSB) over the stockbroker's capital markets and research businesses following an ASIC investigation into management of conflicts of interest in FSB.  ASIC states that it was concerned that FSB failed to adequately manage conflicts between the commercial and personal interests of FSB and its directors, and the interests of FSB’s clients.

[Note: The specific action is discussed in detail here: 17-404MR ASIC accepts enforceable undertaking from Foster Stockbroking following ASIC investigation into conflicts of interests]

Other topics: Other topics included in ASIC's overview of Fundraising include (among others): ASIC research into why listed companies fail and various policy initiatives such as guidance on sell side research; guidance on initial coin offerings; guidance on crowd sourced funding for public companies). 

Corporate Governance

• Related Party Notices: ASIC states that in the period it received 309 related party approval notices under s218 (over double the number received during the previous period).  ASIC comments that the number received is consistent with historical trends and is the percentage of abridgement applications associated with these lodgements.  ASIC states 'urges' companies to seek ASX comments prior to lodging meeting documents in order to reduce the number of documents requiring re-lodgement.

• Disclosure and Climate Risk: ASIC comments that environmental and other sustainability risks (including climate risk) generally 'require a proactive approach to strategy and risk management by all directors' and that on this basis directors need to understand and continually reassess risks and ask relevant questions of management.  ASIC adds that directors should consider these risks in the context of their disclosure obligations under s299A of the Corporations Act 2001 (in the operating and financial review (OFR)) on which it has published guidance  (Regulatory Guide 247 Effective disclosure in an operating and financial review (RG 247)). ASIC adds that Directors may also like to consider the value of disclosing additional information that would be relevant under integrated reporting or sustainability reporting where that information is not already required for the OFR.  ASIC comments that 'We consider it prudent and appropriate for persons involved in the preparation of disclosure documents to carefully consider climate risk in the context of the issuer’s business model and future strategies and prospects, and make necessary disclosures where required'.

• Cyber resilience of firms in Australia’s financial markets: ASIC's comments in relation to cyber resilience appear to replicate the findings in Report 555 Cyber reliance of firms in Australia's financial markets (see: Governance News 4 December 2018).  ASIC comments that cyber resilience is key area of focus and notes that 'While REP 555 shows greater engagement by firms on the issue, there is disparity between firms and insufficient investment in cyber resilience measures.  We encourage all financial markets firms to consider and discuss the information in REP 555 as they develop or enhance their cyber resilience frameworks'.

• 2017 AGM season: The report appears to replicate the findings of Report 564 Annual general meeting season 2017 (REP 564) (see Governance News 02/02/2018) which provides an overview of the AGM season in 2017 for S&P/ASX 200 listed entities that held their AGMs by 31 December 2017.

[Sources: REP 567 ASIC regulation of corporate finance: July to December 2017; 18-053MR ASIC reports on corporate finance regulation – July to December 2017]