Following industry consultation on Consultation Paper 155 (CP 155) which was published by ASIC on 12 April 2011, ASIC released its finalised guidance on prospectus disclosure in the form of Regulatory Guide 228 (RG 228) on 10 November 2011.
RG 228 is generally consistent with CP 155, although RG 228 contains some clarifications on issues raised by respondents during the consultation process. RG 228 has also, in some areas, moved from prescriptive guidance to a more general, flexible approach.
Key areas of guidance
The following is a summary of the key areas of guidance in RG 228:
Clear, concise and effective - ASIC has retained its guidance on how prospectuses can be worded and presented in a 'clear, concise and effective' manner. However, it has clarified that the suggested tools and methods for creating 'clear, concise and effective' documents are not mandatory, but may be useful in ensuring the document is not misleading.
Use of photographs - as in CP 155, photographs should only be included after the investment overview. If a photograph of a celebrity is included, it should be labelled and an explanation included as to why the celebrity is relevant.
Incorporation by reference - ASIC acknowledges that documents which have not been prepared for the purpose of incorporation by reference do not have to satisfy the 'clear, concise and effective' requirement.
Investment overview - CP 155 stated that prospectuses should include an investment overview at the front, highlighting information that is key to a retail investor's investment decision. RG 228 retains this guidance and also sets out the categories of information that should generally be covered in the investment overview. However, ASIC has clarified that the investment overview should be a summary of information that is key to the investment decision, rather than a summary of the prospectus as a whole.
Financial ratios - RG 228 is not prescriptive as to which financial ratios must be included in a prospectus. Instead, the guidance now explains some factors that may help companies decide which financial ratios they should choose (acknowledging that ratios are not appropriate for all companies). A prospectus should also explain how any financial ratios included are calculated and any material assumptions.
Financial information - companies with an operating history should generally give the following audited financial information for at least the 3 most recent years (or 2½ years depending on the date of the prospectus):
- an audited consolidated income statement;
- other information that is material from the notes to the financial statements; and
- any modified opinion by the auditor.
ASIC has also stated that companies should consider giving pro forma income statements for this 3 year period if there has been a significant change to the business. More detailed guidance on pro forma financial information will be contained in the guidance developed in response to Consultation Paper 150.
Commercially-sensitive information - ASIC has clarified that although section 710 of the Corporations Act 2001 (Cth) (Corporations Act) may require disclosure of confidential information relating to a company's business model, companies will not automatically need to disclose commercially-sensitive information or trade secrets.
For instance, often confidential information may not be relevant to the investor's investment decision and in some cases, it may also be unreasonable for investors to expect a company to disclose commercially-sensitive information that could be used by competitors to harm its business.
Risks - ASIC has maintained its guidance that risk disclosure should be specific and tailored to the company's circumstances rather than generic. RG 228 also includes two examples on how risk disclosure can be made specific by explaining the likelihood and consequences of the risk occurring.
Directors and key management - CP 155 stated that a prospectus should include information about whether any of the company's directors and key managers has been an officer of a company that became insolvent during the time the person was an officer or within 12 months afterwards, or has been the subject of legal or disciplinary action. Whilst this guidance has been retained, ASIC has noted in RG 228 that:
- action that concerns the person's conduct in a personal capacity and that does not involve dishonesty (e.g. driving or public order offences) may not be relevant; and
- previous insolvencies where it is clear that the manner in which the company was managed was not responsible in any way for the company failing (e.g. a major customer failing and defaulting on a critical payment) may not be relevant.
ASX has recently issued a release stating that it proposes to amend the Listing Rules with effect from 1 January 2012 to insert a 'good fame and character' requirement for directors and proposed directors of companies proposing to list on ASX. This requirement dovetails with the guidance on disclosure about directors in RG 228. For more information about this ASX proposal, please refer to our Focus Paper "Proposed Changes to the ASX Listing Rules - How the Changes Will Affect New Listings and Disclosure for Mining and Oil & Gas Companies" published on 17 November 2011.
ASIC's review of prospectuses
ASIC does not review all prospectuses, and has indicated that it may use a form of risk rating to determine which type of prospectuses to focus on.
ASIC has also stated that when reviewing a prospectus, it will consider RG 228 but will not apply it as a checklist.
Application of RG 228 to other documents
Although RG 228 is directed at disclosures required in a prospectus prepared under section 710 of the Corporations Act, ASIC has indicated that certain sections of RG 228 may also be relevant to other disclosure that requires shareholders to make an investment decision relating to securities. These other disclosure documents include:
- bidder's statements;
- explanatory statements for schemes of arrangements and scheme booklets;
- transaction specific prospectuses prepared under section 713 of the Corporations Act;
- offer information statements;
- "low-doc" rights issues offer documents; and
- independent experts report.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.