Australia: ASIC targets infrastructure fundraising: back to the future?

ASIC has issued draft guidelines for a content checklist for infrastructure fund prospectuses.

Checklists for fundraising documents were abandoned in 1991, because they encouraged prospectuses that "ticked the boxes", rather than addressing the needs of investors.

Now ASIC thinks that checklists are a good idea when fundraising for infrastructure investment. Its reasoning is that:

• there is about to be an upsurge in infrastructure projects; and
• as an investment choice, infrastructure is too complex for retail investors to understand under current prospectus and PDS rules.

ASIC wants to issue a set of guidelines that would set out:

• benchmarks against which infrastructure fundraising documents would report, on an "if not, why not" basis; and
• matters which infrastructure fundraising documents should address (the "disclosure principles").

Meeting the benchmarks and applying the disclosure principles would not be mandatory. Nor would it guarantee that a fundraising document complied with the statutory disclosure obligations.

Who would be covered?

ASIC hasn't quite decided what would qualify as an "infrastructure entity". It's currently considering two different definitions – listed or unlisted registered managed investment schemes, companies or stapled structure investments that have been offered to retail investors on the basis that:

• their primary strategy or investment mandate is to invest in infrastructure assets, the right to operate infrastructure assets or other entities which, either directly or indirectly, primarily invest in infrastructure assets (this is ASIC's currently preferred definition); or
• at least 70% of the value of their non-cash assets may derive from:
  • (a) infrastructure assets or the right to operate infrastructure assets; and/or
  • (b) investments in equity accounted unlisted entities which invest either directly or indirectly in infrastructure assets.

A crucial element, of course, is what constitutes "infrastructure assets". For the purposes of this draft policy, ASIC defines them as:

"the physical plant, property or equipment of roads, railways, ports, airports and other transport facilities, telecommunications facilities, gas or electricity generation and transmission, water supply and sewerage, hospitals, education, public housing and recreational facilities".

This is intended to be an exhaustive list.

What are the benchmarks?

The proposed benchmarks against which prospectuses and PDSs would report (on an "if not, why not" basis) cover a wide range of matters:

• corporate structure and management
• remuneration of management
• classes of units and shares
• substantial related party transactions
• cash flow forecast
• base-case financial model
• performance and forecast
• distributions
• updating the unit price.

For example, in the case of cash flow forecasts, the benchmark would be:

"The infrastructure entity has, for the current financial year, prepared and had approved by its directors:

• (a) a 12-month cash flow forecast for which the entity has engaged a suitably qualified person or firm to provide, in accordance with auditing standards:
  • (i) negative assurance on the reasonableness of the assumptions used in the forecast; and
  • (ii) positive assurance that the forecast is properly prepared on the basis of the assumptions and on a basis consistent with the accounting policies adopted by the entity; and
• (b) an internal unaudited cash flow forecast for the remaining life of each significant infrastructure asset."

Note that this does not require the fundraiser to prepare these forecasts: it only has to disclose whether it has done so (and, if not, why not).

"Performance and forecast" could perhaps be more accurately described as "performance against forecast". The fundraiser would have to report against the following benchmark (again, on an "if not, why not" basis):

"For any operating asset developed by the infrastructure entity, or completed immediately before the infrastructure entity's ownership, the actual performance for the first two years of operation equals or exceeds the original disclosed forecasts used to justify the acquisition or development of that asset."

Others are less detailed, but still pack a punch. For example, the corporate governance benchmark requires disclosure of whether the entity's corporate governance practices comply with ASX's corporate governance principles. This might seem like a no-brainer for listed entities. However, ASIC wants it to apply to unlisted entities as well.

Similarly, the benchmark for related party transactions would require unlisted entities to report on whether they comply with ASX Listing Rule 10.1 as if they were listed.

What are the disclosures?

ASX's proposed disclosure regime would see entities do more than just report on an "if not, why not" basis. Instead, they would have to disclose information about:

• key relationships
• management fees and performance fees
• related party transactions
• financial ratios
• capital expenditure and debt maturities
• foreign exchange and hedging
• base-case financial model (including key assumptions and procedures used in deriving the model, and an analysis of the effect on the entity if key assumptions were materially less favourable than anticipated)
• valuations (information about valuations and their key assumptions, as well as the entity's policy on valuations – see below)
• distribution policy
• withdrawal policy
• portfolio diversification.

The amount of information to be disclosed could be quite detailed. To take one example – valuations – ASIC proposes disclosure of:

• (a) details of the entity's valuation policy;
  
  
• (b) if, and how, valuations and supporting documentation are available to investors – or a summary of the valuations (required for significant infrastructure assets only) containing at least the following information:
  • (i) who prepared the valuation (including whether the valuation was prepared by management or externally);
  • (ii) the date of the valuation;
  • (iii) the scope of the valuation and any limitations on the scope;
  • (iv) the purpose of the valuation;
  • (v) the value assessed and key assumptions used to determine value;
  • (vi) the key risks specific to the infrastructure assets being valued;
  • (vii) the valuation methodology;
  • (viii) the period of any forecast and terminal yield;
  • (ix) the discount rate; and
  • (x) the income capital expenditure and capital growth rates over the forecast period; and
• (c) any circumstances that may result in a conflict of interest arising in the preparation of the valuations.

What's the timeline?

ASIC would like to see the new policy in operation by the end of this year. It would apply to PDSs and prospectuses issued before as well as after that date.

PDSs and prospectuses dated before 1 January 2012 would have to be made compliant with the new policy by the issue of a new or supplementary PDS or prospectus by the first day of the entity's next financial year that begins on or after 1 January 2012.

However, as part of the consultation process (which closes on 6 May) ASIC is seeking comment on this implementation timetable.

Where to from here...

Fundraising is clearly in ASIC's sights at the moment. We understand that it is currently close to issuing another consultation paper on prospectus disclosure. This will include guidance on "clear, concise and effective" fundraising documents as well as general content guidance.

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.