Services: | Corporate & Commercial |
Industry Focus: | Agribusiness, Life Sciences & Healthcare |
What you need to know
- ASIC has released a report highlighting common failures in the due diligence processes adopted by companies conducting an IPO. It warns that issuers must adopt a comprehensive due diligence process to avoid defective disclosure in their prospectuses and potential personal liability for the issuer, directors and others.
- Directors must be actively engaged in the process – a 'box-ticking' approach is not enough.
- If your company is considering an IPO, or if it is already listed and plans to raise funds under a disclosure document, it is vital that the board engages the right team of advisers and implements a robust due diligence process to reduce the risk of liability and costly delays associated with defective disclosure.
A recent report by the Australian Securities and Investments Commission (ASIC) warns that companies seeking to IPO in Australia must adopt a robust due diligence process to avoid defective disclosure in their prospectuses and potential personal liability for directors, underwriters, advisers and others involved in the preparation of the prospectus.
ASIC has warned that it intends to closely scrutinise IPO prospectuses and issuers' due diligence processes over the course of this financial year, as well as public company fundraising practices generally. It therefore pays to ensure that your company engages the right advisers and heeds ASIC's advice about prospectus due diligence and disclosure.
ASIC review of IPO due diligence
ASIC has reviewed the IPO due diligence practices of 12 companies undertaking IPOs over the past two years and identified a number of key failings. In its report issued last month, ASIC establishes a clear link between poor due diligence practices and defective disclosure in prospectuses.1 ASIC emphasises that an effective due diligence process requires much more than a box-ticking exercise by directors, management and their advisers. Rather, it demands active involvement and engagement by directors, management and their advisers.
An inadequate due diligence process exposes issuers, their directors, underwriters and others to the risk of personal liability in relation to loss suffered by investors and others as a result of defective disclosure in the prospectus. The penalties – both civil and criminal – can be severe.
Due diligence: a quick recap
It is market practice in Australia for companies seeking to IPO (and otherwise conduct fundraisings under prospectuses) to adopt a due diligence process designed to ensure that the prospectus contains accurate information and has not omitted information that is material to investors.
A robust due diligence process is vital for two reasons:
- to ensure information presented in the prospectus is accurate, complete and not misleading; and
- to enable those involved in the preparation of the prospectus to, if necessary, establish and rely upon the due diligence defence to defective prospectus disclosure.
ASIC's key findings and recommendations
ASIC's report identified the following key issues and recommendations:
Issue | Recommendation |
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1. Poor due diligence often leads to defective disclosure, such as misleading and deceptive statements or statements with no reasonable basis. |
Adopt a robust due diligence process that involves:
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2. The extent of due diligence is varied and often inadequate. ASIC found that:
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Engage appropriate professional and expert advisers with the requisite skills and experience. This is important because:
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3. A number of companies adopt a 'box ticking' approach that focuses on form over substance, which ultimately impacts on the quality of information presented in the prospectus. |
Ensure the due diligence process is:
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In some instances, directors demonstrated only superficial involvement in the due diligence process and preparation of the prospectus itself – this was evident despite directors being directly liable under the Corporations Act for the contents of the prospectus. Further, foreign directors appeared less likely to be closely involved or engaged in the due diligence process. In some instances, prospectuses and other important documents were not translated for directors unable to read or speak English. |
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It is market practice in Australia for companies seeking to IPO (and otherwise conduct fundraisings under prospectuses) to adopt a due diligence process designed to ensure that the prospectus contains accurate information and has not omitted information that is material to investors.
A robust due diligence process is vital for two reasons:
- to ensure information presented in the prospectus is accurate, complete and not misleading; and
- to enable those involved in the preparation of the prospectus to, if necessary, establish and rely upon the due diligence defence to defective prospectus disclosure.
ASIC's key findings and recommendations
ASIC's report identified the following key issues and recommendations:
What this means for you
ASIC plans to continue its wide ranging reviews of prospectuses and other aspects of public company fundraising, and the due diligence processes underpinning these activities, with the aim of improving market practice. It has reiterated that it will not be shy in exercising its powers to intervene in an issuer's fundraising by, for example:
- requiring an amendment to be made to the prospectus
- extending the exposure period, or
- issuing a stop order.
These actions can result in delays in the fundraising process, as well as additional costs and reputational damage. It is important to get it right the first time round.
If your company is considering an IPO, or if it is already listed and plans to raise funds under a disclosure document, it is vital for the board to engage the right team and implement a robust due diligence process. Otherwise, there is a real risk of civil and criminal penalties for all involved if the prospectus fails to live up to ASIC's standards for disclosure.
Footnotes
1 A copy of ASIC's Report 484 Due diligence practices in initial public offerings can be accessed at http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-484-due-diligence-practices-in-initial-public-offerings/
This article is intended to provide commentary and general information. It 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 article. Authors listed may not be admitted in all states and territories