Australia: ASIC report sheds light on investment decisions in IPOs

Services: Corporate & Commercial
Industry Focus: Life Sciences & Healthcare

What you need to know

  • ASIC has released a report on recent research into the factors that institutional and retail investors take into account when deciding whether or not to invest in an initial public offering (IPO).
  • The report shows that institutional and retail investors shared certain characteristics but differed in many respects, including the way they viewed the prospectus, with retail investors reporting that they found prospectuses challenging.
  • Given that ASIC has said it intends to take this research into account in considering how it regulates IPOs, companies looking to list should take note of the report's findings and expect further guidance to issue.

What do investors consider most closely when evaluating an opportunity to invest in an initial public offering (IPO)?

Do institutional and retail investors place different weight on different sources of information?

How well do retail investors really understand prospectuses?

These questions were at the heart of recent research that ASIC has detailed in a report released last month. In Report 540 Investors in initial public offerings,1 ASIC has analysed the findings from inquiries undertaken with both institutional and retail investors, shedding light on each of their approaches to investing in an IPO.

This report on investor decision-making is the latest instalment in ASIC's continued focus on the conduct of IPO activity in Australia, following its scrutiny of due diligence and marketing practices relating to IPOs, and its release of guidance on disclosure requirements for historical financial information.

Companies considering an IPO should take note of ASIC's latest report for two important reasons:

  1. The report provides an indication of the direction that Australia's corporate regulator might take in further scrutinising IPOs in the future, as ASIC has stated that the findings will influence its approach to regulation. The very fact that ASIC has invested in obtaining findings of this kind, focusing on qualitative and behavioural analysis of investor decision-making, is interesting in itself.
  2. The findings offer insights about how institutional and retail investors respond to the various materials they consider when evaluating an investment opportunity, allowing companies the chance to keep those insights in mind as they prepare to launch future IPO campaigns.

ASIC's key findings

ASIC's market research found that institutional and retail investors shared certain characteristics when considering investment opportunities, in that they both:

  • considered the prospectus but also used a variety of other information to assess an IPO, and
  • found it important to have access to, or information on, the management of the IPO issuer.

The research also identified numerous differences between:

  • the way the two groups considered the same material, particularly the prospectus, and
  • the additional information sources that institutional and retail investors were most likely to consider beyond the prospectus.

In the two tables below we summarise the report's key findings about the primary factors for decision-making by institutional and retail investors.

Institutional investors – what do they consider?

Factor for decision-making Summary of findings
Prospectus Institutional investors said they valued the prospectus because it was the main source of information on an IPO and it was a regulated document for which directors and others involved in the IPO have liability.
Management team Institutional investors said speaking to the IPO issuer's management was an essential part of their process of considering an investment opportunity.
Internal analysis Institutional investors rated their internal analysis as being important to assessing the value of an offer. They undertook their own analysis of an IPO, including industry research, financial analysis and investigating the rationale for the IPO.
Investor education report Feedback on the importance of investor education reports varied. Some institutional investors were sceptical of their value, as this information was provided by a sell-side firm and therefore potentially conflicted. Others reported this background information on the industry could be useful.

Retail investors – what do they consider?

Factor for decision-making Summary of findings
Prospectus Retail investors indicated that they found prospectuses to be difficult, primarily because of their length and the complexity of the language used. Most retail investors said they felt comfortable ignoring large sections of the document and only focussed on the parts they considered to be most important, or that which they said they could understand.

The findings also showed that retail investors perceive prospectuses as 'marketing' documents that do not necessarily capture the whole picture of an IPO.

Finally, retail investors found that the risk disclosure made in prospectuses was too generic and not tailored to each company's specific risk environment.
Management team Like institutional investors, retail investors also considered management important and said they wanted more information on the IPO issuer's management team. Some even dug for more information than what was provided in the prospectus and conducted further searches to check whether any of the management team had a history of bad management.
Financial media Retail investors commonly reported that they first heard about an IPO from financial media, such as mainstream media and investment magazines.

Retail investors also viewed financial journalists and commentators as independent and having expertise. The research found that a commentator's supportive view of an IPO could have a powerful influence on a retail investor's decision to invest.
Brokers Most of the retail investors who participated in the research did not use a full-service broker or other paid investment advice; they were 'self-directed'. ASIC's report noted that this is a very different result to quantitative research conducted in 2003, which showed 60% of respondents used a full-service broker.2

More experienced retail investors reported using online brokerage services. Other retail investors indicated they did not trust brokers to provide unbiased information and were not convinced that brokers added sufficient value.

That said, when they could obtain broker reports, a considerable number of retail investors found the analysis useful. Some said the reports were written in plain English and had more relevant analysis than that provided in the prospectus. ASIC noted that the research did not confirm whether these reports were 'broker reports' or simply summaries obtained online.
Online forums and social media The small number of retail investors who said they used online forums considered the advice from other members was 'genuine' (that is, independent) and they valued the opinion of members they perceived as knowledgeable about investments. Those same investors valued online forums for providing different perspectives and links to other information.

A few retail investors said that social media was strongly influential on their decisions to invest in an IPO and found this information through subscribing to Facebook groups set up by an investment advisory service to which they were subscribed.

Similarly, a few retail investors used Twitter to follow what was happening in the market or other sites to follow issuer sentiment.
Company information Some retailers reported that they viewed the issuer's website to find additional information beyond what was available in the prospectus, and to get a 'feel' for the issuer based on the website's appearance and content. A few retailers also said they would contact the IPO issuer directly to see if they were able to obtain further information.
Internet searches Almost all of the retail investors said they undertook internet searches on the issuer of varying detail at some stage in their investment decision-making process. Of the more detailed searches, the retail investors looked for information on the management team of the issuer, its competitors and the issuer's market.
Family, friends, colleagues For some retail investors, a recommendation from a friend, family or colleague was the key or even the sole reason they invested in an IPO.

What can we expect ASIC to do with these findings?

ASIC's primary concern when regulating IPOs is to ensure that investors have sufficient information to make informed decisions.

ASIC noted in this latest report that while it is generally satisfied that its regulation of IPOs is 'largely sound', it intends to enhance its approach to IPOs by monitoring a variety of sources of information available to retail investors.3

Although ASIC conceded that the small sample size of the retail investors (52 individuals) may not reflect the whole population of retail investors in IPOs, it will still consider these findings in issuing further guidance and considering how it regulates IPOs.

Based on the findings from its research, ASIC has indicated that it intends to expand its regulation of IPO activity to add the following to its list of focus areas:

  • encouraging stakeholders to improve access to information on issuer management
  • increasing surveillance of online investor forums and social media
  • providing additional information about the IPO process to retail investors.

Key takeaways for companies looking to undertake IPOs

In light of ASIC's findings on investor decision-making, any company looking to undertake an IPO should:

  • anticipate that ASIC is proactively monitoring not only the prospectus but all forms of marketing, including newsletters, magazines, social media and information included in subscription services dedicated to investing
  • ensure its prospectus complies with ASIC Regulatory Guide 228 which provides guidance on ASIC's view of how to make prospectuses effective disclosure documents – in particular, the 'clear, concise and effective' requirement should be carefully considered against the report's findings that retail investors have difficulty understanding prospectuses
  • ensure any marketing undertaken by a company intending to IPO prior to lodgement of its prospectus with ASIC is limited to 'tombstone' marketing (being very limited information which is permitted under the Corporations Act 2001 (Cth)).

For more than 12 months ASIC has had a consistent focus on IPOs, shining a spotlight on different issues. We have previously written about ASIC's scrutiny of due diligence requirements, social media marketing for IPOs, and of course the changes to the disclosure requirements that came into effect last year. That ASIC is keeping a close eye on IPO activity should be expected, given that Australia has such an active and globally competitive IPO market. In 2016, 133 companies listed on ASX (which is more than the number of companies that listed on various foreign stock exchanges including the Hong Kong Stock Exchange, Shanghai Stock Exchange, Nasdaq and London Stock Exchange), raising a total of $6 billion.[4]

Given that ASIC has said this latest report on investor decision-making will influence how it regulates IPOs in the future, we anticipate this will be a continued area of focus for the regulator and further guidance may issue.

Footnotes

1 ASIC Report 540 Investors in initial public offerings was released on 31 August 2017 and is available at http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-540-investors-in-initial-public-offerings/.

2 ASIC Report 540 at [155].

3 ASIC Report 540 at [219].

4 ASX Ltd, Full-year 2017 results presentation 17 August 2017, available at http://www.asx.com.au/documents/investor-relations/FullYear2017AnalystPresentation.pdf

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

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