On 24 January 2012 the Australian Securities and Investments Commission (ASIC) released a new regulatory guide - Infrastructure entities: Improving disclosure for retail investors (RG 231). The guide supplements the primary disclosure obligations imposed on issuers and responsible entities (including under the Corporations Act (Cth) 2001 and other ASIC regulatory guides) by addressing disclosure risks identified by ASIC as being particular to "infrastructure entities." The new regime will apply in respect of both fundraising documents issued from 1 July 2012, and ongoing or updated disclosures (including supplementary disclosure documents) provided after that date. It is likely to increase compliance and administrative cost incurred when seeking capital from retail investors.
What is an infrastructure entity?
For the purposes of the guide, an infrastructure entity is defined as a listed or unlisted registered managed investment scheme, company or stapled structure investment that has been offered to retail investors on the basis that its primary strategy or investment mandate is to invest in any of:
- The physical plant, property or equipment of infrastructure assets
- The right to operate infrastructure assets; or
- Other unlisted entities which, either directly or indirectly, primarily invest in such asset classes.
What does the guide do?
RG 231 sets out the following benchmarks to be disclosed against by infrastructure entities on an "if not, why not" basis:
- Corporate structure and management
- The remuneration of management
- The classes of units and shares
- Substantial related party transactions
- Cash flow forecasts
- The entity's base-case financial model
- Performance against publicly disclosed forecasts for operating assets
- Distributions (if the entity is a unit trust)
- Updating the unit price (if the entity is unlisted and a unit trust).
If the benchmarks are not satisfied, the onus is on the issuer or responsible entity to explain how the business factor or issue underlying the benchmark is dealt with.
In addition to the benchmarks, RG 231 sets out principles in the following areas which ASIC considers should be addressed in disclosure documents issued under Pt7.9 and Ch 6D of the Corporations Act:
- Key relationships
- Management and performance fees
- Related party transactions
- Financial ratios
- Capital expenditure and debt maturities
- Foreign exchange and interest rate hedging
- The entity's base-case financial model
- Distribution policy
- Withdrawal policy
- Portfolio diversification.
Finally, RG 231 outlines the standards ASIC expects responsible entities to meet when advertising infrastructure entities to retail investors. It is important to note that:
- Meeting the benchmarks is not mandatory - the benchmarks establish a framework for disclosure of issues regarded as important.
- Disclosure against the benchmarks and applying the disclosure principles does not ensure that the disclosure obligations (including under the Corporations Act) for an infrastructure entity have been met. Rather, RG 231 simply assists with disclosure of specific issues within the broader disclosure requirements.
Why is the guide deemed necessary?
ASIC's view is that many infrastructure entities in which capital loss was experienced by investors during the GFC exhibited complex business and operational characteristics or risks. A review of product disclosure statements and prospectuses in 2010 identified that disclosure is often complicated, and is not readily comparable across infrastructure entities. Further, infrastructure entities' face difficulties in ensuring that the information provided to prospective investors is appropriately targeted. Consequently, disclosure documents have become long and complicated, and do not facilitate retail investors understanding of investments in infrastructure entities.
ASIC considers that:
The need to provide such information to investors in the infrastructure sector is particularly important because there is an increasing tendency for infrastructure to be funded by capital raised from the public
The guide follows on from consultation papers 134 and 154, and seeks to strike an appropriate balance between:
- Improving the quality of disclosure on investments that have complex characteristics and risks
- Not unduly interfering with the operation and marketing of infrastructure investments
- Promoting efficiency in capital markets.
On balance, the guide should achieve this objective. However, it is likely to result in increased compliance and administrative costs being incurred by issuers and responsible entities when seeking capital from retail investors in respect of infrastructure investments.
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