The Australian Securities and Investments Commission (ASIC) today announced recent results in its ongoing campaign to improve the quality of information and levels of disclosure in fundraising documents.
Since 1 July 2002, ASIC has issued 51 interim stop orders, and 8 final stop orders on prospectuses or Offer Information Statements (OIS).
‘Stop orders are an outcome of ASIC’s risk-based review of selected documents. This means we identify areas where we suspect the risk of poor information may be greater than usual, and we review documents that fall into that area’, ASIC Director of Corporate Finance, Mr Richard Cockburn said.
‘The Corporations Act doesn’t allow ASIC to judge the merits of a proposal, or the value of an investment. We can’t “approve” a prospectus in the sense of giving it a tick or a cross as a “good” or “bad” investment offer.
‘What ASIC does is to ensure the documents comply with the law. The company is required to include all the information an investor would reasonably require to make an informed decision about whether to invest. This includes information about both potential risks and rewards. It’s then up to the individual to make a decision about whether the proposal is a suitable investment for them’, Mr Cockburn said.
‘If ASIC reviews a document which we think is misleading, or lacking in information, we have the power to issue an interim stop order on the document. The company can’t accept any applications from investors while this is in place’, he said.
‘ASIC can lift the stop order if the company amends its document, or issues a new one that includes all the information the Act requires. If not, we can put a final stop order on the prospectus – and that’s permanent. A company has to go through the entire process again if they want to make the offer public for a second time’, Mr Cockburn said.
ASIC periodically issues media releases advising which fundraising documents have had interim stop orders placed on them, and the reasons why these stop orders have been issued. This is intended to assist companies and their advisers identify what particular information must be disclosed.
‘It is disappointing that we detect similar non-disclosure issues time and time again. Generally, it is the companies seeking to raise relatively small amounts, typically less than $5 million, where the following defects most commonly occur’, Mr Cockburn said.
Failure to deal with the consequences of the company not raising the full amount sought
Of all the interim stop orders issued since 1 July 2002, 26 per cent resulted from the failure of the company to disclose the financial position and prospects of the company in the event that the offer is not fully subscribed.
ASIC expects all fundraising documents to address how the company will use the funds raised. A breakdown should be given if the company has different uses for the funds raised.
If the company fails to reach the minimum subscription amount specified in the document, the company is required to refund all application money. This helps to protect investors from being locked into a company that cannot achieve its stated objectives as a result of insufficient funds.
Where the minimum subscription equals the full amount of the funds sought to be raised (full amount), or where the fundraising is fully underwritten, ASIC considers it sufficient for the document to detail how the funds raised will be applied on the basis the full amount is raised.
Where the fundraising is not fully underwritten, or where the minimum subscription is less than the full amount, it is not sufficient only to disclose how the funds will be applied if the full amount is raised. The document must also describe how funds will be applied if less than the full amount is raised.
For example, the document must explicitly state:
- whether some or all of the stated activities may need to be scaled back, and if so, how this will be done. It is not sufficient to state that the activities will be scaled back ‘as appropriate’ or ‘as the directors determine’;
- whether funds will be allocated to stated activities in any particular priority until each activity is fully funded, or whether they’ll be allocated pro rata across all stated activities;
- the effect if any, this has on the company’s financial position and prospects. For example, it may affect a company’s ability to continue as a going concern, or materially alter its debt levels.
Recently, interim stop orders have been placed on the fundraising documents of the following companies:
- Reedy Lagoon Corporation Limited;
- Conquest Mining Ltd;
- Olea Australis Ltd;
- Solagran Ltd (formerly Travelshop Limited);
- Rusina Mining Ltd; and
- First Australian Resources Ltd.
All companies have subsequently lodged a supplementary or replacement document which satisfactorily addresses ASIC’s concerns.
Prospective financial information
Another area where ASIC commonly identifies problems relates to the provision of prospective financial information. 16 per cent of the interim stop orders which have been issued since 1 July 2002 resulted from defective disclosure in this area.
ASIC requires all prospective financial information to be prepared in accordance with ASIC Policy Statement 170.
ASIC has also released guidelines for preparers and reviewers of prospective financial information included in disclosure documents, in response to requests by companies and their experts for guidance on this matter.
Examples of defects commonly identified by ASIC include:
- stand-alone, unsubstantiated statements, such as ‘the directors expect that the company will become profitable by the end of the 2004 financial year’;
- insufficient distinction between hypothetical assumptions and assumptions as to future matters which management expects to take place;
- lack of reasonable grounds for predictions beyond two years, such as the absence of an independent expert’s report, or the absence of contracts relating to forward sales, or future expenses.
Recently, ASIC has placed interim stop orders on the fundraising documents of the following companies, due to concerns in relation to prospective financial information:
- Teebook Global Limited;
- Pisces Marine Aquaculture Limited; and
- Argus Solutions Limited.
These interim stop orders have now been revoked due to the lodgement of replacement documents which address ASIC’s concerns.
ASIC’s consumer website contains useful reading about fundraising documents, as well as general consumer tips about investing in shares. Visit www.fido.asic.gov.au for more information.
Reedy Lagoon Corporation Limited
On 7 January 2003, ASIC placed an interim stop order on the OIS of Reedy Lagoon Corporation, dated 24 December 2002.
Reedy Lagoon is a Melbourne-based company involved in the exploration of gold and diamond deposits. The OIS sought to raise $1,365,000 to fund continued mineral exploration and provide working capital for the company.
In addition to concerns about a lack of information regarding the risk of insufficient funds being raised, and the proposed use of funds if insufficient capital is raised, ASIC required Reedy Lagoon to provide more information about the risk that a material amount regarding past legal work may become payable, although this payment could not be made from the proceeds of the OIS.
ASIC revoked the interim stop order following the lodgement of a supplementary prospectus on 9 January 2003, which adequately addressed ASIC’s concerns.
Conquest Mining Limited
On 8 January 2003, ASIC placed an interim stop order on the prospectus of Conquest Mining, dated 23 December 2002.
Conquest Mining is a listed company, based in Perth, involved in diamond and gold exploration. It is seeking to raise a maximum amount of $1,307,705 by a non-renounceable pro rata entitlement offer. The offer is not underwritten and there is a minimum subscription of $150,000.
ASIC was concerned the prospectus did not adequately disclose the effect of the offer on the company in the event that the offer is not fully subscribed.
The interim stop order was revoked on 9 January 2003 following the lodgement of a supplementary prospectus.
Olea Australis Limited
On 14 January 2003, ASIC placed an interim stop order on the prospectus issued by Olea Australis, dated 8 January 2003.
Olea Australis, a Perth-based owner and manager of olive orchards, is seeking to raise a maximum amount of $3,090,750 by way of a renounceable rights issue. There is no minimum subscription amount or underwriting.
ASIC was concerned the prospectus did not adequately disclose the effect of the offer on the company in the event that the offer is not fully subscribed.
ASIC revoked the interim stop order on 15 January 2003 after the company lodged a supplementary prospectus.
Solagran Limited (formerly Travelshop Limited)
On 4 February 2003, ASIC placed an interim stop order on the prospectus lodged by Solagran on 10 January 2003.
Solagran is a listed company, currently under trading suspension. Solagran was formerly named Travelshop, and operated in the travel business. Prior to that, it was known as Paget Mining Ltd, a mining company.
Solagran is proposing to enter the bio-medical industry by acquiring all the shares of a non-listed company, Solathera Limited (formerly Solagran Limited), in exchange for Solagran shares.
Under a multi-purpose prospectus, the company is proposing to raise a maximum amount of $1,150,000 in cash for working capital. It is also intending to issue 42,500,000 fully paid ordinary shares and 25,000,000 contributing shares as consideration for the acquisition of Solathera.
ASIC was concerned that the prospectus did not have a minimum subscription for the fundraising, and that it failed to detail the risks and proposed use of funds in the event that less than $1,150,000 was raised.
ASIC was also concerned that the prospectus did not adequately disclose the fees and benefits payable to certain experts, and that liability for statements in the prospectus did not comply with the Corporations Act.
ASIC revoked the interim stop order on 14 February 2003, following the lodgement of a replacement prospectus.
Rusina Mining Limited
On 13 February 2003, ASIC placed an interim stop order on the prospectus of Rusina Mining, dated 17 January 2003.
Rusina Mining, a Perth-based mineral explorer, is seeking to raise approximately $918,437 by a non-renounceable entitlement issue of shares with attaching options. The offer is partially underwritten to $480,000.
ASIC’s concerns centre around the absence of disclosure in relation to the financial position and prospects of the company in the event that the offer is not fully subscribed.
The interim stop order was revoked on 14 February 2003, following the lodgement of a supplementary prospectus.
First Australian Resources Limited
On 18 February 2003, ASIC placed an interim stop order on the prospectus issued by First Australian Resources, dated 7 February 2003.
First Australian Resources, a Perth-based oil and gas explorer, was seeking to raise up to $900,000 by a placement of new shares. There is no minimum subscription amount or underwriting.
ASIC was concerned that the prospectus failed to provide sufficient information about the financial position and prospects of the company in the event that the offer was not fully subscribed.
ASIC revoked the interim stop order on 19 February 2003, following the lodgement of a supplementary prospectus.
TeeBook Global Limited
ASIC placed an interim stop order on the OIS of TeeBook Global, dated 14 November 2002.
TeeBook Global, a Melbourne-based company, is involved in marketing a tee booking management system for the golf industry. It is seeking to raise up to $3,000,000 under the OIS for the purpose of marketing and developing the booking system.
ASIC issued an interim stop order on 6 January 2003 as a result of concerns that the OIS contained several forward-looking statements regarding the company’s revenues and cash flows, which did not have any reasonable basis.
The interim stop order was revoked on 9 January 2003 after TeeBook Global lodged a replacement OIS which omitted the statements of concern.
Pisces Marine Aquaculture Limited
ASIC placed an interim stop order on the prospectus of Pisces Marine Aquaculture, dated 15 October 2002.
Pisces Marine Aquaculture is an aquaculture company based in Port Stephens, New South Wales, and is involved in farming snapper and mulloway fish. It is seeking to list on the Newcastle Stock Exchange via a $2.5 million share issue.
ASIC formed the view that the prospectus contained inadequate disclosure about prospective financial information relating to the company.
The interim stop order was revoked on 11 February 2003, following the lodgement of a replacement prospectus.
Argus Solutions Ltd
ASIC placed an interim stop order on the prospectus of Argus Solutions, dated 24 December 2002, as a result of concerns that it contained insufficient disclosure about the assumptions underlying prospective financial information that was included in the prospectus.
Argus Solutions is involved in "iris recognition technology" for the security and information technology industries, and is seeking to raise approximately $5.5 million to purchase a technology licence, as well as developing and marketing new products.
In addition to concerns about the basis for prospective financial information, ASIC formed the view that the prospectus lacked sufficient disclosure about the various agreements that Argus is party to.
Argus lodged a replacement prospectus on 11 February 2003 which adequately addressed ASIC’s concerns.