The Australian Securities and Investments Commission (ASIC) today provided an overview of the action it has taken since January 2004 to protect investors from defects in fundraising documents involving equity securities (equity prospectuses).

Since 1 January 2004 to date, ASIC has obtained supplementary disclosure in five matters, issued 16 interim stop orders and eight final stop orders involving equity prospectuses seeking to raise more than $1.5 billion from the public.

‘ASIC continues to undertake a risk-based review of selected fundraising documents to ensure that investors have adequate information upon which to make their investment decisions’ ASIC Director of Corporate Finance, Mr Richard Cockburn, said.

‘ASIC publishes the details of defects identified in our review of fundraising documents as a guide for issuers and their advisers in preparing their own disclosure documents on what to look out for, and what pitfalls to avoid.

‘We are therefore disappointed that some of the issues identified as part of our review were not addressed during the due diligence process associated with the prospectus’, Mr Cockburn said.

Common defects identified since January 2004 include:

• Issuers raising money from the public to run investment businesses without holding an Australian Financial Services Licence. Such activity is prohibited under the Corporations Act 2001 (the Act);
• The failure of issuers to include the assumptions upon which financial forecasts in the fundraising prospectuses were based.
• All advisers and independent experts must be aware of, and comply with the requirements of Policy Statement 170 Prospective financial information [PS 170];
• The inclusion of statements where companies implied that they would be seeking a listing on a financial market in the future. Such statements are prohibited under the Actunless an application for listing is made to the relevant financial market within the statutory timeframe;
• Issuers attempting to use a transaction-specific short form prospectus when the issuer had been listed for less than 12 months;
• Issuers skewing the balance of information in the prospectus by highlighting positive information in the first few pages of the prospectus while burying negative information in the back of the prospectus; and
• Lack of disclosure of the methodology used, and assumptions applied, for the valuation of options in the prospectus. There was also concern that the option valuation methodology used had not taken into consideration probability or discounting factors.

The majority of the final stop orders were issued with the consent of the relevant company after they made the decision not to proceed with the particular prospectus, rather than to address the disclosure deficiencies.