The Australian Securities and Investments Commission (ASIC) today announced a campaign aimed at improving the disclosure in fundraising documents issued by small capitalisation companies (Small Caps Campaign).

‘The Small Caps Campaign will be aimed at fundraisings of up to around $5 million by existing listed companies and initial public offerings (IPOs) seeking listing on the Australian Stock Exchange, Bendigo Stock Exchange, Newcastle Stock Exchange, or Australia Pacific Exchange’, ASIC’s Director of Corporate Finance, Mr Richard Cockburn said.

In the six months to 31 December 2004, 279 documents were lodged with ASIC for fundraisings up to $5 million, seeking to raise a total of $400 million.

‘In the current buoyant stage of the fundraising cycle, small issuers continue to access the capital market through IPO and secondary issues and are meeting an ongoing investor demand in this market sector. ASIC is concerned to ensure that documents provided to investors in small capitalisation companies contain all the information an investor would reasonably require to make an informed decision about whether to invest’, Mr Cockburn said.

The campaign will focus on getting disclosure right the first time in six areas of disclosure. ASIC has identified that the quality of information and levels of disclosure in these six areas have, historically, not been sufficient to allow investors to make informed investment decisions about the merits of the offer.

The six areas that ASIC will focus on are:

• use of funds and consequences of not raising the full amount sought;
• use of terms from the Australasian Code for Reporting Mineral Resources and Ore Reserves (JORC) and Valmin Codes by resource sector companies;
• prospective financial information;
• related party underwritten fundraisings;
• material contracts; and
• directors’ track record.

The attachment to this media release provides further detail about each of these common failures, and where relevant, how ASIC expects issuers to address them.

‘The Small Caps Campaign will run in addition to ASIC’s ongoing program of selectively reviewing fundraising documents which pose a risk of containing inadequate or misleading information’, Mr Cockburn said.

‘The Small Caps Campaign and more general risk-based reviews are not designed for ASIC to make a judgement about the commercial merits of the offer or the company’s prospects. ASIC’s role is to ensure that fundraising documents contain sufficient information for investors to make that assessment on their own.’

‘If ASIC finds a disclosure document which is materially misleading, or materially lacking in information, ASIC will take action. This may include delaying or indefinitely stopping the fundraising by issuing an interim or final stop order. It’s in everyone’s interests for issuers to get it right the first time’, Mr Cockburn added.

ASIC expects to release a report on the results of its campaign report by June 2005.

End of release

Attachment to IR 05-34: Common disclosure failures by small capitalisation companies

Use of funds and consequences of the company not raising the full amount sought

Issuers commonly fail to address how the company will use the funds raised and the consequences for the company if the full amount sought is not raised where there is no underwriter.

ASIC sets out what is expected of companies in this respect in ASIC Information Release 03-06 Fundraising documents have common failures.

Compliance with the JORC and Valmin Codes by resource sector companies

The JORC Code sets out minimum standards, recommendations and guidelines for public reporting of exploration results, mineral resources and ore reserves.

The Code and Guidelines for Technical Assessment and/or Valuation of Mineral and Petroleum Assets and Mineral and Petroleum Securities for Independent Expert Reports (Valmin Code) sets standards for commissioning and preparing expert reports for public documents.

Material non-compliance with the JORC and Valmin Codes may make the disclosure document misleading.

Prospective financial information

Issuers commonly fail to adequately disclose the assumptions underpinning prospective financial information. The assumptions must provide reasonable grounds for the inclusion of the financial information.

ASIC requires all issuers, advisers and independent experts to comply with ASIC Policy Statement 170 Prospective Financial Information, when including prospective financial information.

Related party underwritten fundraisings

ASIC will scrutinise rights issues and other fundraisings which are underwritten by major shareholders and related parties to ensure that the intent of Chapter 6 of the Corporations Act 2001 is not avoided (see further ASIC Policy Statement 159, paragraphs 159.152 to 159.187 and Panel Guidance Note No. 1).

Material contracts

Issuers commonly provide insufficient information in relation to the terms and conditions of material contracts with associated and third parties.

Directors’ track record

ASIC expects disclosure documents to contain sufficient information about directors’ professional backgrounds and experience (track record), and to ensure that such information is not misleading, or omits material information.

As part of its risk rating process, ASIC carries out directors’ background checks on matters such as bankruptcies, associations with entities in external administration and ASIC disciplinary or other proceedings. Any material non-compliance with track record disclosures may cause ASIC to take action, as noted earlier