ASIC is proposing an overhaul of prospectuses that would make them much easier for retail investors to use and would improve the quality of information on the proposed business model and the associated risks.
ASIC Commissioner Belinda Gibson said the proposals – which are the subject of consultation with industry – were aimed at ensuring the focus of prospectuses is high-quality information that investors can understand, and which gives investors a full picture of the offer.
"Under ASIC's proposals, prospectuses will focus on information that is relevant to the investment decision, will be easier to follow, will give investors a better picture of what they are being offered, how the company will make money and generate returns for investors, the associated risks, who will manage the company, and how they will run it", Belinda Gibson said.
"First and foremost, a prospectus is a disclosure document aimed at informing investors. Sales and marketing statements – and the extensive use of promotional photography - are secondary," Belinda Gibson said. "The consultation paper raises for discussion the proper balance that we should achieve".
ASIC's proposals are contained in two documents that have been released today - Consultation Paper 155 [CP 155] Prospectus disclosure: Improving disclosure for retail investors, and an accompanying draft regulatory guide.
Consultation with industry on the proposals in the paper will continue until 7 June 2011, after which ASIC will issue a new regulatory guide – taking into account the results of the consultation.
ASIC has already undertaken extensive consultation in arriving at the proposals that it is making public, and it has drawn on consumer research.
The consultation paper and draft regulatory guide cover prospectuses issued under section 710 of the Corporations Act 2001. Generally, these are prospectuses for initial public offerings and for companies that propose to list. The guidance is also relevant to other types of prospectuses as well as some other documents.
The table below summarises the shortcomings that ASIC has identified in prospectuses, and the proposed response:
|
Shortcoming |
Proposed solutions |
|---|---|
|
Front sections of a prospectus are often ineffective, include repetitive and/or multiple summaries, over-emphasise the benefits of the offer, and have a high ratio of marketing statements and photographs |
Provide one balanced investment overview that helps retail investors make an informed investment decision by highlighting key information (see section C of CP 155). No photos in the overview other than the front cover |
|
Prospectuses are long and complex |
Use practical communication tools (see tables 3 and 4 in the draft regulatory guide) to help make prospectuses ‘clear, concise and effective' and reduce length where possible (including by incorporating certain information by reference) |
|
Risk disclosure is too general and may resemble a ‘shopping list’ |
Highlight the principal risks; listing every conceivable risk may not necessarily help investors to make informed decisions. Risk disclosure should be specific to the company – explain the risk with some indication of what is likely to happen if the risk occurs (see section D of CP 155) |
|
Fragmented information on risks and associated returns requires investors to piece together the picture. Inadequate information on how the business will generate a return or meet defined short-term objectives |
Explain the company’s business model i.e. how the company plans to make money and/or generate income or capital growth. If a company does not intend to generate a return for investors in the short term, explain the short term objectives and how they will be met. Explain the strategic risks to the business model (see section D of CP 155) |
|
Absence of complete disclosure on directors and key managers who are leading or managing the company, and relevant benefits or interests they have |
Explain relevant expertise and skill. Include any criminal convictions, declarations under s1317E of the Corporations Act, personal bankruptcies, disqualifications or disciplinary action within Australia or other jurisdictions that are less than 10 years old and that are relevant or material to the role to be undertaken and to the investment decision. Explain if the person has been an officer of a company that went into a form of external administration because of insolvency during the time the person was an officer or 12-months afterwards. (see section D of CP 155) |