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17-287MR ASIC reports on how investors decide to invest in IPOs
Based on recent research, ASIC reports that prospectuses are important for investors in considering an investment in an IPO but there is scope for improvement in the usability and credibility of these documents.
ASIC aims to support confidence in our capital markets by proactively regulating IPOs. To ensure that ASIC is regulating IPOs in an evidence-based manner ASIC looked at the experience of institutional and retail investors in making decisions about IPO investment.
REP 540 Investors in initial public offerings contains our analysis of findings from interviews we conducted with institutional investors and qualitative research commissioned by us on the information and factors that influence retail investors. The report explains how we will use the findings to enhance our regulation of IPOs. It also explains how companies, their advisers and other market participants can help investors.
ASIC’s inquiries with institutional investors found the most highly valued inputs in assessing whether to invest were:
- The prospectus, because it was the main source of information regarding an IPO, and was a regulated document for which directors and others involved in the offer have liability
- Access to the IPO issuer’s management, and the institution’s own technical analysis of the offer, which was also very influential.
The qualitative research focusing on retail investors explored the impact that prospectuses, marketing practices and other sources of information have on their decision-making. The findings include that financial media, including mainstream media and subscription services, were influential in both alerting retail investors to potential IPO investments and in guiding the decision-making process.
The prospectus was seen as a key source of information, although many retail investors said the document was hard to read and could not be relied on to tell the whole truth about an IPO.
ASIC Commissioner John Price said, ‘The project’s findings allow us to have an understanding of the current factors and types of information that investors rely on when investing in IPOs, and will allow us to enhance our regulation of IPOs.’
'We believe that ASIC’s regulation of IPOs is sound. ASIC will continue to review a significant proportion of prospectuses, given their importance to investors and to maintaining the reputation of Australia’s capital markets.'
'The qualitative research reinforces that prospectuses can be challenging documents for retail investors and particular areas of our guidance on prospectus disclosure should be carefully considered by issuers and their advisers to produce more effective disclosure for retail investors."
ASIC plays an active role in the IPO market and closely reviews a significant proportion of prospectuses. In 2016, this resulted in ASIC requiring corrective disclosure from issuers on 134 occasions, making 56 interim stop orders and 5 final stop orders (with most of this regulatory action relating to IPOs).
There are some additional areas that ASIC proposes to focus on to help better investor decision making, including:
- engaging with stakeholders to encourage them to provide greater accessibility to management for investors;
- increasing our review of online investor forums and social media;
- broadening our regular monitoring of the financial media to include investment magazines and online subscription services; and
- providing additional information about the IPO process to retail investors.
IPOs are an important part of Australia’s capital markets. Investors need to be able to make informed decisions about IPOs to ensure that capital is invested efficiently. For companies to continue raising capital efficiently, it is important that investors have confidence in the regulation of IPOs. IPO disclosure also plays an important role in ensuring that informed secondary trading occurs once the company is listed.
Australia has a globally competitive IPO sector, both in terms of the number of companies listing and the amount raised. For example, in the 2016 calendar year:
- 133 companies listed on ASX raising a total of $6 billion;
- 115 companies listed on HKEX raising $25 billion;
- 66 companies listed on LSE raising $4 billion; and
- NYSE where 37 companies listed raising $13 billion.
This report complements other reports issued relevant to the IPO market:
- REP 486 Sell-side research and corporate advisory: Confidential information and conflicts
- REP 484 Due diligence practices in initial public offerings
- REP 494 Marketing practices in initial public offerings of securities
We appreciate the assistance of Australian Shareholders' Association and OnMarket Bookbuilds for promoting participation in the market research to retail investors.