An ASIC review of mining and exploration initial public offers (IPO) has found that companies, directors and lead managers need to implement better practices that take account of the unique characteristics and vulnerabilities of the micro-cap sector.

Report 641 An inside look at mining and exploration initial public offers considered IPO practices and processes from inception through to on-market trading.

ASIC’s review found that:

• Some lead managers give preference to a select subset of investors. Retail investors not associated with a lead manager or their networks had limited access to IPO investments. One potential consequence of this can be an environment encouraging a rapid return on the initial investment rather than an investment aimed at the medium to longer term returns.
• This can be exacerbated by the fact lead managers often initiate the IPO origination. In this way, some professional advisers target the sector in order to generate those immediate returns on an investment, gaining a disproportionate benefit through their early, direct involvement in the process.
• The prevalence of conflicts of interest is a significant concern, leading to potential misconduct and unfair outcomes. This is because lead managers may act for both the company and investing clients, hold direct interests in the company, have representatives on the board or provide other ongoing services.
• Promotional materials such as investor presentations, explanatory material and email marketing methods are often subject to substandard compliance controls, and yet they can have a significant influence on investors’ perceptions and actions.
• IPO transaction design and structure may lead to a distorted and unsustainable market demand in the securities’ short-term trading, at the expense of longer investment horizons more appropriate for the delivery of exploration programs.

ASIC encourages companies, directors and lead managers to have regard to the better practice recommendations outlined in the report and eliminate, or at least recognise and appropriately manage, conflicts of interest.

ASIC Commissioner John Price said the mining sector, comprising micro-producers and explorers, was a key and unique component of Australia’s equity markets.

‘These companies represent more than a quarter of all ASX-listed entities, with a combined market capitalisation of more than $300 billion. The sector accounted for about a third of all IPOs of the past two years.’

‘Companies and advisers need to conduct themselves in a way that is fair and responsible. Disclosure has limits and over reliance on disclosure alone can lead to poor investor outcomes and a loss of confidence in the market.’

‘ASIC will therefore focus more on the underlying business practices and processes supporting IPO transactions in future, including the conduct and governance practices of company directors and advisers. ASIC is able to take enforcement action where we identify unlawful conduct or practices that may harm investors.’

‘While this report focuses on mining and exploration companies, the concerns raised and the improved practices needed to address them are relevant to most, if not all, companies, directors and lead managers in Australia.’

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• Report 641 An inside look at mining and exploration initial public offers
  

Background

ASIC’s report is based on a review of a representative sample of 17 mining IPOs, representing approximately 23.6% of mining IPOs between 2016 and 2018. ASIC’s review considered IPO processes from transaction origination through to on-market trading after listing and involved the review of over 50,000 documents received under notice and voluntary interviews with 45 individuals.

Several of the concerns and recommendations identified by ASIC are consistent with recent amendments made by the Australian Stock Exchange (ASX) to its listing rules and guidance to enhance transparency.