ASIC in the west

Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, July 2015.

The Australian Securities & Investments Commission's Western Australian (WA) office has just under 100 employees, many of whom have specialist knowledge about the Perth market and stockbroking sector. In this article, ASIC offers some observations from its Perth-based Market & Participant Supervision (M&PS) and Emerging Mining and Resources (EM&R) teams.

The stockbroking community has a significant presence in WA. There is a mix of branch offices (both Australian and internationally owned) and independent organisations. While a small number of these Participants are institutionally focused, the vast majority have a greater proportion of retail clients than their counterparts in eastern states.

The WA market is predominantly made up of listed mining companies that account for around 40% of the national market. Traditionally there has been a heavy reliance upon corporate fees being generated from capital raisings undertaken by companies with small capitalisation in need of funding. However, the WA stockbroking community has shown a tendency to shift its focus from a sector such as resources when interest is lacking to a sector that is booming, for example, the technology resurgence in recent times.

Relationship Managers from M&PS regularly meet with WA-based Participants to conduct compliance liaison meetings, risk assessment visits and to assess the state of the market. Recently, during these visits, they have been observing a number of these firms diversifying their product and advice offerings by adding options strategies or wealth management to their suite of client services. Additional resources are being placed into the development of wealth management platforms and investment in professionals with the appropriate expertise to build this capability.

The EM&R team primarily focuses on small cap mining and resource exploration companies. Most of the team's work is required under the Corporations Act 2001. This includes regulating disclosure and conduct by corporations and focusing on corporate transactions such as fundraising, mergers and acquisitions, corporate governance, related party transactions and financial reporting.

In 2012, EM&R identified the need for the mining industry to carefully consider its reporting obligations. Since the Joint Ore Reserves Committee (JORC) Code is the industry standard for mining and exploration reporting in Australia, EM&R worked with the resources industry, JORC and the ASX to update the JORC Code in the ASX Listing Rules and provide guidance on public reporting for mining and oil and gas companies. These changes came into effect on 1 December 2013. The updates have enhanced transparency and disclosure in the exploration, mining and energy sectors and EM&R continues to work with industry to improve disclosure practices.

An ongoing concern for the EM&R team is the use of forward looking statements such as production targets, forecast financial information and income based discounted cash flow valuations by companies. It is common for investors in resource companies to put a lot of emphasis on forecasts when considering an investment. With this in mind, directors, analysts or Participants may provide forward looking statements to attract investment.  However, companies need to be aware that under the Corporations Act, representations about future matters may be taken to be misleading if they are made without reasonable grounds. Reasonable grounds will depend on the facts of each case and the use of cautionary language, qualifications or disclaimers are not sufficient to prevent forward looking statements from being misleading.

With the downturn in commodity prices, WA mining companies have come under increasing pressure which has led them to search for alternative options. As a result, EM&R are seeing a transformation in business with an increasing number of technology and service companies backdoor listing through struggling resource companies. This uplift in transaction activity shows similar characteristics to the dot-com boom in the early 2000s.

Many of the businesses being backdoor listed include start-up technology companies with innovative business plans. Given the nature of the technology industry, these businesses generally have unique and technical product or service offerings, complex corporate structures, high proportions of intangible assets and operations and assets in emerging market jurisdictions. It should also be noted that backdoor listings are very significant transactions which often involve an entirely new and often different business that is vended into the resources company.

EM&R have identified significant concerns with the majority of these transactions. These concerns include deficiencies in disclosure particularly in relation to audited financial information, the valuation of the business or intangibles, the business model of the incoming company and the roles of the key people involved in the business. EM&R have responded to the additional areas of risk by increasing our regulatory focus on these transactions and taking regulatory action such as interim and final stop orders.

The future work of EM&R will continue to be guided by the types of risk that emerge within the WA market. Part of the team's work over the next year will involve onsite due diligence surveillances. The EM&R team are also mindful of the impact of cyber-crime in the current market and will therefore focus on companies' cyber resilience, what controls are used and what type of cyber related governance they have in place.

Perth office relocation

On 22 June 2015, ASIC's Perth office moved to new premises located at Level 1, 11 Mounts Bay Road.

Last updated: 20/09/2017 10:57