ASIC Viewpoint: Reviewing allocations practices in capital raising transactions

Published by the Australian Financial Markets Association in AFMA Member News, February 2017.

Businesses thrive if they are able to effectively source capital. Last financial year $52 billion of new capital was raised by businesses on the ASX market.[1] It is vital for our businesses that investors can confidently participate in these capital raisings.

Poor management of allocations in capital raising transactions can affect the integrity of a capital raising. Our 2016 review of sell-side research and corporate advisory (see Report 486 Sell-side research and corporate advisory: Confidential information and conflicts) uncovered potential issues with some of the market practices around allocations in capital raisings.

We’ve started taking a closer look at current allocation practices in capital rising transactions.

Receiving an allocation can be beneficial to investors, particularly where an issue is in demand and the price of the securities in the secondary market may be pushed up as a result. This can create incentives for AFS licensees to allocate securities to promote their business or interests – which may be inconsistent with the interests of their other clients, the issuer and other investor clients.

In Report 486 we highlighted a number of allocation practices, including:

  • differential treatment of investor clients based on how licensees have classified them
  • larger IPO allocations in exchange for a commitment to engage in after-market buying (i.e. laddering) or to compensate a client for earlier trading losses
  • allocations to senior management or directors of other companies to secure corporate business from them in the future, and
  • investor bids being scaled back in favour of principal or staff allocations.

If your organisation is responsible for managing allocations during a capital raising transaction, you must make sure:

  • you adequately manage conflicts of interests
  • your messaging to potential investors about the status of the offer is not misleading or deceptive, for example:
  • there should be consistent messaging around the status of the offer, and
  • the use of the words ‘covered’ and ‘cornered’ in communications to potential investors should not be used inappropriately to encourage them to bid for securities in a capital raising transaction, and
  • you don’t breach market manipulation prohibitions (e.g. by engaging in laddering)
  • you meet your obligations to provide financial services efficiently, honestly and fairly (see section 912A(1) of the Corporations Act 2001).

To better understand how allocations are conducted in practice, we are looking at a selection of transactions (both primary and secondary market) and consulting with a range of stakeholders, including licensees, corporate advisors, corporate issuers and investors. We have also been in contact with international regulators to understand their regulatory approach to allocations. Where needed, we will reach out to licensees and issue notices for further information.

Sell-side research

Late last year we released guidance to help Australian financial services licensees (AFS) that provide sell-side research to better manage conflicts of interest and inside information.

Regulatory Guide 264 Sell-side research looks at the key stages of a capital raising transaction and provides guidelines on how conflicts of interest should be managed during each of these stages, including the preparation and production of investor education reports. Regulatory Guide 264 also provides guidance for AFS licensees on the identification and handling of inside information by research analysts, and about the structure and funding of sell-side research teams.

The guidance addresses uneven market practice that has developed since the publication of Regulatory Guide 79 Research report providers: Improving the quality of investment research in 2004. It also responds to industry requests for more detailed guidance on sell-side research and supplements guidance in Regulatory Guide 79.

For more information, visit our website.

[1] AFMA 2017 Australian Financial Markets Report

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