Activist short selling campaigns in Australia
This information sheet (INFO 255) outlines the practice of activist short selling campaigns in Australia and ASIC's expectations to promote market integrity during these campaigns. It:
- briefly explains what activist short selling is
- describes the impact of activist short selling on markets
- provides an overview of the Australian regulatory framework relevant to these campaigns
- recommends better practices for activist short sellers and authors of short reports, market operators, target entities and market participants
- lists some of the actions that we may take in response to these campaigns.
INFO 255 should be read together with Regulatory Guide 196 Short selling (RG 196).
People sometimes sell (short sell) financial products they do not own with a view to repurchasing them later at a lower price.
Generally, where a person executes a short sale and relies on an existing securities lending arrangement to have a 'presently exercisable and unconditional right to vest' the products in the buyer at the time of sale, the sale is a covered short sale. Covered short selling in section 1020B financial products (e.g. securities, bonds and managed investment schemes) is permitted under the Corporations Act 2001 (Corporations Act).
Short selling without a securities lending arrangement is known as 'naked short selling' and is generally not permitted in section 1020B products in Australia. More information on short selling can be found in RG 196.
Activist short selling involves a person taking a short position in a financial product and then publicly disseminating information (e.g. one or more reports) directly or through an agent to negatively impact the price of the product ('short report'). A short report may, for example, criticise an entity's finances, management, public disclosures or future prospects. A short report does not necessarily have to be in the form of a formal report. It could be, for example, a post on a social media platform, blog or online forum. The activist short seller expects the short report to cause the price of the financial product to fall, enabling them to realise a profit.
Activist short selling campaigns are not new. Over time, they have received more attention with online news and social media outlets providing instantaneous access to a broad audience. This can exacerbate the speed and depth of the market's response to a short report.
Most campaigns against Australian entities have been by overseas activist short sellers that caveat their reports as not intended for an Australian audience. In practice, online distribution and reporting of campaigns by Australian media mean the reports (or their key messages) are widely accessed by Australians.
Our research indicates that activist short selling campaigns tend to target entities with complex and opaque corporate structures and accounting practices, or poor disclosure. They also tend to target companies with lower market capitalisation. There is also a tendency to follow cyclical trends (e.g. to target entities and industries that are high growth/high risk or may be overvalued or have experienced rapid security price growth). They may also target sectors that are technically complex and/or easily misunderstood (e.g. medical research, technology and mining).
Investors expect to transact in a fair and informed market. When activist short sellers provide accurate and meaningful new information, they can have a positive impact on price formation and market integrity as they may counterbalance excessive market optimism.
Short reports can provide new research and analysis and test the veracity of information released by a target entity. Some activist short sellers have exposed flawed business models, questionable business or accounting practices, insolvency and fraud in targeted entities.
However, activist short sellers can also unduly distort the price of a target entity's securities. For example, by making false or misleading statements, providing an incomplete view of the facts, drawing conclusions unsupported by adequate evidence or by using overly emotive or inflammatory language to distort the facts ('short and distort' campaigns).
Short reports are often released during trading hours for maximum and immediate effect on the price of the target entity's securities. The time taken:
- to request and implement a trading halt, and
- for the target entity to issue a response,
may result in a period of trading in the target entity's securities where the market is not fully informed.
If the claims in a short report appear plausible or if the market suspects the target entity is subject to a 'short and distort' campaign (regardless of the plausibility of the short report claims), they can cause significant and immediate security price volatility. Other investors may be induced into selling the target entity's securities for less than their true value, potentially resulting in financial loss. If the price fall is as a result of a false or misleading statement, this can undermine investor confidence in the market and may affect their willingness to participate in the future.
This activity can also harm the reputation of the target entity. In addition to creating doubt in the minds of existing shareholders, it may discourage future investors, negatively influence future valuations and the price of the target entity's securities, and impact the target entity's ability to raise capital.
False or misleading statements and misleading or deceptive conduct
Under section 1041E, a person must not (whether in Australia or elsewhere) make a statement, or disseminate information, that is false in a material particular or is materially misleading, and the statement or information is likely to:
- induce persons in Australia to buy or sell financial products, or
- have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in Australia.
This applies whether or not the person knows, or ought reasonably to have known, that the statement or information is materially false or misleading. They must also not otherwise engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive: see section 1041H.
A disclaimer in a short report (or on a distribution channel) that the report is not intended for an Australian audience does not absolve a person from these obligations. A short report distributed from outside Australia that contains false and misleading statements may be in breach of the Corporations Act in spite of such a disclaimer.
In the context of listed entities, these obligations apply to all statements and information they release, including about the entity's financial situation, business operations and future prospects. Listed entities must also comply with the continuous disclosure obligations in section 674 and the listing rules of the market operator to make timely releases of potentially material non-public information.
Inside information is information that is not generally available and if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular financial products. Where a person (whether in Australia or elsewhere) possesses such information, they must not directly or indirectly acquire or dispose of an interest in the financial products or communicate the information to a third party that may use the information: see section 1043A.
Short reports that express an opinion or recommendation about the value of the target entity's securities may amount to inside information in the same way sell-side research can. Persons in possession of such a short report prior to its release could be considered insiders and not permitted to trade on the information. The effect may be greater where the activist short seller has a strong investor following or history of moving the market through their reports.
A person must not take part in, or carry out (whether directly or indirectly and whether in Australia or elsewhere) one or more transactions that have or are likely to have the effect of creating or maintaining an artificial price for trading in financial products on a financial market operated in Australia: see section 1041A.
A report that contains a recommendation or statement of opinion that is intended (or could reasonably be regarded as having been intended) to influence a person's decision about a particular financial product is considered to be the provision of financial product advice.
This may apply to short reports, regardless of any disclaimer that the opinions are not advice. In some cases, the provision of short reports may amount to carrying on a financial product advice business in Australia and require an Australian financial services licence under section 911A. This may be the case even if the core financial services business is located overseas.
Short sale reporting of transactions and positions above certain thresholds is required under sections 1020AB and 1020AC and is published by market operators and ASIC: see also RG 196.
We have no tolerance for misconduct that undermines market integrity or harms listed entities or investors. We will pursue action for breaches of Australian law where there is sufficient evidence to support a case and it is in the public interest to do so. Information Sheet 151 ASIC's approach to enforcement (INFO 151) sets out our general approach to taking enforcement action. Where entities are based abroad, we will work closely with overseas regulators.
All persons in the Australian financial market ecosystem have a role to play in supporting a fair, orderly and transparent market. This section outlines some better practices for activist short sellers, distributors of short reports, target entities, market operators and market participants.
Short reports should be released outside of Australian trading hours and not immediately before market open
Releasing short reports outside of trading hours and not immediately before market open provides time for the target entity to prepare a response so the market can be fully informed when the short report is released. It also allows time for investors to digest the information before trading recommences. This will potentially dampen intra-day price volatility and protect investors because the opening price of the securities better reflects the full information. It will also help to mitigate the market manipulation risk for the activist short seller by reducing the impact on the price of the securities.
Short reports should be based on reliable information and any recommendation or opinion should be formed on a reasonable basis
Providers of short reports should ensure their reports are balanced and based on objective, verifiable facts and analysis, and are not coloured by their special or biased interests or those of related parties. For example, any estimates of security price valuations should be based on quantifiable analysis.
Providers of short reports should avoid being selective in deploying only facts that support their short thesis while ignoring facts that run counter to the thesis. Engaging with only a small and select sample of clients, ex-employees or contracted parties may not be representative of issues across the entire entity. In these situations, short reports should disclose the sample size and composition to allow a reader to make an informed view about how much weight to place on this information.
Authors of short reports should check their facts with the target entity to identify and address errors before the release of a short report. This may provide the market with greater certainty around the issues raised. It also reduces the risk of the market being misinformed and helps to mitigate the risk for the activist short seller of making false or misleading statements.
The language in short reports can mislead investors and lead to panicked investment decisions. Short reports should be factual, relevant and expressed in a clear and objective manner. Emotive, intemperate or defamatory language should not be used, nor should vague or imprecise language.
There should be clear disclosure in the short report or through the distribution channel of conflicts of interest. For example, any payment or benefit received by the author of the report or material interests in financial products that relate to the target entity should be disclosed (e.g. holding a short position or revenue sharing arrangement from positions related to the target entity). It would also be responsible practice to disclose if the short report has been commissioned, by whom and their conflicts of interest.
If an activist short seller releases subsequent information or reports on the same target entity, the conflicts of interest disclosure should be updated to ensure users continue to be aware of all conflicts of interest.
Short reports by their very nature are designed to have a price impact, and possession of information about the impending publication of a short report may amount to possession of inside information. There is always a risk when inside information is provided to someone that they may trade on the information in contravention of the insider trading prohibitions.
We expect authors of reports to protect inside information and to manage the preparation and release of reports with care. Authors of reports that contain inside information should ensure that the report and underlying research is locked down ahead of publication so that the material is not accessible by any parties that do not have a business 'need to know': see RG 264.
Section 792A of the Corporations Act requires market operators, to the extent that it is reasonably practicable to do so, to do all things necessary to ensure that the market is fair, orderly and transparent. We work closely with market operators to manage disclosure issues with activist short selling campaigns so that markets are properly informed and all key stakeholders comply with relevant listing rules and the Corporations Act.
If the market operator becomes aware that a listed entity is the target of a new short report that has had a material price impact, it should immediately pause trading in the target entity's listed securities.
The market operator should also request that the target entity release a detailed and comprehensive response to the market as soon as practicable. This will minimise trading occurring on a misinformed basis.
The listing market operator should consider the issues and concerns raised in a short report, together with the target entity's response, to form a view of whether any listing rules have been breached and whether investors may have been misinformed by previous disclosures by the target entity. Should any breaches be identified, the market operator should take appropriate regulatory action – for example, by seeking additional disclosure and referring the matter to ASIC where warranted.
It is common for activist short sellers to publish follow-up reports addressing the target entity's response to the short report. Market operators should continue monitoring for subsequent short reports to assess whether these reports have an impact on the price of the entity's securities and whether the target entity may need to provide additional information to the market in response to issues not previously addressed. This is particularly the case where reports are issued in short succession (e.g. days apart).
Target entities can take steps to make themselves less appealing to activist short sellers. There are also strategies they can employ if they become a target.
Maximise business transparency and foster a proactive attitude towards reducing information asymmetry
Entities that are transparent about their business models and financial statements, and have clear and timely market-sensitive announcements, are less likely to be the subject of an activist short selling campaign. Further, entities that implement sound disclosure practices enable investors to make informed investment decisions about their securities. While the nature of various businesses necessarily gives rise to differing levels of technical complexity and future predictability, it is beneficial to the entity and its investors to increase transparency where possible.
Entities should monitor activity in their industry sector and be aware of commentary that may suggest particular entities and/or sectors may be overvalued or subject to significant speculative attention.
ASIC's immediate priorities with short selling campaigns are to protect investors, to protect the integrity of the market for the target entity's securities and to ensure the market is informed.
Where a target entity is notified before the release of a short report, they should have a response prepared to release at around the same time the report is to be published and before trading in the target entity's securities recommences. If the target entity disputes the claims in the report, they should request a trading halt to allow sufficient time to prepare a response so that investors have all relevant information before trading recommences.
Where a target entity has no prior notice of the short report and the short report is likely to have a material impact on the price or value of their securities, they should immediately request a trading halt to allow them time to prepare a detailed response.
The target entity's response to a short report (and any subsequent reports) is critical to maintaining an informed market. The response needs to be prompt, address each assertion with sufficient detail and where possible backed up with evidence. Broad statements dismissing an entire report as being false are unlikely to address investor concerns.
Market participants should monitor for suspicious short selling activity. Under the market integrity rules, they must report suspicious activity to ASIC as soon as practicable. This means once they become aware of the activity, not after they start investigating the activity. Time is of the essence with activist short selling campaigns.
There are a range of steps ASIC may take in response to activist short selling campaigns, including:
- engaging with market operators on steps to ensure a fully informed market, on the timing of trading halts and to consider the claims in short reports
- examining trading activity of short sellers throughout the campaign. We are particularly focused on 'short and distort' campaigns and campaigns that exhibit behaviours of potential insider trading
- engaging with the activist short seller, where their identity is known, on:
- whether the person has conducted a financial service in Australia and holds the necessary licence
- testing the veracity of the claims in the short report
- the process and timing of the short report's release and its impact on the market, and
- how conflicts of interest are disclosed
- engaging with the target entity to test the veracity of the claims in the short report and the target entity's compliance with financial services law
- where the activist short seller is based abroad, engaging with their home regulator, and
- taking action for breaches of the law (see INFO 151).
For more information, see:
- RG 79 Research report providers: Improving the quality of investment research
- RG 196 Short selling
- RG 264 Sell-side research
- INFO 151 ASIC's approach to enforcement
Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. Omission of any matter on this information sheet will not relieve a company or its officers from any penalty incurred by failing to comply with the statutory obligations of the Act.
You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases your particular circumstances must be taken into account when determining how the law applies to you.
This is Information Sheet 255 (INFO 255) issued in May 2021.