On 5 December 2019, ASIC released its latest report, ASIC Report 641 An inside look at mining and exploration initial public offerings (Report 641), which was the product of its detailed review of a large number of small mining IPOs occurring between 1 October 2016 and 30 September 2018. Report 641 identified some common IPO practices of concern in the microcap mining industry – with lessons for IPOs more broadly – including around the importance of managing potential conflicts of interests, taking care with the promotional materials used in IPOs and some guidance more generally about the activities undertaken during the IPO period.

While Report 641 focuses on prospective issuers and corporate advisers involved in IPOs of small companies in the mining exploration space, ASIC has publicly stated that the concerns raised in the report and the improved practices needed to address them are relevant to all prospective issuers, directors and lead managers involved in IPOs undertaken in Australia.

The following key points and “better practices” recommendations provided by ASIC in Report 641 are therefore a timely reminder for equity market participants as we close out 2019 and head into the new year:

1. Alignment of promotional materials to prospectus disclosure

Companies must ensure that any non-deal roadshow or management presentations and other promotional documents distributed to potential investors do not provide an unbalanced view of the proposed investment or contain misleading statements or information that is not consistent with prospectus disclosure. Management and investor presentations should not be used to make statements that could not be made in a prospectus. This applies equally to Bloomberg emails and other promotional materials utilised as part of an IPO. It is recommended that any such promotional materials be reviewed by the company’s legal advisers before distribution. Directors should ensure that they have clear oversight of the final version of the promotional materials.

2. Lead manager liability for promotional materials

Notwithstanding the company’s primary responsibility for preparing promotional materials, lead managers must bear in mind that they may be liable for any contravention of the fundraising provisions or advertising restrictions in the Corporations Act in relation to their distribution of IPO promotional materials (as well as any deemed liability for the prospectus arising from a role as an underwriter).

3. IPO promotional activities

Directors of companies and lead managers should be wary of engaging in public promotional activities in connection with the IPO once allocations of securities have already been finalised. ASIC is particularly concerned about promotional activities targeted to promote trading on secondary markets (ie. to generate positive news flow for positive short-term share performance) rather than to promote the IPO to prospective IPO investors.

4. Seeking to influence investor behaviour post-IPO

Lead managers should exercise caution when communicating with investors and shareholders regarding their allocations and trading intentions post-listing. In the context of micro-cap mining IPOs, ASIC has identified examples of problematic conduct by lead managers, including closely monitoring and questioning investors selling securities shortly after listing, specifying to brokers and advisers of AFS licensees daily volumes that may be traded, and communicating expectations that shareholders receiving allocations continue to hold securities after listing.

5. Lead Manager mandates

Lead manager mandates should clearly identify the obligations and responsibilities of the lead manager and disclose any actual, potential or perceived conflicts of interest and how these conflicts of interests will be managed.

6. Conflict management

Lead managers should implement robust conflict management processes and procedures in relation to their roles as lead manager, company adviser, investor adviser and shareholder. There should also be clear and prominent prospectus disclosure regarding the total aggregate benefits payable to the lead managers (including any contingent remuneration or trailing fees) and the services the lead managers will be providing to the issuer.

7. Allocation of pre-IPO funding

Where a company undertakes pre-IPO fundraising, any pre-IPO capital with an incentive element should be clearly disclosed in the prospectus. This includes any preferential allocation of pre-IPO capital or any substantial discount in pricing between the pre-IPO funding capital and IPO offered to directors of the issuer, lead managers or other promoters.

8. Use of funds prospectus disclosure

In the context of micro-cap mining IPOs, ASIC expressed concern regarding significant departures in the actual expenditure of listed entities from prospectus use of funds disclosure. Such companies (which commonly includes technology companies) should be more precise in defining how IPO proceeds will be used and ensure that there are underlying expenditure plans to support this disclosure.