“ASIC has found that a well-advised issuer conducting the necessary due diligence processes will be better placed to mitigate the risk of any added delays (and related costs), future liability and reputational damage from a poor-quality prospectus.” – ASIC Report 484

ASIC has conducted a review of 12 initial public offering (IPO) prospectuses and the due diligence processes surrounding these IPOs and has outlined its findings and concerns in ASIC Report 484 (Report). The Report serves as a reminder that directors may be exposing themselves to unnecessary risks by taking shortcuts during the due diligence process.

Unsurprisingly, issuers who demonstrated poor due diligence practices produced prospectuses with defective disclosure, such as misleading and deceptive statements, forward-looking statements with no reasonable basis and omissions of material information.

Of the 12 prospectuses reviewed, 10 provided improved disclosure in the form of a replacement prospectus, with one reducing the offer price. Additionally, one withdrew the offer and another offer was subject to a stop order. In a number of instances issuers were required to make changes because potentially material issues (identified during the due diligence process) were either not appropriately disclosed or were incorrectly determined to be “not material” by the Due Diligence Committee.

Key Takeaways for Directors:

• Have at least one independent director on the Due Diligence Committee, and one executive director.
• All directors should ensure appropriate expert advisers are retained and the due diligence process in the Due Diligence Planning Memorandum has been followed.
• All directors and all advisers should apply an independent mind going beyond a mere checklist and box ticking exercise and focus on an actual investigation of the issues.
• Question the completeness, accuracy and reliability of all statements with robust discussions and ensure this is reflected in the minutes.
• Have a key issues list recording potential red flags and their resolution.

What we aren’t convinced about:

ASIC considers statements of opinion or belief in a prospectus should disclose whose opinion or belief is being quoted and the basis on which it is expressed. Any opinion or belief outlined in a prospectus and not attributed to a third party is presumed to be the Boards’ opinion or belief and we consider a reasonable basis should exist, but that disclosure of that absent a forward looking statement is unnecessary and adds voluminous verification material to a public document.