Requirement for a prospectus
The company must issue a prospectus (or with ASX’s agreement, an information memorandum if the company is undertaking a compliance listing without raising capital) before it can be listed on ASX.
When an offer of new securities is made to Australian retail investors, a prospectus (which has been lodged with ASIC) must be issued to investors.
A prospectus (or other disclosure document) is also required for secondary sales of previously issued securities in certain circumstances. The “on-sale” provisions contained in the Corporations Act (which impose this disclosure requirement) are intended to prevent companies or sellers from avoiding the prospectus requirements by issuing or selling their shares to sophisticated and professional investors only (who do not ordinarily require a disclosure document) only for those purchasers to “on-sell” those shares to retail investors.
Prospectuses do not need to be registered by ASIC, but must be lodged with ASIC. The company may distribute a prospectus immediately after lodgement, but must not accept an application for, or issue or transfer securities offered under the disclosure document until seven days after lodgement (or for up to 14 days, if extended by ASIC). This is known as the exposure period.
Liability and defences
Under the Corporations Act, civil, and potentially criminal, liability are imposed on those involved in the preparation and issue of a prospectus if:
- the prospectus contains a misleading or deceptive statement;
- there is an omission from the prospectus of any material required by the Corporations Act to be included in the prospectus; or
- a new circumstance has arisen since lodgement of the prospectus which would have been required to be disclosed in the prospectus had it arisen prior to lodgement, and it was not included in a supplementary or replacement prospectus.
This “deemed” liability for the prospectus extends to the issuers of the prospectus (typically the company and any person who makes a sale offer), the directors and proposed directors of those entities, as well as to underwriters, persons named with their consent as having made statements included in the prospectus and other people involved in the preparation of the prospectus. Each of these persons has personal criminal and civil liability regardless of whether or not they are personally at fault for the relevant deficiency.
The two defences potentially available to those persons are the “due diligence defence” and the “reasonable reliance defence”.
The ability to rely on these defences will depend on the nature of the due diligence system, the reliability and appropriateness of the people involved, and the involvement in the process and conduct of the person seeking to rely on the defence.
The prospectus will be prepared simultaneously with the conduct of the due diligence process which is managed and co-ordinated by a DDC. The content of the prospectus will reflect the findings of the due diligence process. The Corporations Act has both general and specific disclosure requirements.
The general requirement is that a prospectus must contain all the information in relation to the company that investors and their professional advisers would reasonably require to make an informed assessment of (broadly):
- the rights and liabilities attaching to the securities offered; and
- the assets and liabilities, financial position and performance, profits and losses and prospects of the company,
to the extent to which it is reasonable for investors and their professional advisers to expect to find that information in the prospectus. Disclosure will only need to be made if the company, its directors and proposed directors (if any), underwriters or advisers (including people named in the prospectus) actually know the information or (in the circumstances) ought reasonably to have obtained the information by making enquiries.
The prospectus must be worded and presented in a clear, concise and effective manner (ASIC Regulatory Guide 228 sets out ASIC’s view on how issuers can satisfy this requirement).
Unlike in other jurisdictions such as the United States and Hong Kong, it is not mandatory for ASIC to pre-vet a prospectus. Where certain issues arise however, ASIC has pre-vetted specific sections of the prospectus relevant to those issues.
Disclosure of historical financial information
Although historical financial disclosure requirements will vary from company to company (including whether the company is applying under the “profit test” or the “assets test”), in general, a prospectus must contain the following audited financial information for at least the 3 most recent financial years (or 2 years of audited information and a half-year of reviewed information, depending on the prospectus date):
- consolidated income statement (showing major revenue and expense items and profit or loss, including EBIT and NPAT);
- consolidated cash flow statement (at a minimum showing operating and investing cash flows);
- other material information from financials, notes and any other documents attached to the financial reports;
- any modified opinion by the auditor;
- all events that have had a material effect on the applicant since the date of the most recent financial statements; and
- a warning that past performance is not a guide to future performance.
You should also expect to provide a consolidated audited statement of financial position for the most recent financial year (or reviewed statement if most recently you have completed a half-year) showing major asset, liability and equity groups and a corresponding pro-forma statement of financial position showing the effect of the offer and any acquisitions.
It is also customary for pro forma income statements and cash flow statements to be prepared for inclusion in the prospectus.
Depending on the timing for lodgement of the prospectus, the most recent financial statements for the company might be a half-year accounts. In that case, because ASIC’s regulatory policy requires that prior period comparatives are also included in the prospectus, it may be necessary for a company to arrange a review of its half-year accounts for that prior period (if it hasn’t already). Practically, this means that the requirement for financial information disclosure in the prospectus is 3 years or 2 years plus 2 half-years.
There are very limited circumstances in which ASIC and ASX will soften these requirements, so we recommend early engagement with ASX, ASIC and the company’s auditor to ensure that the timetable allows for the preparation of audited or reviewed accounts.
There is no specific legal requirement for a prospectus to include a forecast, however the Corporations Act requires that a company disclose its “prospects”. ASIC Regulatory Guide 170 indicates that ASIC expects a forecast to be disclosed in a prospectus if reasonable grounds exist for making such forecasts. Market practice is also for companies with operating profit to provide forecasts. Accordingly, it will often be the case that a forecast is included in an IPO prospectus to assist the marketing of the IPO and to meet the disclosure requirements.
If a forecast or prospective financial information is included, there must be reasonable grounds for making that forecast or statement. Whether or not there are reasonable grounds for including prospective financial information depends on various factors. It is customary to include an investigating accountant’s report from an external accountant which covers the forecast financial information. The length of the forecast given will depend on the nature of the business and the timing of the IPO (with forecasts generally ranging from 6 to 18 months).
Supplementary and replacement prospectuses
If a prospectus is found to be deficient, or if new information emerges during the period before the shares are issued (or transferred) under the offer, there may be a need to issue and lodge a supplementary or a replacement prospectus. It is an offence to proceed with the offer in the absence of a supplementary prospectus where the deficiency is materially adverse from the point of view of an investor.