In its latest report on regulation of corporate finance, ASIC has identified the regulation of information relating to IPOs outside of formal disclosure documents as a focal point of its regulatory activities over the next 6 months.
Despite strict limitations in the law on IPO advertising outside of a prospectus, ASIC’s research in 2018 showed that retail investors continue to be heavily influenced by ‘alternative’ sources of information about IPOs, other than the prospectus, in making their investment decisions.
In one instance, ASIC found that misleading statements that it had required an issuer to remove from its prospectus, were published instead in promotional materials. Upon modifying Chapter 6D to prevent the issuer from accepting any offers until the statements were retracted, the issuer withdrew its IPO.
In other instances, ASIC found that investor education reports had been leaked to the media, prior to any prospectus having been lodged with ASIC. With media reporting being noted as a “core element of any IPO consideration”,1 this creates a heightened risk that retail investors may be making their investment decisions based on ‘cherry-picked’ information, purposely selected from the analyst’s report to sensationalise a media article, without access to or proper consideration of the whole report with its qualifications and underlying assumptions.
Pre-commitment statements by institutional investors is also an area of growing regulatory concern, with research showing that retail investors perceived a cornerstone investor’s pre-commitment to an IPO or other ‘market interest’ as a strong indication that the IPO is a good investment.
It will be interesting to see what actions ASIC will take to regulate the promotion of IPOs outside of the prospectus, in an era of possible ‘distrust’ of the company and preference for financial media. An ASIC-commissioned report in 2017 revealed that there is widespread belief that a prospectus does not tell the “full story”, and that it would only present information in the best light to promote the IPO.2 Other perceived limitations associated with prospectuses include that some of the information was difficult to understand, too lengthy, not specific enough or hard to find. These factors have contributed to the growing reliance by retail investors on ‘secondary’ sources of information in assessing an IPO, and raise the question of whether legal reform is required in this area to better align with and address investor practices and expectations.
1. Attachment to ASIC Report 540: ‘Investors in initial public offerings’.