Prepare a Successful IPO: Due Diligence and Marketing
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A company wanting to list on the Australian Securities Exchange in an initial public offering must first meet a number of requirements, including preparing a prospectus to lodge with the ASIC and to issue to the public.
This past July, ASIC reviewed due diligence practices for IPOs and found that often, not enough effort or consideration is taken to ensure compliance with the Corporations Act. When a prospectus is found to be defective, there could be criminal/civil penalties as well as financial liabilities.
As such, thorough due diligence and transparent marketing communications should be practiced in order to prevent being seen as misleading or deceptive to the public.
If you want to know more about the ASIC report or listing on the ASX, feel free to give us a call or shoot us an email, we would love to hear from you.
A company wanting to list securities on the Australian Securities Exchange (ASX) in an Initial Public Offering (IPO) must first meet a number of requirements for general admission to the ASX, including preparing a prospectus to lodge with the Australian Securities and Investment Commission (ASIC) and to issue their prospectus to the public.
Preparing a Prospectus
The Corporations Act 2001 requires the company seeking to raise funds through the issue of securities to provide a disclosure document, usually a prospectus. There are a number of information requirements that a prospectus must meet, culminating in a verification process taken prior to the finalization of any prospectus. The final verification involves a due diligence committee, usually comprised of company representatives, checking each material statement to ensure that it is accurate and complete. Those involved in the preparation and verification of the prospectus are liable for any deficiencies or omissions in the prospectus.
If a prospectus is found to contravene the Corporations Act, substantial penalties – civil, criminal, or both – may apply. Further, a defect in a prospectus may give IPO applicants a right to a refund of their monies and may compromise other financial arrangements. To ensure that liability is kept to a minimum, it is important for companies to have an effective due diligence practice in place.
Due Diligence
In the context of IPOs, due diligence is a process by which stakeholders involved in the listing of a company find out and confirm information they need to know in relation to the company, its business, assets, and liabilities. The due diligence process should be designed to ensure that the prospectus contains accurate information and has not omitted any material information.
This past July, the ASIC reviewed and reported on matters regarding due diligence in IPOs. The report highlighted a number of findings and recommendations for good due diligence practices.
The ASIC’s Key Findings:
Poor due diligence leads to poor disclosure. Poor disclosure means defective disclosure, such as misleading deceptive statements and omission of material information. Such defects and omissions would have been avoided if all reasonable investigations into the prospectus had been conducted.
There was considerable variation in the due diligence processes adopted by organizations, with small to medium-sized entities adopting fewer due diligence processes and demonstrating less effort and consideration of due diligence.
There was a bigger focus on form over substance in due diligence procedures, with companies implementing a simple ‘box-ticking’ approach rather than focusing on the disclosure in the prospectus.
Often, the board of directors was only superficially involved. The ASIC observed numerous instances where the directors had only a minimal involvement in the preparation of the prospectus before signing off on the document – exposing the directors to liability if the prospectus was found to be defective.
Low-cost due diligence often led to delays, further work, and ultimately more costs despite the apparent upfront savings.
In light of these findings, the ASIC made several recommendations for due diligence:
The adoption of a more robust due diligence process;
A ‘substance over form’ approach;
More director involvement in due diligence processes;
Engaging appropriate professional and expert advisors; and
Better focus on work carried out by foreign legal and finance advisors.
Marketing the IPO Process
Due diligence is a very important aspect of the IPO process, but so is marketing the company’s IPO. The Corporations Act places restrictions on pre-prospectus lodging advertisement and post-lodging marketing. Failure to comply with the Corporations Act in advertising or publicizing offers of securities may lead to steep monetary fines or even prison time for offenders. Similarly, misleading or deceptive conduct in violation of the Corporations Act leads to civil liability.
This past September, the ASIC issued a report focused on marketing practices in IPOs, on both traditional and non-traditional methods of marketing to retail investors. Traditional marketing methods include telephone calls, email distribution, roadshows, ‘investor education’ materials, websites, and advertisements. Non-traditional methods include social media, crowdfunding sites, and investor forums.
The ASIC found that while traditional marketing methods remained very important, some small and medium-sized firms were using more non-traditional methods of marketing IPOs. However, with both types of marketing methods, the ASIC expressed concerns about misleading communication in marketing practices, inadequate controls on access to information, oversight weaknesses, and failure to monitor marketing content.
To address these concerns, the ASIC recommended:
That firms not give undue weight to forecasts in marketing materials;
That the content of the marketing is based on the merits of the IPO and not anything else that could be construed as misleading;
That tighter controls on restricted material should be applied, along with employee education on how to handle restricted material;
That social media posts are reviewed prior to publication and that employees should be educated on how to post in compliance with the Corporations Act; and
That firms should apply tighter controls over the marketing and selling of IPOs by phone.
While there are many considerations in preparing for an IPO, Companies must implement appropriate practices to ensure compliance with the Corporations Act in regards to due diligence and marketing requirements.
What Should I Do Next
Contact us if you would like further legal advice on developing better due diligence practices and marketing strategies for your Organization’s IPO. Our lawyers at You Legal will be happy to assist you in whatever way we can.
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* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.