Prospectus Disclosure: ASIC’s Corporate Finance Report Takeaways

In its recent Corporate Finance Report (Report) for the period 1 January to 30 June 2019 (Period), ASIC flagged several key concern areas for prospectus disclosure, particularly for Software as a Service (SaaS) providers. Below is a summary of the Report, which was expanded on in detail at ASIC’s bi-annual Corporate Finance Liaison Meeting, held in Melbourne on 1 October 2019.

Early stage tech companies issuing disclosure documents

ASIC noted that during the Period, it saw a number of IPOs by companies focused primarily on developing and manufacturing technology, or providing technology services. Many of these companies are based in overseas jurisdictions, and are generally early-stage, loss-making, high-growth investment propositions. As such, with prospectuses pertaining to tech companies, there tends to be considerable focus on growth, both in revenue and customer numbers.

ASIC has an immediate focus on prospectus disclosure in the technology space – particularly where the issuer is at an early-stage, and is a loss-making, high-growth company.

Corrective disclosure required

During the Period, ASIC has sought corrective and additional disclosure in a number of tech prospectuses in relation to customer numbers, revenue growth, summary financial information, and market segments. In the Report, ASIC encourages issuers to take note of the following recommendations when preparing their prospectuses:

      • Customer numbers: To give an informative and balanced picture to potential investors, issuers should disclose the number of active customers and explain the definition of ‘active customer’. Measures of customer retention or ‘customer churn’ that are able to be understood by “mum and dad” investors should also be disclosed.
      • Revenue growth: Issuers should avoid disclosing ‘revenue annualisations’ – that is, presenting revenue on an annualised basis by extrapolating quarterly or monthly revenue – without disclosing actual revenue with equal prominence in the same place. Otherwise, this can give a misleading impression.
      • Summary financial information: Even if the business is loss-making and early stage, summary financial information should be provided in the investment overview section so readers can easily assess the size of revenues and losses.
      • Market segments: Issuers should be careful and conservative when presenting industry or market size data. For example, it could be misleading to suggest, even implicitly, that an issuer will be able to successfully access whole parts of a particular market (like the entire US retail market), when it is clear that the product or service would realistically be relevant to only a fraction or subset of that market..

Areas of focus for ASIC from the period

ASIC confirmed its primary areas of concern/focus are on:

(i) disclosure around an issuer’s business model and use of funds;
(ii) boiler plate risk disclosure; and
(iii) unbalanced disclosure.

In the Meeting, ASIC also noted that:

(i) An issuer will be held accountable for third party adviser statements in publicity (such as that an offer is oversubscribed)

          • ASIC intervened in an IPO after an email advertisement (from a web-based marketing platform involved in the IPO application process) incorrectly described the offer as ‘oversubscribed’.
          • In order to correct the misstatement, the issuer was required to ensure that the platform retracted and corrected the advertisement. As potential investors had already indicated their interest in the offer through the marketing platform, the issuer agreed to seek further positive confirmation that the investors still wished to formally apply for shares under the IPO. This resulted in a material reduction in funds raised by the issuer through this channel. 

(ii) The requirements for financial reporting by registered foreign companies 

          • ASIC also reminded that foreign issuers registered under Ch 5B of the Corporations Act 2001 (Cth) are only permitted to lodge financial statements prepared in accordance with foreign accounting principles if they already have a statutory obligation to prepare such accounts in their place of incorporation or formation.
          • If foreign issuers do not have this statutory obligation, generally they must prepare and lodge financial statements with ASIC that comply with the Australian accounting standards under s601CK: see p7 of the Report and Regulatory Guide 58: Reporting by registered foreign companies and Australian companies with foreign shareholders (RG 58).