ASIC concerned about poor due diligence in IPOs

ASIC has released a report setting out concerns with poor due diligence practices in initial public offerings (IPOs). ASIC notes its concerns covers prospectuses containing misleading and deceptive statements with no reasonable basis and material information having been omitted that would have been included had the issuer conducted all reasonable investigations; significant inconsistency in the diligence practices as well as a worrying tendency to take a ‘tick-the box’ approach; and a lack of involvement by directors in signing off prospectuses. Another key concern was the poor oversight by Australian legal advisers of the due diligence processes conducted by foreign legal advisers.

Report 484: Due diligence practices in initial public offerings covers reviews of the due diligence practices of 12 IPO issuers conducted between November 2014 and January 2016 and the quality of advice being provided to issuers. The review examined small, mid-sized and large offers, as well as some from emerging market issuers. 

ASIC sees a correlation between defective disclosure in a prospectus and poor due diligence. The report sets out a number of recommendations, highlighting the need for issuers to ensure they have addressed all elements of a due diligence process are implemented, from oversight to investigations, record keeping, verification of all material statements and continuation of the due diligence process after the lodgement of the prospectus and throughout the offer period to capture material developments.

ASIC also recommends that issuers take a ‘substance over form’ approach to the due diligence process, to promote informed decision-making by investors and their advisers. Another recommendation is that any effective process should identify the material matters that will require an expert opinion and ensure that the appropriate advisers are engaged.

The report noted the ‘superficial involvement of directors’, even though the directors of an issuer have direct liability under the Corporations Act and in some cases were actively involved in the business. In some instances prospectuses were not translated for directors who cannot read English. ASIC’s report reinforced the responsibility of directors for the contents of the prospectus.

When it came to emerging market issuers, ASIC recommended that Australian advisers should focus on effective oversight of the due diligence work carried out by foreign legal and other advisers.

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