ASIC sees room for improvement in IPO docs
Prospectuses are important to investors considering an Initial Public Offering (IPO), but the usability and credibility of these documents could be improved, according to the Australian Securities and Investments Commission (ASIC).
It recently examined the experience of institutional and retail investors when making decisions on IPO investments and has released its findings in REP 540 Investors in initial public offerings.
In interviews, ASIC found that institutional investors — who tend to be the biggest investors in IPOs and often help determine their pricing — highly valued the following inputs when making decisions:
- the prospectus, because it was the main source of information regarding an IPO and was a regulated document for which directors and others involved in the offer have liability
- access to the IPO issuer’s management
- the institution’s own technical analysis was also important in assess the value of the offer.
Institutional investors were also found to seek out other sources of information about the IPO and were sceptical of information if there was a conflict of interest.
Additional qualitative research commissioned by ASIC revealed that the financial media, including mainstream media and subscription services, were influential in alerting retail investors to potential IPOs and in guiding their decision making process.
While the prospectus was seen as a key source of information, many retail investors said the document was hard to read and could not be relied on to tell the whole truth about an IPO.
ASIC’s research showed that retail investors were likely to dismiss the prospectus if it was too hard to read, and would rely on other sources of information. But while they valued ‘independent’ analysis, their access to informal sources such as the media or online investor forums could be limited.
A number of retail investors said they wanted more information on the issuing company’s management, such as its track record and what skills executives had to contribute.
There was also a perception that the prospectus, at least in part, was a marketing document and, therefore, did not provide the whole picture.
ASIC Commissioner John Price believes these findings will help the regulator enhance its regulation of IPOs.
While ASIC believes this regulation is sound, he adds: 'The qualitative research reinforces that prospectuses can be challenging documents for retail investors and particular areas of our guidance on prospectus disclosure should be carefully considered by issuers and their advisers to produce more effective disclosure for retail investors.’
To better help investor decision-making, ASIC plans to:
- engage with stakeholders to encourage them to provide greater accessibility to management for investors.
- increase its review of online investor forums and social media.
- broaden its regular monitoring of the financial media to include investment magazines and online subscription services.
- provide additional information about the IPO process to retail investors.
Given their importance to investors and to maintaining the reputation of Australia’s capital markets, ASIC says it closely reviews a significant number of prospectuses.
In 2016, this resulted in ASIC requiring corrective disclosure from issuers on 134 occasions, making 56 interim stop orders and final stop orders (with most of this regulatory action relating to IPOs).