5. Fundraising

5.1 Obligation to produce a prospectus for rights issues of quoted securities

The obligation to produce a prospectus can introduce considerable delays in the process of conducting a rights issue, where speedy execution is often a crucial factor.

One way to speed up the process would be to remove the requirement to issue a prospectus for rights issues of quoted securities on the grounds that the combination of an original prospectus on listing and the continuous disclosure rules (possibly supplemented by exchange rules on market disclosure at the time of the rights issue) is sufficient to ensure informed decision-making. Rights issues are directed at existing shareholders, who may be presumed to be sufficiently well informed about the company to eliminate the need for a prospectus.

Consultation Issue Comments are sought on whether the requirement to issue a prospectus for rights issues of quoted securities should be removed.

 

5.2 Review of the fundraising provisions to facilitate certain types of fundraisings

Small scale fundraising is subject to the disclosure rules in the Corporations Act. This may be inhibiting the creation of new businesses with venture capital.

There is scope for analysis to determine the potential for revision of certain sections of the Corporations Act such as those dealing with the various types of offer documents and when they must be prepared, as well as the various conditions determining whether a particular fundraising is exempt from the disclosure requirements. This could potentially include a revision of certain key definitions, for example those applying to small-scale offerings (subsection 708(1)) or to sophisticated investors (subsection 708(8)).

Consultation Issue Comments are sought on whether changes to the fundraising provisions of the Corporations Act are needed to facilitate small scale securities offerings.

 

5.3 Review secondary sale disclosure rules

CLERP 9 introduced new requirements for allowing secondary sales of listed securities originally issued without a regulated disclosure document. The provisions of section 707 have the practical effect of requiring a prospectus to be issued where a security was issued originally without disclosure and is on sold within 12 months to a retail investor, such as is likely to be the case if sold on the ASX. The new section 708A means that no further disclosure is required where investors have the benefit of information that is comparable to that otherwise available in the prospectus. Currently these provisions require disclosure to be made to investors where both the issuer and the acquirer have an intention of on-sale, unless a ‘cleansing statement’ is given to the market operator.

These provisions are highly technical in nature. The number of legislative amendments and ASIC Class Orders issued in relation to the subject matter over the last few years have left many market participants confused as to what constitutes a ‘secondary sale’ and what they need to do about it. Share placements are often, sometimes of necessity, implemented on an urgent basis. Where a company is relying upon the exception in section 708A, it is important the requirements of that section be met in full because there are civil and criminal penalties applicable if this warranty is misleading or false. In particular, if a ‘cleansing statement’ is made to the ASX under s 708A(5), it must be lodged within the required five business days and in any event, before any secondary sales.

Consideration could be given to whether the secondary sale disclosure requirements relating to circumstances where securities are offered for sale within 12 months of their issue are working appropriately (sections 707(3) and 708A).

Consultation Issue Comments are sought on whether the secondary sale disclosure requirements relating to circumstances where securities are offered for sale within 12 months of their issue are working appropriately.

 

5.4 Employee Share Ownership Plans

In accordance with the Chapter 6D fundraising provisions of the Corporations Act, the issue of shares to employees for consideration requires a prospectus, unless it involves fewer than 20 employees in any 12 month period. ASIC has granted class order relief from this requirement to listed entities (Policy Statement 49). The main concern therefore relates to unlisted companies, for whom the expense and effort required to compile a prospectus is considered by business to be excessive.

In addition, a number of issues arise in the context of financial services regulation, which has unintended consequences with respect to Employee Share Ownership Plans (ESOPs). An example is that the operation of an ESOP may require obtaining a financial services licence.

On the other hand, shares in unlisted companies contain a higher level of risk due to the lower level of disclosure required for such entities. While employees may have a better insight into the financial circumstances of their employers, some level of disclosure may still be deemed appropriate to ensure that employees are informed of the nature of the investment they are being offered.

Consultation Issue Comments are sought on whether the disclosure requirements should be eased for unlisted companies issuing shares to employees.

 

5.5 Prospectus advertising and publicity

The provisions relating to advertising and publicity for prospectuses are significantly more restrictive than those for Product Disclosure Statements.

Currently, the disclosure requirements for prospectuses include content rules that result in a significant amount of small font disclosure in advertising material for the offer of securities. These content rules are not required when advertising financial products, rather the advertising requirements include reference to the Product Disclosure Statement and where it may be obtained.

A change to the prospectus disclosure requirements which removes the content requirement rules when advertising and publicising an offer and substitutes a notice that an application can only be made by applying under the prospectus, would bring the regime into line with that for Product Disclosure Statements.

Consultation Issue Comments are sought on ways to achieve greater alignment between the advertising and publicity requirements of the Product Disclosure Statement and prospectus disclosure regimes.

 

Next: Chapter 6 - Takeovers

Previous: Chapter 4 - Corporate governance