An ASIC review of issuer due diligence in initial public offerings (IPO), has found a close correlation between defective disclosure in a prospectus and poor due diligence.

REP 484 Due diligence practices in initial public offerings (REP 484) includes this and other findings and provides ASIC’s recommendations for good practice due diligence for issuers and directors.

In the context of IPOs, due diligence is a process adopted by issuers of securities to determine whether they have properly prepared their prospectus.

Between November 2014 and January 2016, ASIC conducted systematic reviews of the due diligence practices of 12 IPO issuers, ranging from small, mid-sized and larger offers and a sample of offers from emerging market issuers. While ASIC often conducts reviews of due diligence in relation to particular disclosure issues in a prospectus, the reviews outlined in REP 484 focus on the practices and processes adopted by issuers.

Key observations arising from the review include:

• The adoption of poor due diligence practices often produced prospectuses with defective disclosure.
• The issuers and their directors should conduct an effective due diligence process to mitigate the risk of any future liability from a poor-quality prospectus.
• It is important for directors of issuers and their advisers to be actively engaged in the due diligence process.
• Additional procedures may be required to overcome the additional challenges of foreign laws, language barriers and supervision for emerging market issuers.
• A low-cost due diligence process may often lead to delays, further work and ultimately be more costly to an issuer.

Common concerns identified during ASIC’s reviews included variation in the quality of due diligence processes, a ‘form over substance’ approach and a lack of involvement by the directors of the issuer. In general, these concerns were identified in small to mid-sized issuers.

ASIC Commissioner John Price said the purpose of our review was to observe current market practices and report on our key findings.

‘While there is no legal requirement to do so, conducting a due diligence process when preparing a prospectus, has emerged as a market practice for issuers seeking to mitigate the risk of future liability from a poor-quality prospectus, and to ensure that the prospectus includes all information necessary to make an informed investment decision and is not misleading.

‘As this report demonstrates, there are clear benefits in conducting a thorough due diligence process and significant consequences for poor quality due diligence.

‘Informed by the findings of this review and ASIC’s broader experience in regulating offers of securities, this report includes guidance for directors and advisers about good practice due diligence’, Mr Price said.

Background

ASIC regularly reviews prospectuses to ensure their compliance with Chapter 6D of the Corporations Act. The review of the due diligence practices of issuers enables ASIC to assess how a prospectus is prepared and complements our other activities in regulating offers of securities. ASIC has a broad role in monitoring the practices of various parties involved in the IPO process, including lead managers, underwriters, brokers and financial and legal advisers.