ASIC crackdown on company prospectuses step in right direction: expert

Experts say the Australian Securities and Investments Commission is on the right track with its plans to simplify company prospectuses for retail investors by reducing their length and making information about the company’s business models and key risks more prominent.

Reuben Buchanan, executive director of Wholesale Investor, says even sophisticated institutional investors sometimes struggle with understanding long-winded prospectuses.

ASIC said yesterday it was hoping to make prospectuses easier to understand for retail investors by:

• Cutting the size of prospectuses.
• Providing a ‘balanced investment overview’.
• Scrapping photos in the overview, apart from the front cover.
• Explaining the company’s business model and strategic risks and short-term objectives.
• Including the criminal convictions and personal bankruptcies and disqualifications of company directors.

ASIC is particularly concerned that companies could use photos of celebrity brand ambassadors – as Myer did with model Jennifer Hawkins in its prospectus in 2009 – to give the impression these celebrities endorsed the share offering.

“First and foremost, a prospectus is a disclosure document aimed at informing investors. Sales and marketing statements – and the extensive use of promotional photography – are secondary,” ASIC Commissioner Belinda Gibson said yesterday.

Buchanan, who helps connect high net worth and professional investors with private, pre-IPO and small cap ASX-listed investments, says the more disclosure the better, particularly seeing most IPOs are high risk investments.

“Some prospectuses are 150 pages long, and normal investors just can’t deal with that information,” Buchanan told Smart Company.

“Too many people get a prospectus – it’s thick, it’s complicated, and they don’t read it.”

While Buchanan largely supports the proposals, he is calling for more focus on valuation in the documents, saying even reasonably sophisticated investors don’t understand valuations on some occasions.

“These sorts of things should be clearly and simply explained, and put at the front of the prospectus.”

Key business risks, the business’s history and how the money raised will be spent should also be clear at the start of a prospectus, he says.

According to Buchanan, the proposed changes are unlikely to be onerous for companies looking to list.

“Companies can achieve their objectives within ASIC’s guidelines,” he says.

He says another idea would be two different versions for prospective investors: a fuller version for institutional investors and a shorter one for retail investors.