Mining and exploration make a significant contribution to Australian capital markets, at least in volume terms if not absolute value terms. Resources companies make up more than 25% of all Australian Securities Exchange-listed ("ASX") companies, and initial public offerings ("IPOs") in this sector accounted for more than one-third of all IPOs in 2017 and 2018.
Potentially inspired by the work undertaken by ASX in connection with its wide-ranging listing rules and guidance notes update (and some of the behaviours cited by ASX in support of their changes), the Australian Securities and Investments Commission ("ASIC") has released a report detailing the findings of its review of mining IPO processes in the micro-cap sector, with a particular focus on the practices of lead managers.
ASIC certainly does not say so in so many words, but we expect ASIC is trying to answer the eternal question – just what are these resources companies mining – commodities or the market?
On 5 December 2019, ASIC released Report 641 entitled "An inside look at mining and exploration initial public offers".
ASIC conducted a sample review of mining IPOs between 1 October 2016 and 30 September 2018, with a particular focus on transactions raising less than $20 million, a monetary threshold that captures the majority of resources IPOs. The review considered IPO processes from transaction origination through to on-market trading post listing and identified a raft of circumstances that ASIC found concerning (if not unexpected by those operating in this part of the market).
The review raised particular issues in connection with the often heavy and multi-faceted involvement of lead managers and other promoters throughout the IPO process for smaller fundraisings, potentially resulting in:
- the lead manager garnering a disproportionate benefit through their direct involvement early in the process;
- significant potential for conflicts of interest where lead managers act for both the issuer and investors on the transaction process, and where lead managers hold direct interests in the company, have representatives on the board and/or provide ongoing advisory services;
- the lead manager being in a position to influence the share register by giving preference to a small subset of investors, generating a 'tight' register and potentially unhealthy levels of influence over the company's shareholder base and the board; and
- a greater focus on short term returns for a small pool of investors at the expense of longer investment horizons more appropriate for the delivery of exploration programs.
ASIC also expressed a concern around the balance of information and reliance as between prospectus disclosure and the less formal disclosure in the form of term sheets, investor presentations and other related communications (sometimes issued well in advance of, but clearly with a view towards, an IPO). Often, the less formal disclosure:
- did not provide a balanced view of the proposed investments;
- largely ignored risks; and
- occasionally contained misleading statements, particularly about mineralisation and 'nearology', or statements inconsistent with the prospectus.
ASIC expects lead managers and companies to take on board the "better practice" recommendations outlined in its report, noting that it may intervene or take enforcement action where it considers there is conduct that is unlawful or poses risk of harm to investors.
The following are our top 5 highlights out of ASIC's "better practice guidelines":
1 Read ASX Guidance Note 1: ASIC consistently cites ASX's updated Guidance Note 1 (Applying for admission – ASX listings) in connection with its recommendations. Clearly ASIC is a fan of the additional requirements in the Guidance Note, and lead managers, directors and promoters should take the time to read it.
2 Duties and conflict management paramount: Given the common influence of lead managers and promoters in the appointment of directors (or indeed those players themselves being represented on the board), directors need to be keenly aware of their duties, separate the interests of the company from its promoters, and maintain robust conflict management processes and procedures.
3 Clarity of the lead manager role: ASIC wants to see greater clarity around the role of the lead manager, both in terms of disclosure to investors but also in mandates and in the minds of directors. This extends to an identification of actual, potential or perceived conflicts of interest, including how conflicts are to be managed.
4 Director control over capital raising: Directors are encouraged to take greater control over the "seed capital" process, including in respect of quantum, pricing and allocation, particularly where it ends up in the hands of associates of the lead manager. ASIC's sensitivity to allocation continues through the IPO process, with lead managers and companies encouraged to heed the recommendations made in the previously released ASIC Report 605 (Allocations in equity raising transactions).
5 IPO allocations: ASIC has also suggested that directors communicate to the lead manager the type of investor that the company wishes to apply for securities under the IPO. Unfortunately for those in and around the resources equities markets over the past few years, the answer is a simple as one that is willing to part with their hard earned money! Here's hoping that 2020 will bring a return to a market environment where companies can exercise this sort of discretion.