This article was written by Scott Phillips.
ASIC and ASX released two consultation papers on the provision of historic financial information in prospectuses and as a requirement for listing on ASX on 12 May 2016:
- ASIC’s consultation paper suggests it will significantly narrow the circumstances in which anything less than 3 years’ (or 2 ½ years’) audited accounts will be acceptable in a prospectus. If you are working on a fund raising under a prospectus and thinking you’ll provide less than this, you should consult with ASIC as early as possible to ensure your timetable has room to prepare audited accounts if need be. The policy contemplated by ASIC’s consultation paper will be equally applicable to a PDS for a managed investment scheme.
- Companies contemplating an IPO will need to ensure they negotiate full access to financial records of businesses they propose to acquire in connection with an IPO. This will be necessary to ensure the IPO entity can prepare historical accounts which include the contribution of those businesses. ASIC’s consultation paper suggests they will have little sympathy for entities which cannot prepare fulsome historical accounts because they don’t have access to financial information for business acquired in the run-up to an IPO.
- ASIC is proposing to formalise the periods after which financial information will be stale and updated information will need to be prepared before a prospectus can be lodged. If you are using full year information, you will need to get your prospectus lodged within 75 days after the next a half-year end and if you are using half year information, you will need to get it lodged within 3 months after the next full-year end. This is largely consistent with market practice.
ASIC Consultation Paper
The Consultation Paper appears to have been issued in response to ASIC’s concern that a number of recent prospectuses have included inadequate historical accounts. ASIC’s view is that those prospectuses fall below the prospectus content standard required by section 710 of the Corporations Act 2001.
To address this issue, ASIC is proposing to clarify the level of historical financials that must be included in prospectuses going forward.
- ASIC’s Current Policy - ASIC’s current guidance on historical information in prospectuses (Section F of Regulatory Guide 228 (RG 228)) suggests that issuers should generally provide two-and-a-half or three years of audited historical financial information in prospectuses (see RG 228.87). However, ASIC accepts that in exceptional circumstances less disclosure may be justified. ASIC provides no further guidance on what these circumstances may be.
- ASIC’s Proposed Policy – ASIC proposesto clarify that, other than in limited circumstances, issuers should disclose audited historical financial statements for two-and-a-half or three years for both the issuer and any business it acquires even where the business acquired is not in a corporate form (ie, it is an asset acquisition).
ASIC’s proposed new policy throws up a number of questions:
- When will an asset be a “business”? If assets acquired by an issuer are in substance the acquisition of a business, ASIC indicates that the assets are to be treated like a business and the issuer should generally disclose historical income statements which incorporate the financials of that those assets.
- When will an asset not be a “business”? ASIC states that it will use the relevant accounting standard to make this determination (Appendix B of AASB 3). ASIC notes that it may be acceptable for issuers which are acquiring assets such as property assets or mining tenements to only include balance sheet disclosure and relevant expert reports (eg, property valuations or geological expert’s reports) rather than a full set of historical accounts.
- What if the issuer does not have access to reliable historical accounts? ASIC does not accept that issuers can exclude historical financial information for acquired businesses (or to include unaudited information) on the basis that they have not negotiated full access to the financial records of the entity if the entity was contemplating a public fundraising when the acquisition occurred.
- When will a qualified audit opinion be unacceptable? If an audit includes a qualification that the audit opinion provides limited independent assurance for investors, ASIC is likely to treat the financial information as unaudited and therefore not in compliance with the requirements of section 710 of the Corporations Act.
ASIC is also providing helpful guidance on when financial information will become stale and updated information will need to be prepared before a prospectus can be lodged.ASIC’s proposal is that a prospectus can include:
- accounts up to the previous year end provided the prospectus is lodged with ASIC less than 75 days after the end of the half-year (eg, 30 June year end accounts can be used up until 15 March); and
- accounts up to the previous half-year end provided the prospectus is lodged with ASIC less than 3 months after year end (eg, 31 December half-year end accounts can be used up until 30 September).
Helpfully, ASIC has provided a number of Case Studies which set out when full 3 (or 2 ½) year audited accounts would be required under ASIC’s proposed policy. These are summarised below.
ASIC’s examples of when less historic disclosure may be acceptable
- The main business undertaking has been divested during the three year history and the issuer has subsequently commenced an unrelated business (in this case ASIC indicates that financials would only be required from the date the new business was commenced).
- The issuer acquired a business or asset prior to the prospectus fundraising and has already consolidated the acquisition for a substantial portion of its disclosed financial history (the key requirement here is that the assets or business were acquired before the issuer was considering a public fundraising and a substantial track record is already disclosed). ASIC does not indicate what a substantial track record would be, but its examples indicate that 18 months is sufficient.
- The business or asset acquired is not material to the issuer’s financial history.
The issuer has acquired assets, which are not effectively businesses, (eg, property assets) it may include balance sheet disclosure only along with an appropriate expert’s report (eg, a valuation).
ASIC’s examples of when less historic disclosure likely to be unacceptable
- Company X will make two material acquisitions of Companies Y and Z using funds raised under an IPO. Company Y and Z have only ever prepared internal management accounts. Company X has not negotiated access to underlying financial records of Y and Z. ASIC considers that Company X’s prospectus will be deficient if it includes historical information for Company X alone. This will not be solved by forecast information being disclosed which includes Companies X, Y and Z.
- Company X has a “roll up” strategy and will acquire 50 individual businesses in the same sector using funds raised under an IPO. None of these businesses are individually material. These businesses do not have statutory accounts and many have accounts prepared on a cash basis only. ASIC suggests that full audited historical financial accounts for 3 years may be required even though the issuer may argue that obtaining 50 individual clean audits may not be possible.
- Company X will acquire a business from Company Y using funds raised under an IPO. Company Y is much larger than Company X. ASIC suggests that it would not be acceptable for Company X to rely on the audit performed by Company Y’s auditor with a review opinion from Company Y’s investigating accountant, as Company Y’s materiality thresholds are likely to be much lower.
Company X currently manages a series of caravan parks. Company X proposes to raise funds from a public offering which will be used to acquire the caravan parks. While ASIC would usually expect balance sheet disclosure only of acquired property-related assets, as Company X has been operating a business from the assets that generates management fees, ASIC indicates that full audited historical trading information for the last 3 (or 2 ½) years would be required.
ASX Consultation Paper
In its Consultation Paper, ASX proposes a number of changes to the admission standards including a change to require audited historic accounts for entities seeking admission under the assets test.
Under the current Listing Rules, an entity seeking admission under the assets test is only required to give ASX any accounts that have previously been prepared. If the entity has no accounts then none are required to be provided. By contrast, the profits test requires the entity to provide 3 years’ of audited historical accounts and if none exist they must be prepared before listing.
ASX proposes to include a note in the Listing Rules which states that less than 3 full years of audited accounts may be accepted, but ASX will generally only do so where ASIC has accepted less than 3 years’ audited accounts in the relevant disclosure document.
The ASX Consultation Paper also proposes to increase the financial thresholds for both the profits test and the assets test; change the spread test; and increase the minimum free float requirement (at least 20% of shares will need to be free float). The revised financial thresholds are still relatively low (eg, $500,000 profit, $5 million NTA etc).