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ASIC Uncovers ‘Misleading And Deceptive’ IPOs


On 14 July 2016, ASIC released its report into due diligence practices in initial public offerings (IPOs). The report has exposed a number of key problems, particularly in the prospectuses of some small and mid-size issuers of IPOs, and provides guidance on good due diligence practices for those planning to raise capital in the future.

Due diligence is a process adopted by issuers to determine whether they have properly prepared a prospectus, a document which discloses information such as the terms of issue and past performance of the company to potential investors, when undertaking a capital raising. The process is designed to ensure the prospectus contains accurate information, does not omit any material information and most importantly, does not mislead investors. Importantly, implementation of a due diligence system is a statutory defence to misleading and deceptive conduct claim.

In completing the report ASIC conducted a review of the due diligence processes of 12 IPOs and as a result, found a correlation between poor due diligence and defective prospectus disclosure. From the 12 IPOs that were reviewed, 10 resulted in supplementary disclosure being required, one was withdrawn and one was subject to a final stop order.

Some of ASIC’s key findings from the review were:

  • Considerable variation in due diligence processes adopted;
  • ‘Form over substance’ problems; where issuers adopted a ‘box ticking’ approach to due diligence rather than focusing on what was actually disclosed in the prospectus;
  • Superficial involvement by the board of directors; and
  • Inconsistency in the quality of contributions to the due diligence process.

The report also sets out a number of recommendations for effective due diligence. In particular ASIC highlighted the need for issuers to ensure they have addressed all elements of the due diligence process including investigations, record keeping, verification of material statements and continuation of the due diligence process after lodgement of the prospectus and throughout the offer period.

ASIC has indicated that it intends to conduct a wider range of systematic reviews of IPO due diligence processes in the future with the goal of promoting good market practices for fundraising.

The full text of the report, including ASIC’s view on what a “robust due diligence process” entails, can be retrieved from http://bit.ly/2a21GYi

At New Era our lawyers have acted on a number of IPOs and have designed and implemented due diligence systems for over 50 capital raisings. Our experienced team will ensure that your capital raising is a success.

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