ASIC cracks down on debt issuers

TheAustralian Securities and Investments Commission(ASIC), in line with its ongoing efforts to improve risk disclosure to investors, has released an overview of common debenture prospectus defects.

The peak regulator has issued five interim stop orders and one final stop order on debenture prospectuses that collectively sought to raise more than $80 million from investors since the beginning of the year.

“ASIC has focused on debt raising in the past year because of our concern that the prospectuses may not adequately identify the different risks associated with these fixed interest investments,” ASIC corporate finance director Richard Cockburn says.

According to Cockburn, given debenture offerings invariably differ it is essential investors are able to assess the different levels of risk they are exposed to and make sure they are comfortable and feel adequately rewarded by the returns for those risks.

Common defects identified by ASIC in debenture prospectuses since the start of the year include the mis-description of debentures in prospectuses, failure to comply with the requirement to enter into a trust deed and with the requirement to appoint a trustee, insufficient disclosure of the prospects of the issuer and inadequate disclosure on borrowing limitations.

Cockburn says some issuers continue to incorrectly describe unsecured notes as debentures.

“This can be misleading and deceptive, as it leads investors to believe that the instruments may be more secure than they actually are,” he says.

In the current low interest rate environment, ASIC also considers that it is extremely important debenture issuers provide adequate disclosure to enable investors to understand the risk profile of the products and make a fully informed decision about whether to invest in the issuer.