Keep prospectuses short and simple: ASIC

Prospectus issuers and their advisers have failed to fully meet Corporations Act disclosure requirements to provide “clear, concise, and effective” prospectuses according to the Australian Securities and Investments Commission, which yesterday released draft guidelines on the preparation of such documents.

The draft guidance comes as ASIC continues investigations into the failure of Westpoint’s high-yield investment products.

ASIC acting chairman Jeremy Cooper said issuers needed to make prospectuses shorter, clearer and readable.

“So far, there’s been a lot of ‘over-disclosure’ as a means of limiting liability. That is clearly not the purpose of the disclosure requirements,” he said.

Cooper said the draft policy statement, Better prospectus disclosure, provided guidance on specific prospectus content issues that had arisen in the past, such as risk disclosure, high-yield debentures, the use of the proceeds of fundraising and share allocation policy.

He said the prospectus should explain the practical implications of what is being offered.

“Prospectuses should present a balanced picture of risk and return. Risk disclosure should be specific and not just a long list of every conceivable risk.”

The guidance gives specific instructions to prospectus issuers, explaining to high-yield debenture issuers, for example, that they should include disclosures on their borrowers, loan products, lending policies, approval process and credit and risk management systems.

“You should disclose clearly whether you have a first ranking mortgage over real property or not. If you do not have first ranking security, the prospectus should explain the risks associated with ranking behind other lenders,” the draft policy details.

It also states that possible conflicts of interest in lending to related parties and the risks associated with these transactions should be disclosed.

For issuers of high-yield debentures in property-based investments, the draft guidance instructs: “Investors need to understand that in lending to an issuer that on-lends to property developers, they are exposed to some of the property development risk. You should not say you invest in a ‘portfolio of mortgages’ when you really lend to property developers.”