Australian IPO Review 2022: Regulatory developments

ASIC gives guidance on forecast earnings ranges and ‘total contract value’

Prospectuses and other disclosure documents may include information that is prospective or forward-looking in nature, including forecast financial information and non-financial targets.

We have discussed in both the 2020 and 2021 editions of The Australian IPO Review ASIC’s proactive approach to the inclusion of forecasts in disclosure documents and its approach to engaging with issuers and their advisers.

In 2022, ASIC raised the issues of including forecasts with earnings ranges in disclosure documents and disclosure documents that include ‘total contract value’ metrics. Both of these disclosures are likely to involve forward-looking statements.

In its June 2022 Corporate Finance Update, ASIC noted that it would not be likely to support the inclusion of forecasts with earnings ranges in disclosure documents on the basis that the inclusion of a range undermines the reasonable basis of the forecast.

ASIC also noted that entities that wish to disclose ‘total contract value metrics’ (including assumptions about future contract extensions) in disclosure documents should take care to ensure that there are sufficient qualitative disclosures to explain the basis of those metrics. In its June 2022 Corporate Finance Update, ASIC noted that it had required an issuer to provide an explanation of the reasonable grounds which underpinned the issuer’s assessment of the likelihood of contract extensions.

Greenwashing

In the 2021 edition of The Australian IPO Review, we discussed ASIC’s focus on the inclusion of commitments to achieving “net zero” greenhouse gas emissions in disclosure documents.

In 2022, ASIC made clear that one of its key focuses going forward will be “greenwashing”, which ASIC defines as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical. ASIC took its first action against an ASX listed entity for alleged greenwashing in October 2022 and continued in the latter part of 2022 to take enforcement action against entities which it alleged to have engaged in greenwashing. The following examples are notable:

• In October 2022, Tlou Energy Limited paid four infringement notices totalling $53,280 to ASIC for making allegedly false or misleading statements in its ASX announcements. The relevant statements included that the electricity that the company produced was “carbon-neutral”, that its gas-to-power project would be “low emissions”, that it had the approvals and capability to generate certain quantities of solar electricity, and that it was equally concerned with producing “clean energy” as it was with developing its gas-to-power project.
• In December 2022, Vanguard Investments Australia Ltd paid three infringement notices totalling $39,960 for claiming that one of its index funds had an “investment screen” that excluded companies involved in significant tobacco manufacture and sales. ASIC alleged that the statement was misleading on the ground that the investment screen only excluded manufacturers of tobacco products rather than companies involved in their sale.
• In a similar case, also in December 2022, Diversa Trustees, a superannuation fund trustee, paid $13,320 in compliance with an ASIC infringement notice. The fund had claimed that it had investment screens in place to avoid companies involved in “polluting and carbon intensive activities”, “financing or support of activities which cause environmental and social harm” and “poor corporate governance”. ASIC alleged that these statements were misleading because the investment screens were more specific and implemented on a more limited basis than the fund’s website had suggested.

ASIC takes action on product design and distribution obligations

In the 2020 and 2021 editions of The Australian IPO Review, we discussed the introduction and coming into effect of the product design and distribution obligations (DDO).

In 2022, taking enforcement action in relation to DDO became one of ASIC’s key priorities. ASIC placed its first interim stop orders in July 2022 in relation to perceived deficiencies in target market determinations (TMD). In 2022, ASIC placed 21 interim stop orders and commenced its first civil penalty proceeding in relation to a TMD in December 2022.

ASIC has taken action in circumstances where, for example:

• disclosure documents have contained misleading information (including not adequately explaining how forecasted returns were calculated and using outdated performance numbers);
• distribution conditions in a TMD were not specific enough to ensure that financial products are distributed to consumers in the target market;
• DDO conditions were not specific enough to make it likely to reach consumers in the target market;
• a TMD did not specify any distribution conditions; and
• a TMD used vague terms to define the target market.

Omnibus ASX Listing Rule Amendment

In April 2022, ASX released a public consultation paper in which it indicated its proposal to make enhancements to the Listing Rules (Omnibus Rule Amendment), including, amongst other things:

• requiring entities that wish to utilise the placement capacity exemptions set out in rule 7.2:
  • for share/interest purchase plans (SPP), to disclose scale back arrangements in the event the SPP is oversubscribed; and
  • for pro rata issues, to offer any shortfall to eligible existing investors (on a pro rata basis with reference to their holding or their application for over-subscriptions) in the first instance;
• imposing new disclosure requirements for all material placements (ie non-pro rata offers comprising greater than 10% of an entity’s issued capital or an offer of greater than $50 million) that are consistent with those imposed by ASX on entities seeking to rely on ASX Covid-19 relief to undertake capital raisings involving an initial placement to institutional investors followed by a pro rata or SPP offer to retail investors; and
• various enhancements to the rules regulating the financial reporting framework for listed entities.

Of importance to IPOs, the Omnibus Rule Amendment included proposals to:

• add a note to rule 1.1 condition 1 (admission conditions for ASX Listings) and its counterpart in rule 12.5 (ongoing requirements for ASX Listings) which confirms that, for an entity to have a structure appropriate for a listed entity, amongst other things, the terms of its securities must comply with chapter 6 of the rules and it must have governance arrangements suitable for a listed entity;
• amend rule 1.1 condition 8 (admission condition for ASX Listings) to specify that a security holder is only counted for spread purposes if they are a resident of Australia or of another jurisdiction that is acceptable to ASX;
• amend rule 1.1 condition 13 (admission conditions for ASX Listings), rule 1.8 condition 9 (admission conditions for ASX Debt Listings), rule 1.11 condition 9 (admission conditions for ASX Foreign Exempt Listings) and rule 12.6 (ongoing requirements for listed entities) to require the person appointed by an entity to be responsible for communication with ASX in relation to Listing Rule matters to be someone acceptable to ASX;
• amend rule 1.3.2 (the commitments test) to provide that the rule does not apply where the entity has a track record of profitability or revenue acceptable to ASX;
• amend rule 1.4.7 to extend the date that an entity being listed on the basis of an information memorandum must not undertake a capital raising from three months after the date of issue of its information memorandum to three months after the date of its admission to the official list;
• amend conditions 3(a) and (b) (admission conditions for ASX Debt Listings) to require the accounts given to ASX by the entity or its guarantor to be audited if the entity is intending to offer or issue retail debt securities;
• amend rules 1.19 and 2.9 to make clear that ASX’s decision on whether to admit an entity to the official list and to quote its securities is final and that ASX may refuse admission or quotation without giving any reasons to the entity and without being obliged to afford the entity the opportunity to make further submissions on why it should be admitted to the official list or why its securities should be granted quotation; and
• add new rules 1.19A and 2.9A making it clear that the admission of an entity to the official list and the quotation of its securities should not be interpreted in any way as an endorsement by ASX of the merits of investing in, or the prospects of, the entity and investors should make their own enquiries and exercise due diligence before investing in the entity’s securities.

Consultation on the Omnibus Rule Amendment closed on 27 May 2022, with the amendments set to be released in the third quarter of 2022 to take effect on 1 December 2022. In its Listed@ ASX Compliance Update no. 09/22, ASX notified the market that its consultation response would not be released in 2022 and that the timeframe for its release had not yet been determined.

ASX Listing Rule Compliance Course

In the 2019 edition of The Australian IPO Review, we discussed a range of amendments that ASX made to the ASX Listing Rules which came into effect on 1 December 2019.

On 1 November 2021, a regime was introduced into Parts 8B.8 and 9.1A of the Corporations Act 2001 (Cth) which required directors (or alternate directors acting in the capacity of a director) to apply for a Director Identification Number (DIN).