ASIC Report 484: Due diligence practices in initial public offerings has exposed problems in the prospectuses of some small and mid-size issuers as well as providing guidance from the regulator on good practice.
The report found that IPO issuers that demonstrated poor due diligence practices tended to produce prospectuses with defective disclosure, such as “misleading and deceptive statements with no reasonable basis”.
“These prospectuses also omitted material information that would have been included had the issuer conducted all reasonable investigations,” the report said.
ASIC also found that small to mid-size issuers tended to adopt fewer diligence processes – for example, they might “convene a due diligence committee but nothing more”.
Even when due diligence processes are adopted and followed, IPO issuers are often guilty of adopting a ‘box-ticking’ approach, according to the report.
“We [also] observed instances where certain directors had little involvement in the preparation of the prospectus before signing off on the document,” ASIC said.
The report contained a number of recommendations for effective due diligence during the IPO process, including effective oversight of the process; record-keeping concerning the key issues; and verification of all material statements.
“Issuers and their advisers should conduct a thorough and investigative due diligence process to ensure that the prospectus not only complies with the law but also promotes informed decision making by investors and their advisers,” the report said.
“To ensure that the contents of the prospectus are complete and do not contain any material misstatements, directors must make sure that a robust due diligence process has been undertaken.”
ASIC also noted that appropriate professionals and expert advisers should be engaged by the company undertaking an IPO.
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