Varying quality in IPO due diligence
The corporate regulator has found variations in due diligence process quality in small to mid-sized issuers of initial public offerings (IPOs).
The Australian Securities and Investments Commission's (ASIC's) review of IPO issuer due diligence found a close correlation between defective disclosure in a prospectus and poor due diligence.
The review aimed to include guidance for directors and advisers about good practice due diligence and followed a number of recent financial services IPOs.
"Common concerns identified during ASIC's reviews included variation in the quality of due diligence processes, a ‘form over substance' approach and a lack of involvement by the directors of the issuer. In general, these concerns were identified in small to mid-sized issuers," ASIC said.
ASIC commissioner, John Price, said while there was no legal requirement to do so, conducting a due diligence process when preparing a prospectus had emerged as a market practice for issuers seeking to mitigate the risk of future liability from a poor-quality prospectus.
"…and to ensure that the prospectus includes all the information necessary to make an informed investment decision and is not misleading," he said.
"As this report demonstrates, there are clear benefits in conducting a thorough due diligence process and significant consequences for poor quality due diligence."
The review found:
- The adoption of poor due diligence practices often produced prospectuses with defective disclosure;
- Issuers and their directors should conduct an effective due diligence process to mitigate the risk of any future liability from a poor-quality prospectus;
- It was important for directors of issuers and their advisers to be actively engaged in the due diligence process;
- Additional procedures may be required to overcome the additional challenges of foreign laws, language barriers and supervision for emerging market issuers; and
- A low-cost due diligence process may often lead to delays, further work and ultimately be more costly to an issuer.
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