Topic G Part 3 Disclosure to investors PDF

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Topic G Part 3 Fundraising: Investor Protection and Disclosure Documents

Objectives 

Examine the nature of and requirements for disclosure documents under Ch 6D of the Corporations Act 2001 (Cth)



Explain the areas of liability of company officers and advisers for the contents of disclosure documents

LECTURE

1. Various types of companies may choose to raise capital by issuing shares (equity capital) or debentures (debt capital). All companies can raise capital, but only certain types of company are permitted to offer their shares to the public, following special disclosure rules.

2. Fund raising and disclosure (i) Corporations Act applies: Chapter 6D ( ss 700- 741) (ii) Fundraising provisions in Chapter 6D 

seek to balance need for investor protection on the one hand, against need to facilitate an efficient and credible capital market on the other



require offers of ‘securities’ ( i.e shares or debentures) to include disclosure of information to investors, subject to exemptions for some investors who do not need protection.



require offer and application form for ‘securities’ to be accompanied by a disclosure document (4 types)



seek to ensure the disclosure document does not contain misleading or deceptive statements, or omits material information

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(iii) General requirement: (1) A disclosure document ( such as a prospectus) must accompany any offer of ‘securities’ unless an exception applies: ss704 and 706. (2) The fundraising provisions apply to offers of securities of public companies e.g BHP Ltd -

Note: a proprietary company ( e.g Acme Pty Ltd must not engage in any activity that would require disclosure to investors under Ch 6D, though it can make an offer of its shares to existing employees or shareholders: s113(3). Therefore, ‘pty’ companies are not permitted to offer their securities to the general public. To do so, they would have to convert to a public company.

(3) A person is prohibited from making an offer of securities ( or distributing an application form for offer that requires disclosure) unless a disclosure document has been lodged with ASIC: s727(1)

(iv) Offers that do not need disclosure

( Lipton & Herzberg, [ 7.30] )

Personal offer: small scale offering: s708 -

an offer is a personal offer, and if: o offers or invitations have been made to fewer than 20 persons in the previous 12 months, and o the new offer will not result in more than $2 million being raised in that 12 months;

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(v)

Disclosure documents for offer of securities (a) Types Standard prospectus: s710

Prospectus

Short form prospectus: s712

s710

Profile statement s714

Offer information statement s715

(b) Standard prospectus: full disclosure document Short form prospectus: for retail investors Profile statement: sent to investors instead of prospectus. Used by certain industries such as Managed Investment Schemes. Prospectus must still be lodged with ASIC Offer information Statement: instead of prospectus for offer < $10 million ; and a audited financial statement is attached (not more than 6 months old) Examples: see ASIC website

(c) A disclosure document used for an offer of securities must be lodged with ASIC: s718. It is an offence not to do so: s727(1). If the disclosure document is found to be deficient, ASIC or any other aggrieved party has the ability to apply for injunctions from the court to stop the fundraising. ASIC itself can also issue a stop order if it views the disclosure document as misleading or deceptive (see below).

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(vi)

Prospectus: Disclosure test (s710(1) (a) General Disclosure test: a prospectus must contain: All the information that investors and their professional advisers would reasonably require to make an informed assessment of certain matters including: (a) the rights and liabilities attaching to the securities offered; and (b) the assets and liabilities, financial position and performance, profits and losses and prospects of the company that is to issue (or issued) the securities

(b) Forecasts (or forward-looking statements) if any: the statement is regarded as being misleading and deceptive (for liability provisions of the Act) if a person making it does not have reasonable grounds for making the statement: 728(2) (c) Other specific matters to be included in prospectus (s711) -

Disclosure of interests of directors and experts; lodgement details (with ASIC), and consents Terms and conditions of offer Quotation of securities on ASX? Expiry date of offer Information prescribed by regulations

(viii) Liability on disclosure documents

(a) Pt 6D.3 Corporations Act covers liabilities and remedies arising from misstatements from or omissions in disclosure documents (b) A person must not offer securities under a disclosure document if there is:  

a misleading or deceptive statement (in the documents or accompanying application form, or any other offer document) an omission from the disclosure document of material legally required to be provided, or new circumstance that has arisen since lodgement with ASIC that would have been required to be disclosed

(s728)

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(c) Liability: (i) Civil liability: Who is the person connected with the offer who can be civilly liable to the investor? (s729)      -

Person making the offer (the company) Each director of the body making the offer Proposed directors who have consented to being in the disclosure document Persons who make statements in the prospectus e.g an expert e.g geologist Underwriter named in offer

Remedies for investors  Damages  Rescission (terminate contract and get a refund)

(ii) Criminal liability: if the statement is materially adverse from the point of view of the investor (s 728) -

Defences? (s731)

A person is not guilty of an offence and is not civilly liable for loss or damage resulting from misleading or deceptive statements in the prospectus if s/he proves they:  Made all enquiries that were reasonable in the circumstances  After doing so, believed on reasonable grounds that statement was not misleading or deceptive. There is a similar defence for ‘omissions’.

3. Restrictions on issue (i)

Problems arise if minimum subscription not received within 4 months after date of disclosure document . s724 requires the company to repay the money received, or provide amended offer document with one month for investor to withdraw and be repaid; or issue securities with amended disclosure document with one month for investor to return security and be repaid.

(ii)

Stock Exchange listing: if disclosure document promises listing will occur and this does not happen within prescribed time, then issue is void and money must be repaid : s 723(3)

(iii)

Expiration of disclosure document: it expires 13 months after their date: ss711, 714 and 715

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4. Advertising Restrictions: Prior to lodgement with ASIC, advertising permitted under s734(5) for

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listed securities provided reference to disclosure document: s734(5) unlisted securities provided advertisement limited to key information about availability of issue and documentation

5. Other issues (i) Issues of Securities by a listed company also need to comply with the ASX listing rules: -

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15% limit on new shares in 12 month period without approval of ordinary shareholders. Exceptions apply. Minimum issue price (of 20 cents cash) of quoted security

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APPENDIX Corporations Act 2001 (Table of sections) CHAPTER 6D--Fundraising \ PART 6D.1--APPLICATION OF THE FUNDRAISING PROVISIONS 700. 702. 703. 703A.

Coverage of the fundraising rules Treatment of offers of options over securities Chapter may not be contracted out of Operating a clearing and settlement facility is not offering securities etc.

PART 6D.2--DISCLOSURE TO INVESTORS ABOUT SECURITIES Division 1--Overview 704. 705.

When disclosure to investors is needed Types of disclosure document Division 2--Offers that need disclosure to investors

706. 707. 708. 708A.

Issue offers that need disclosure Sale offers that need disclosure Offers that do not need disclosure Sale offers that do not need disclosure

Division 3--Types of disclosure documents 709. Prospectuses, short-form prospectuses, profile statements and offer information statements Division 4--Disclosure requirements 710. 711. 712. 713. 714. 715. 715A. 716.

Prospectus content—general disclosure test Prospectus content—specific disclosures Prospectus content—short form prospectuses Special prospectus content rules for continuously quoted securities Contents of profile statement Contents of offer information statement Presentation etc. of disclosure documents Disclosure document date and consents

Division 5--Procedure for offering securities 717. 718. 719. 720. 721. 722. 723.

Overview of procedure for offering securities Lodging of disclosure document Lodging supplementary or replacement document Consents needed for lodgment Offer must be made in, or accompanied by, the disclosure document Application money to be held on trust Issuing or transferring the securities under a disclosure document

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724. Choices open to person making the offer if disclosure document condition not met or disclosure document defective 725. Expiration of disclosure document PART 6D.3--PROHIBITIONS, LIABILITIES AND REMEDIES Division 1--Prohibitions and liabilities 726. Offering securities in a body that does not exist 727. Offering securities without a current disclosure document 728. Misstatement in, or omission from, disclosure document 729. Right to recover for loss or damage resulting from contravention 730. People liable on disclosure document to inform person making the offer about deficiencies in the disclosure document 731. Due diligence defence for prospectuses 732. Lack of knowledge defence for offer information statements and profile statements 733. General defences for all disclosure documents 734. Restrictions on advertising and publicity 735. Obligation to keep consents and other documents 736. Securities hawking prohibited Division 2--Remedies 737. 738.

Remedies for investors Securities may be returned and refund obtained

PART 6D.4--ASIC'S POWERS 739. 740. 741.

ASIC stop orders Anti-avoidance determinations ASIC's power to exempt and modify

PART 6D.5--MISCELLANEOUS

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