What attracts investors to IPOs?

On 31 August, ASIC reported on its findings for how investors decide to invest in IPOs, with the release of Report 540: Investors in Initial Public Offerings. The report includes details on:

• ASIC’s own inquiries with institutional investors and other financial intermediaries about their approach to investing in IPOs, and
• a qualitative research report commissioned by ASIC on the factors and information that retail investors rely on when investing in an IPO, followed by a behavioural analysis by ASIC on the research findings.

The report has been in the pipeline for some time and complements a number of ASIC’s previous reports, on due diligence and marketing practices, relevant to the IPO market (see our previous blog posts: ASIC on media watch for IPO publicity and IPO due diligence under the spotlight).

IPOs are an important part of Australia’s capital markets and investors need to be able to make informed decisions about IPOs to ensure that capital is invested efficiently. Some key findings of the report are:

• prospectuses can be challenging documents for retail investors and so the investment overview is essential for assisting with their review, including a plain English explanation of the key financial data
• while the prospectus is seen as a key source of information, many retail investors said the document was hard to read and could not be relied on to tell the whole truth about an IPO (given that it was perceived to be a marketing document)
• retail investors valued information that they perceived to be independent and easy to understand, and that had been prepared by someone they perceived as having a high level of expertise
• a number of retail investors said they wanted more information on the issuing company’s management (including its track record and what skills executives had to contribute)
• risk disclosure needs to be specific to the issuing company, with retail investors indicating frustration with risks that appear to have been copied from another prospectus
• financial media and commentary, including mainstream media and subscription services, were influential in both alerting retail investors to IPO opportunities and in guiding the decision making process, and
• for institutional investors, the most highly valued inputs in assessing whether to invest are:
  • the prospectus (including the pathfinder and the lodged prospectus), as it is the main source of regulated information for an IPO, for which directors and others involved in the offer have liability, and
  • access to the IPO issuer’s management and the institution’s own technical analysis of the offer.

ASIC reports that, overall, there is scope for improvement in the effectiveness of prospectuses.

While ASIC considers that its regulation of IPOs and guidance on prospectuses is largely sound, the report explains how ASIC will use the findings from the project to enhance its regulation of IPOs and how companies, their advisers and other market participants can assist investors participating in IPOs. In particular, ASIC flagged the following areas of focus:

• company’s engaging with stakeholders to encourage them to provide greater accessibility to management for investors (for example, making IPO roadshow sessions available online for retail investors after the prospectus is lodged)
• increasing ASIC’s review of online investor forums and social media
• ASIC continuing to undertake targeted surveillance to check whether prospectuses have been subject to rigorous due diligence procedures
• ASIC closely reviewing historical financial information, particularly in large IPOs, to ensure it complies with the updated guidance in ASIC Regulatory Guide 228, and
• broadening ASIC’s regular monitoring of the financial media to include investment magazines, newsletters and online subscription services.

Following the release of the report, ASIC has reaffirmed that it will continue to review a significant portion of prospectuses, given the importance to investors and to maintaining the reputation of Australia’s capital markets.

ASIC’s most recent report on the regulation of corporate finance (Report 539 to June 2017) highlighted that supplementary and replacement prospectus lodgements account for 43% of total lodgements. Issuers currently considering or undertaking an IPO should review Report 539 and the abovementioned Report 540 carefully. Undoubtedly, this will be a continued area of focus for ASIC and one to watch for updated guidance in due course.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.