While there are a number of securities exchanges operating within Australia (including the National Stock Exchange of Australia, the Sydney Stock Exchange and Chi-X Australia), the Australian Securities Exchange (ASX) is typically the securities exchange of choice for entities undertaking an initial public offering (IPO) in Australia, as it is the highest-profile securities exchange in Australia and has the largest volume of capital.
ASX is a fully integrated securities exchange across multiple asset classes (e.g.
Foreign Influence on Australian Companies
equities, fixed income, derivatives and managed funds) and is a globally renowned equity market with an international reputation for conducting markets of integrity; providing investors with the confidence which is required for active securities trading.
With Australia having Asia’s largest pool of investable funds and ASX consistently being ranked in the top exchanges globally for raising capital, a listing on ASX offers access to capital in the world’s fastest-growing region, within a robust regulatory environment, in a country that has recorded 26 years of uninterrupted economic growth.
This section contains a high-level overview of the key steps involved in taking an IPO, the typical timing required to complete an IPO, and the parties involved in the IPO process.
Key steps involved in undertaking an IPO
The process of undertaking an IPO will typically involve the company undertaking the following key steps:
- Establishment of a due diligence committee: To ensure the prospectus being prepared in connection with the IPO complies with the content requirements imposed under the Australian Corporations Act 2001 (Cth) (Corporations Act) or, if the prospectus is defective, those with potential liability have the ability to make use of the legal defences contained in the Corporations Act, it is usual for companies to undertake a formal due diligence process. The process also helps to:
- ensure that the prospectus is not misleading or deceptive;
- identify legal impediments to the IPO which can be dealt with prior to completion of the IPO; and
- enhance market comfort by establishing the reputation of the company and showing quality corporate governance.
- In accordance with market practice, a due diligence committee (DDC) is typically established to manage and coordinate the due diligence process for the IPO, with a view to ensuring that the above objectives are met. The DDC will usually comprise representatives from the board and management of the company, any major selling securityholder, the company’s lawyers and tax advisers, the investment bank/stockbroker or underwriter of the IPO and the investigating accountant.
- Undertaking legal due diligence enquiries: The company and its advisers will need to carry out commercial, legal, accounting, financial and tax due diligence enquiries on the company, its business and assets to determine material issues and identify any legal impediments to the IPO or associated transactions requiring resolution (e.g.
a consent which is required to be obtained under a material contract to permit, for example, the IPO).
- Pre-IPO restructure; corporate and capital structures: If recommended by legal, tax, accounting and/or commercial advice, the company may need to effect a pre-IPO restructure to implement optimal settings for its corporate and capital structure, having regard to potential liabilities, operational and marketing matters. The company will also need to review (and revise as necessary) its governance arrangements having regard to the principles of good corporate governance and recommendations set by the ASX Corporate Governance Council.
- Offer structure: The company, together with its advisers, will need to determine the structure for the proposed IPO, including to whom offers will be made (institution/broker/retail split), where offers will be made (i.e., in what jurisdictions), how offers will be made (i.e., privately marketed through a front-end bookbuild or publicly marketed with a back-end bookbuild) and by whom offers will be made (sell-down/fresh raise or a combination of the two). Decisions will also need to be made in relation to the form of underwriting (if any) for the IPO (and an agreement negotiated), the composition of lead manager and broker syndicates, and the terms of escrow which may apply to existing and continuing shareholders.
- Prospectus: The company will need to prepare a prospectus which complies with the content requirements of the Corporations Act. The outputs of the due diligence process undertaken in connection with the IPO will inform the content of the prospectus. As the Australian Securities and Investments Commission (ASIC) does not review a prospectus prior to lodgement and launch of the IPO (except in very limited circumstances), the onus is on directors of the company, underwriters and others involved with the issue of the prospectus to ensure that it complies with the requirements of the Corporations Act. Substantial penalties can apply in the event that the prospectus contains misleading information or omits material information.
- Verification of the prospectus: Prior to lodgement of the prospectus with ASIC, a detailed verification process will be undertaken with respect to the prospectus. The verification process is usually coordinated by the company’s lawyers and involves each material statement in a substantially final form of the prospectus being referenced back to a verifying source document to ensure its accuracy. Where there are statements of opinion, forecasts or expectations on, for example, future performance, growth or development of the business, the verification process will need to investigate the reasonableness of the assumptions on which these views are based.
- ASX admission: To obtain admission to the official list of ASX, the company will need to apply for admission to ASX by satisfying the admission criteria in Chapters 1 and 2 of the ASX Listing Rules (further detail of which is set out below). If any ASX or ASIC waivers or confirmations are necessary in connection with the IPO, application will need to be made at an earlier stage.
- Allocation and completion: The final stage in the IPO process is to allocate securities upon pricing of the IPO. The IPO will be completed by the company issuing securities and gaining admission to, and quotation of its securities on, ASX (after satisfying customary listing conditions).
Timing for completion of an IPO
Assuming a company is well prepared to undertake an IPO, an IPO can generally be completed in three to four months under the indicative timetable shown on the previous page.
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Parties involved in the IPO process
A company should engage advisers who are familiar with IPOs and the listing process. The following advisers will usually make up the IPO team:
- Investment bank / lead manager: The investment bank or lead manager will be the adviser who is primarily responsible for coordinating the IPO process and the company’s other advisers. Its role may include advising on the structuring of the IPO, including the size of the issue, timing and pricing of the IPO, and advising on, and conducting marketing of the IPO including coordinating and running roadshows with the company. The investment bank will also be responsible for managing the IPO so as to ensure that the IPO will be successful (including achieving the required security holder spread) and, if underwritten, to guarantee that the underwriter will acquire, or place, any securities not taken up by the public. In most circumstances, the underwriter will be appointed at the commencement of the IPO process by a mandate letter which contains the material terms of appointment. The underwriting agreement will then be negotiated in the period prior to lodgement of the prospectus, and is typically signed immediately prior to lodgement of the prospectus with ASIC.
- Lawyers: The role of the lawyers is to advise companies on all legal aspects of preparing for the IPO and the listing including matters such as converting to a public company, implementing any required pre-IPO reorganisation, appointing and removing directors, changing the company’s constitution and directors’ and managements’ service contracts, tax-related issues and preparing corporate governance policies. The lawyers will also coordinate the due diligence process and conduct the legal aspects of due diligence, assist with the preparation and verification of the prospectus, and advise on underwriting or offer management arrangements.
- Investigating accountant: The role of the investigating accountant is to prepare the materiality guidelines used to decide whether due diligence findings are material, to conduct financial and accounting due diligence, to assist with the preparation of the financial information disclosure in the prospectus, and to provide a ‘review’ level assurance report (for inclusion in the prospectus) on the company’s historical and forecast financial information (if any) for inclusion in the prospectus.
- Public relations consultant: The role of the public relations consultant will be to liaise with media to ensure that media coverage relating to the company and the IPO is appropriately managed, subject to the strict Corporations Act requirements relating to pre-prospectus publicity (described below in further detail). A public relations consultant may also assist in managing shareholder communications in connection with the IPO.
- Other advisers: The company will also need to appoint tax advisers (note, this role can often be fulfilled by the company’s lawyers or an investigating accountant) and may require experts to report on specific matters (e.g.
Independent Geologist for resources companies; Patent-Attorney for biotech companies, etc.).
An IPO undertaken in Australia will principally be governed by the requirements set out in the Corporations Act (which governs the disclosures which are required to be included in the prospectus and is regulated by ASIC) and the listing rules of the ASX (which prescribe the requirements which must be satisfied to obtain a listing on ASX and is regulated by ASX).
Content requirements prescribed by the Corporations Act
If a company intends to offer securities to the public in connection with its IPO, it will ordinarily be required to prepare a prospectus. However, in certain circumstances where a company is not looking to raise capital at the time of seeking admission to the official list of ASX, ASX will permit a company to prepare an information memorandum, which can have marginally lower disclosure requirements and does not attract the statutory prospectus liability regime.
While the Corporations Act does not prescribe all matters that should be included in a prospectus, it does require that a prospectus contain all information that investors and their professional advisers would reasonably require to make an informed assessment of the rights and liabilities attaching to the securities offered and the assets and liabilities, financial position and performance, profit and losses and prospects of the company. The prospectus must include this information if it is known to the company, its directors and proposed directors, the underwriter and advisers, or if it could be reasonably found out by those people. The fact that certain information is confidential is a relevant consideration in what is reasonable for investors and their advisers to expect to see in the prospectus. However, the overriding rule is that if information is material to investors it cannot be omitted from the prospectus on the basis that it is confidential.
There is also certain prescribed information which must be included in a prospectus, such as the terms and conditions of the offer, disclosure of certain payments made to directors and advisers in connection with the IPO, information about the ASX listing, lodgement of the prospectus with ASX and ASIC, and the expiry date for the prospectus.
In addition to containing the prescribed content, the Corporations Act also requires that the prospectus be worded and presented in a ‘clear, concise and effective’ manner so that investors (in particular, retail investors) can understand the potential opportunities and risks associated with an investment in the company’s securities.
A sample contents page for a prospectus is set out below:
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It is important to note that forecasts should only be included in a prospectus where there are reasonable grounds for doing so. Having reasonable grounds for a statement means that there must be a sufficiently objective foundation for the statement. In the absence of contrary evidence, a forecast which extends beyond a two-year period may not have a reasonable basis. As a result, forecasts in prospectuses are typically for periods of between 6 and 18 months.
Requirement to lodge prospectus with ASIC
The company must lodge a copy of its prospectus with ASIC, as well as lodge its application for admission to the official list of ASX, with ASX, within seven days of lodging its prospectus with ASIC. The maximum life of a prospectus is 13 months.
Following lodgement with ASIC, the prospectus will be subject to an exposure period to allow any concerns about the prospectus to be raised by the market. During the exposure period, the company may receive (but must not process) applications, and the prospectus must be made generally available. The initial exposure period is seven clear days, however, ASIC may extend this period for a further seven days if it is concerned that there is a defect in the prospectus which is not resolved in the first seven days.
Supplementary and replacement prospectuses
If there is a significant change affecting any matter contained in the prospectus, or a significant new matter arises after lodgement of the prospectus with ASIC which renders the information provided in the prospectus false, misleading or deceptive, or a new circumstance arises which would have been required to be disclosed in the prospectus if it had been in existence at the date of the lodgement of the prospectus, this will need to be disclosed by way of a supplementary or replacement prospectus if the new information is materially adverse from the point of view of an investor.
If the prospectus deficiency is materially adverse to an investor, the company must either repay application moneys or give investors a one-month period during which they can choose to be repaid their application moneys.
ASX admission requirements
In addition to the requirements set out above, there are a number of ASX requirements which will need to be satisfied for a company to be admitted to the official list of ASX. Set out below are the main admission requirements:
The following provides a high-level overview of the regulatory regime which applies in respect of the marketing of an IPO in Australia:
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Pre-prospectus publicity: The Corporations Act imposes strict restrictions on advertising an IPO before a prospectus is lodged with ASIC. Subject to certain limited exceptions, a company will be prohibited from advertising an IPO (including ‘image advertising’ which may induce applicants for securities) before a prospectus is lodged with ASIC. This prohibition is intended to stop the public applying for securities without first reading the prospectus.
Ordinary course advertising: The image advertising restrictions in the Corporations Act will not prohibit the company from continuing its normal business advertising, provided that such advertising relates only to the company’s business (and not the IPO).
Roadshows: An IPO is generally marketed privately for a period of between one and two weeks before the prospectus is lodged with ASIC to ensure there is sufficient demand for the IPO. This process is called the roadshow. The underwriter/lead manager will need a near-final prospectus prior to undertaking a roadshow and will usually sign the underwriting agreement/offer management agreement and agree to lodgement of the prospectus with ASIC following a successful roadshow. A roadshow to Australian financial services licence-holders is an exemption to the prospectus publicity restriction.
Post-prospectus publicity: There is more flexibility in terms of advertising an IPO once a prospectus has been lodged with ASIC. However, the advertising must not be false, misleading or deceptive (including by omission) and should be consistent with the disclosures made in the prospectus. The advertisement must also include a statement that the securities are offered under the prospectus and that applicants must read the prospectus before applying for securities and must complete the application form in, or accompanying, the prospectus in order to apply for securities in the company.
Once trading of the company’s securities commences on ASX, and in the absence of any specific waivers being received from ASX, the company will need to comply with the detailed continuing obligations in the ASX Listing Rules. Key obligations are described below:
Generally, unless a foreign company has a foreign exempt listing, overseas companies are required to comply with the same continuing obligations as Australian companies. However, in certain circumstances, ASX will impose additional disclosure requirements, or may waive certain ASX Listing Rules, for foreign companies. For example:
- As the Australian takeover and substantial shareholder provisions do not apply to companies incorporated outside Australia, ASX requires a statement of that fact to be included in each annual report, and requires an undertaking from the company to immediately inform the market on becoming aware of any person becoming or ceasing to be a ‘substantial shareholder’ (as defined in the Corporations Act), or a movement of at least 1% in the number of securities in which a ‘substantial shareholder’ has an interest.
- ASX may permit foreign companies to report in the currency of their home jurisdiction and under the recognised accounting policies of that jurisdiction and will, in certain circumstances, waive its financial reporting requirements where it considers that the equivalent requirements of the company’s primary exchange are sufficiently stringent to keep the market informed.
The following provides an overview of when a prospectus is likely to be considered to be ‘defective’ (and therefore give rise to potential civil and criminal liability), who is exposed to liability for the defect, and to what extent defences to liability are available.
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Liability for a prospectus
A person may be subject to civil and criminal liability under the Corporations Act in relation to an IPO if:
- the prospectus contains a false, misleading or deceptive statement or omits information which is required to be included under the Corporations Act; or
- after the prospectus was lodged, a new circumstance has arisen which would have been required to be disclosed in the prospectus if it had arisen before the prospectus was lodged with ASIC, and an amended supplementary or replacement prospectus has not been issued.
The company, its directors or a person responsible for statements in a prospectus, may also be liable at common law for a fraudulent or negligent misrepresentation in a prospectus.
In addition to the specific liability set out above, liability may also arise for other actions taken or statements made in connection with an IPO. For example, a person could potentially contravene the Corporations Act by making a false, misleading or deceptive statement during marketing activities undertaken as part of the IPO or by breaching the pre-prospectus advertising restrictions. Accordingly, directors and management should be very careful about any statements they make about the company or the IPO during the IPO process.
Who may be liable?
A number of parties involved in the preparation of the prospectus may be subject to criminal and civil liability including (amongst others) the offeror of securities (being the company and/or any selling shareholder), directors and proposed directors of the company, underwriters and persons who are involved in the contravention of the Corporations Act. The extent of the potential liability will differ depending on the person involved. In particular, in the event that the prospectus is defective the company, any selling shareholder, their respective directors and any underwriter will bear responsibility for the entire prospectus and will potentially be liable for any loss or damage suffered.
Defences to liability
There are a number of defences available to potential civil and criminal liability, some of which include that an appropriate due diligence process was undertaken (which requires reasonable enquiries and a reasonable belief that the relevant statement was not defective), reasonable reliance on others’ defence (which requires reasonable reliance on a third party such as an adviser), withdrawal of consent (which requires the public withdrawal of consent to be named in the prospectus), and non-awareness of a new matter (which applies where the new matter has arisen since the prospectus was lodged).