Capitial Raisings Without a Prospectus

Posted by Paul Hardie on 2 January 2010 | 5 Comments

Tags: Capital Raising, ASX

Recent Market Developments
The global financial crisis has had a profound effect on the way ASX listed entities raise capital. During the stock market recovery that commenced in March 2009, many ASX listed entities have successfully raised additional capital through the equity markets by taking advantage of recent regulatory reforms designed to broaden the types of capital raisings that can be undertaken in Australia without a prospectus.

One of the significant benefits of these reforms is that they allow ASX listed entities to tap the market quickly and cost-effectively which has proved most beneficial to companies in the junior and micro cap sectors of the market. This trend looks set to continue in 2010.

What Offers can be made without a Prospectus?

There are a number of options available to ASX listed entities that wish to raise capital without a prospectus, including:

• placements to existing shareholders and new investors;
  
• security purchase plans (SPPs) to existing shareholders of up to $15,000 per shareholder; and
  
• pro rata rights issues to existing shareholders.
  

Each of these types of offers can be undertaken separately or in conjunction with one of the other types of offers.

Market conditions since the global financial crisis began have led to a surge in placements utilising a listed entity’s 15% placement capacity under the ASX Listing Rules without the need to obtain shareholder approval.

This process has the advantage of enabling listed entities to raise additional capital in the shortest possible time. However, given the potential dilutionary impact of this type of capital raising (particularly if the raising is done at a discount to the market price), many ASX listed entities have sought to combine a placement with a rights issue or SPP to provide existing shareholders with the opportunity to participate in the capital raising at the same or a similar price.

What are the Key Disclosure Obligations for these Offers?

The general rule is that disclosure to investors is required where a body’s securities are offered for sale within 12 months of their issue. This can have a significant and detrimental impact on underwriting arrangements and the ability of institutional investors, who have participated in a placement without a prospectus, to dispose of their shares within the 12 month period after the securities are issued.

Section 708A of the Corporations Act 2001 (Cth) (Act) – which applies only to “quoted securities” – purports to address the unintended consequences of these secondary sales provisions. According to the Explanatory Memorandum to the relevant piece of legislation, “the basis of the proposed amendments is that no further disclosure is required where investors have the benefit of information that is comparable to that otherwise available in a prospectus”.

Accordingly, the need for disclosure is not triggered provided that the listed entity satisfies certain conditions with respect to financial reporting, continuous disclosure and continuity of quotation of its securities on ASX. Suspensions from trading that do not exceed 5 days during the first 12 months from the date of issue of the securities will not disentitle the exemption. (Trading halts are not counted as suspensions).

To take advantage of the secondary sale exemption, the listed entity must issue a “cleansing notice” to ASX at or around the time of the capital raising either confirming that the entity has disclosed all material information to the market under the continuous disclosure regime or disclosing any such information. This information must be included in the notice only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in a disclosure document, such that the requirement imposes a prospectus-like test regarding the information to be disclosed without actually requiring the preparation and lodgement of a prospectus.

Typically, a listed entity will satisfy this requirement by announcing any material price sensitive information (eg, debt refinancing, asset writedowns, acquisitions etc) to ASX at the same time as the capital raising is announced and prior to issuing the cleansing notice. For rights issues and SPPs, the entity must also issue an offer document outlining the terms and conditions of the offer.

The Need for Due Diligence

Whilst the specific prospectus liability provisions of the Act do not apply to capital raisings without a prospectus, entities may still be exposed to liability when undertaking a capital raising using a cleansing notice if, for example, there has been other breaches of the Act (such as a breach of the continuous disclosure provisions) or false and misleading statements are made in connection with the capital raising.

For this reason, it is advisable for companies to carry out due diligence investigations even if the capital raising is conducted without a prospectus. Such investigations should include at a minimum:

• due diligence on the entity’s continuous disclosure compliance;
  
• due diligence on any ASX announcements to be made in conjunction with the capital raising; and
  
• completion of directors’ due diligence questionnaires.
  

Whilst due diligence is recommended, it will usually be a less formal process than the sort of due diligence and verification processes required for a prospectus. Either way, it should be noted that due diligence is an on-going process and systems should be put in place to ensure that all material information is disclosed prior to the issue of shares under the offer.

Other Issues to Consider

There are many factors to be considered when undertaking any capital raising. Some of the more important issues to consider include:

• the size of the offer – for entities that have already utilised their 15% placement capacity or need to
  raise more than this amount, a pro rata rights issue may be the only option. Alternatively, shareholder
  approval may be required in order to refresh” an entity’s 15% placement capacity. An opportune time
  to do this is at the company’s AGM; and
  
• related party/control issues – if a capital raising is underwritten by a related party and/or a major
  shareholder, or if a placement is offered to such a person, additional disclosure will often be required
  to explain the effect on that person’s voting power and their intentions with respect to the company.
  

Conclusion

In summary, capital raisings without a prospectus offer many advantages to ASX listed entities seeking to raise additional capital in a short time-frame. However, companies (and directors) should always seek legal advice regarding their disclosure obligations for any capital raising.

If you would like further information on the above, or if you wish to discuss the contents of this article in more detail, please contact us

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