ASIC Report 489 ASIC regulation of corporate finance: January to June 2016 (REP 489) makes a number of observations about recent technology company listings.
ASIC says that it identified some common disclosure issues requiring correction. These included:
(a) insufficient disclosure about the business model of the company, including how revenue will be generated by the company;
(b) inadequate explanation of the true competitors of the company. In particular, ASIC noticed that the market in which the company operates was often too narrowly defined. This resulted in an emphasis on certain online domestic competitors, and a failure to disclose all direct online domestic competitors, international online competitors, and physical ‘bricks and mortar’ competitors;
(c) for start-up technology companies, insufficiently prominent disclosure in the prospectus outlining the limited operating history of the company and, where relevant, details of that history;
(d) inadequate disclosure about intellectual property rights, including the rights that the company holds, what intellectual property the company uses, how integral intellectual property is for the company, and whether third-party intellectual property rights may be infringed; and
(e) data and statistics included in the prospectus that were not directly relevant to the business or industry of the company, including (for example) data about worldwide internet use and speeds of wi-fi access.
ASIC noticed a trend in a number of prospectuses involving issuers with a limited history of operations, including financial technology (fintech) businesses, where financial measures such as gross transaction value or total transaction value (TTV) are prominently disclosed to indicate revenue or growth in revenue.
ASIC’s view is that TTV measures may indicate ‘sales’ of millions of dollars— but the actual revenue earned by the issuer may be only a very small fraction of the headline TTV because the issuer earns revenue on a commission or agency style arrangement. Growth rates in TTV need to be considered in light of the actual amount of revenue earned by the issuer. Often the actual income is not disclosed in the overview but is included in the body of the document.
In these circumstances, ASIC has sought and obtained amendments to ensure prominent disclosure of the actual revenue generated wherever TTV measures are described. ASIC believes that the over-emphasis of these measures has the potential to significantly mislead investors.
ASIC also noted that many smaller issuers, including start-ups, with an unprofitable trading history do not disclose a summary of their trading history in the investment overview section of the prospectus and whether they are likely to experience continuing losses.
