On 29 September 2022, the Australian Securities and Investments Commission (ASIC) released its Corporate Finance Update newsletter (Update). The Update, amongst other things, sets out ASIC’s findings in relation to the use and accuracy of prospectus forecasts from a review of prospectus forecasts for all issuers who sought an initial public offering (IPO) and were listed on ASX during the three-year period from 1 July 2018 to 30 June 2021. From its review, ASIC observed the following:
- forecasts are an established feature of the IPO market – 30% (or 72 of 243) of ASX IPOs (excluding listed investment companies, listed investment trusts and exchange traded funds) contained a formal forecast;
- forecasts are usually included in prospectuses at the large end of the market – more than 80% of prospectuses for issuers seeking to raise above $100 million contained a forecast. This drops to 15% for those issuers seeking to raise $10 million to $25 million;
- the average duration of forecasts dropped due to COVID uncertainties – the average length of forecasts was 9.2 months in FY 21, down from 11.9 months in FY 19;
- from the sample reviewed, 19% of issuers downgraded forecasts, 4% withdrew and 19% upgraded forecasts; and
- only 26% of issuers continued to formally forecast after the end of the forecast period – there appeared to be a strong preference to provide narrative outlooks rather than formal forecasts.
ASIC tested the accuracy of forecasts by examining pro-forma revenue and pro-forma profit measures (and statutory measures if there was no pro-forma forecast for the period). Pro-forma adjustments are generally used in IPO prospectuses and adjust the statutory numbers in a prospectus to better align historical results with forecasts. ASIC noted various concerns from its comparisons of prospectus pro-forma forecasts against year-end results including:
- some issuers are judging performance based on their own view of the most relevant profit measure (such as EBITDA), and are only presenting those pro-forma measures in announcements, without a full reconciliation to NPAT (as is disclosed in the prospectus);
- issuers who issued short duration forecasts in response to COVID, that did not align with statutory half year or year-ends, were not necessarily updating the market at the end of the forecast period; and
- an issuer who announced interim downgrades, no longer referring to prospectus forecasts in its year-end announcements at all.
‘Good practice’, according to ASIC, requires that where a forecast is included in a prospectus, an announcement should be made at the end of the forecast period comparing forecast and actual results. Where a pro-forma forecast is included in a prospectus, at the end of the forecast period a full income statement reconciliation (or key line items) should be included comparing statutory and pro-forma results in any announcement the company publishes. The pro-forma results should be compiled on the same basis as the prospectus.
Continuous disclosure for unlisted entities
In the Update, ASIC also highlighted that continuous disclosure is important for unlisted disclosing entities. ASIC notes that companies should be mindful of their obligations and provide disclosure to shareholders as soon as practicable where material corporate events arise, such as entry into agreements for material transactions. Regulatory Guide 198 Unlisted disclosing entities: Continuous disclosure obligations (RG 198) encourages unlisted disclosing entities to place all material information on their website as it may be a more effective means of communicating information to shareholders in a timely fashion.
Read the ASIC Corporate Finance Update newsletter here.