The general rule is that a person must not offer securities, including options or shares, in a company until a disclosure document for the offer is lodged with the Australian Securities and Investments Commission (ASIC), unless the offer is exempt from disclosure under section 708 of the Corporations Act. In our three-part series, we have set out the essentials of the three key types of disclosure documents. Earlier, we looked at a pitch deck and an Information Memorandum. Below, we answer what is a prospectus and unpack what it should include.
When is a Prospectus Used?
Public companies use a prospectus to offer shares to the public. A company requires a full prospectus when listing on a stock exchange, also known as the company’s initial public offering (IPO).
What are the Different Types of Prospectuses?
Variations include a full prospectus, a short form prospectus and a specialist prospectus for continually quoted securities. If a securities offer requires a disclosure document, the general rule is that you must submit a prospectus unless you can use an Offer Information Statement. A full prospectus is approximately 75 to 100 pages.
What Must a Prospectus Contain?
Typically, a prospectus must contain all the information that investors and their professional advisors might reasonably require to make an informed decision about the following:
- The rights and liabilities attached to the offered securities; and
- The issuing company’s assets and liabilities, financial position and performance and their profits and losses.
Although the Corporations Act contains a general disclosure test for a prospectus, it does not set out a “checklist” for all the content it should contain. In practice, a prospectus typically includes information about the following:
- The company’s business model,
- Financials, and
- Details of the offer.
What is the Disclosure Standard and What are the Risks?
The Specific Prospectus Disclosure Liability Regime requires a prospectus to contain information that the relevant people involved in preparing the prospectus should know. If the prospectus does not contain the required information, inquiries should be made to determine its full disclosure.
It is an offence to make false or misleading statements or engage in misleading or deceptive conduct about the company or its securities. This includes making false or misleading statements verbally or in writing or omitting information in your prospectus.
The company, directors and the underwriters all have potential criminal and civil liability.
What is Due Diligence and Why is it Important?
Due diligence is a process of investigating relevant areas of the business, with representatives of the company and with the other parties who are potentially liable under the prospectus. The process is undertaken to help ensure that the information that is contained in the prospectus:
- Presents a correct and coherent description of the company to potential investors;
- Meets legal requirements; and
- Ensures that any potentially liable parties can rely on due diligence defences in law.
Before signing off on the prospectus and lodging with ASIC, it is market practice for a company issuing a prospectus to conduct thorough due diligence when drafting and verifying the document.
Under the Act, if a person makes a misleading statement about a future matter without reasonable grounds, he or she will be liable unless:
- They made all reasonable inquiries (if any) in the circumstances; and
- After doing so reasonably believed that the statement wasn’t misleading or deceptive, or that there was no omission from the prospectus in relation to a particular matter.
Questions about making an offer that requires a disclosure document? Ask our start-up lawyers. As a tech startup ourselves, we understand what’s involved in raising capital successfully. Let us know if you need assistance with due diligence, drafting or advice on best market practice.