ASIC flags dodgy sales tactics used in mining IPOs

Posted: 5 December 2019 6:18 pm

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The watchdog report found lead managers and company directors faced numerous conflicts of interest in the IPO process.

Initial public offerings (IPOs) in Australia's $300 billion mining sector is largely unregulated and many investors aren't properly advised of the risks involved, according to a report by the corporate watchdog on Thursday.

Mining IPOs have boomed in Australia in recent years, accounting for 36% of all listings in 2018, and 25% of all companies on the ASX by market capitalisation.

But a large number of Aussie miners are small-sized explorers, according to the Australian Securities & Investments Commission (ASIC), which carry greater risks than many investors are made aware of.

Also read: What is an initial public offering (IPO)?

Instead, the report found investors may be lured by misleading and biased promotional material, such as presentations and sponsored content, in the weeks leading up to the float.

While company prospectuses are legally obliged to detail company information, marketing material is often not covered by compliance checks and is riddled with confusing jargon, making it hard for investors to make an informed decision, it said.

Broker bias

But the risks of poor advice also develop further up the chain.

ASIC found that lead managers – the main brokerage engaged with distributing an IPO to investors – oftentimes face conflicts of interest by acting on behalf of both the company and its investing clients.

Many have undisclosed interests in the company, work for the company or aren't able to identify whose interest they are truly acting in, the review said.

Watchdog commissioner John Price said it was especially significant because miners account for such a large portion of stocks listed on the ASX and a third of all IPOs in the last two years.

"Companies and advisers need to conduct themselves in a way that is fair and responsible. Disclosure has limits and over reliance on disclosure alone can lead to poor investor outcomes and a loss of confidence in the market," said Price.

ASIC has recommended:

  • Investors be made aware of the bigger risks involved in mining IPOs
  • Companies, directors and lead managers bring in better practices to help mitigate conflicts of interest
  • Directors review all promotional public messages made on behalf of the company during and after the IPO process
  • Compliance checks implemented by companies for all marketing content

While regulation has primarily focused on the company prospectus lodged by companies entering an IPO, the watchdog says it will also be taking into account the promotional practices that occur in the lead up to its lodgement.

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