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Financial Services Reform

The impact of ASIC policy statement 173 and class order 02/1180 on placements

This article examines the policy statement  and class order relief issued by ASIC in order to facilitate placements after 11 March 2002.

Last updated January 2003.

In the area of securities issuance, one dramatic impact of the new FSR law reforms is on institutional placements. Any institutional placement after 11 March 2002 must deal with a quite different system of regulation. This article aims to give an overview in relation to institutional placements of listed financial products such as shares in a listed company or units in a listed managed investment scheme.

A bit of background

Basically, issues of financial products, such as shares and units, require a lodged prospectus or product disclosure statement (PDS) whereas sales do not. There are, of course, exceptions to both these rules. So, it has in the past occurred to some lateral thinking types that you could (first) issue securities without a prospectus by relying on an exception to the first rule and (secondly) immediately on-sell those securities to retail investors without a prospectus (or PDS) relying on the second rule ie, relying on the rule that generally speaking sales of securities do not require a prospectus.

A long time ago an anti-avoidance provision was created. It has been refined over the years with the last refinement being the FSR refinement effective on 11 March 2002. That refinement was the most comprehensive and therefore the most successful in stopping the "lateral thinkers". Unfortunately, it would also have stopped fast institutional placements by listed entities. To its enormous credit, ASIC has been pro-active in encouraging discussion about this issue (see ASIC's discussion paper, 'Disclosure for on-sale of securities and other financial products', 27 June 2002) and in March and June 2002 issuing interim class orders to allow the institutional placement business to continue (almost) as usual.

On 3 December 2002, ASIC released Policy Statement 173: 'Disclosure for on-sale of securities and other financial products' and Class Order 02/1180, replacing the previously issued interim relief. The policy statement was developed in consultation with industry participants and organisations. The old interim relief will continue to apply to protect the on-sale of securities issued pursuant to it. 

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What if the class order does not apply?

If the class order does not apply to allow an institutional placement to be done so that on-sale is permitted, then either a prospectus or PDS will be needed to effect the placement or one-off relief will need to be obtained from ASIC. Two things to note:

  • entities which fall outside the class order may be able to develop "shelf" short-form disclosure documents which can be updated and lodged to effect relatively quick institutional placements; and
  • one-off ASIC relief may not be easily obtainable, now that ASIC has clarified its position on this issue in Policy Statement 173, other than in the case of clear anomalies.

Just remind me - what's going on here?

The point is this: if a placement happens and the anti-avoidance provision bites then the placees (and perhaps even other holders from time to time of the placed securities or other placed financial products) when they on-sell within 12 months (other than to other institutions) need to create and lodge a prospectus or PDS and it needs to be signed by the issuer as well as the seller. Clearly, this is unacceptable, so the trick is to do a placement in such a way that the anti-avoidance provision does not bite with the result that placees can on-sell freely.

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Can't we just continue using the old solution?

The old solution was to have mutual representations by the issuer and the placees that in effect the issuer had no current purpose for the placees to on-sell in the short to medium term.

This no longer works on its own because the anti-avoidance provision has been beefed up to look not only at the issuer's purpose but also at the placee's purpose and the relevant on-sale purpose can now merely be one of a number of purposes. When that is combined with the onus of proof ie, if a placee on-sells within 12 months then the onus shifts to the placee/issuer to establish that they did not have the relevant purpose, it is a potent cocktail. In other words the old solutions do not solve the new problem, unless the class order applies.

So what can a class order do for me?

Where the class order applies, it preserves the old (less extreme) form of the anti-avoidance provision. This means that the usual solution can be used, ie:

  • the board of the issuer or responsible entity considers its purpose and decides that its purpose is to raise money from the placees and that it has no purpose that the placees on-sell;
  • the placees are asked to represent that they have no purpose to on-sell in the short or medium term (recognising however that they may decide to sell as and when they think fit).

This solution "catches" the "lateral thinkers" whose activities were always intended to be caught, ie those who take the placement as part of a plan not to hold the placement but to immediately push it into the hands of retail investors. Such a person would not be able to give the warranty (truthfully). In any event, under the old anti-avoidance provisions it is only the issuer's purpose which is relevant and if the issuer receives written assurances from the placees along the lines suggested (and believes those representations) then it will be hard to argue that the issuer's purpose (main or dominant) was that the placees on-sell. Knowledge that something may possibly occur eg, on-sale is not the same as having it as your main or dominant purpose.

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The class order is the place to be

The class order provides three types of relief:

  • disclosure-based relief: this relief applies where retail clients have, through some alternative means, the benefit of disclosure comparable to that which might otherwise be contained in a prospectus or PDS;
  • exemption-based relief: this relief ensures that products issued to persons including retail clients under separate disclosure exemptions (eg, an issue under a Scheme of Arrangement) may be on-sold; and
  • transitional relief: this provides limited transitional relief to ensure that investors who relied on the earlier interim relief are not disadvantaged.

One of the most important aspects to note is that this relief now covers both debentures and managed investment products, neither of which were covered by the interim ASIC relief. 

The exemption-based and transitional relief found in the class order is essentially "technical" relief which is not presently relevant eg, to allow employees who obtain shares and options under most employee share and option plans to on-sell those securities without creating a prospectus.

The "substantive" relief, ie, the disclosure-based relief, primarily relates to institutional placements.

There are in effect two possible categories within which an issuer will try to fall.

  • The Dump category: category 1 (securities) and category 3 (managed investment products) of the class order apply where the listed issuer makes a "dump" of information previously withheld from the market or confirms there is no such information.
  • The Same Class Prospectus category: category 2 (securities) and category 4 (managed investment products) of the class order apply where either: 
  • there has been a prospectus or PDS for the same class of financial product issued before any on-sale of the financial product; or
  • the financial products were issued to an underwriter under an underwriting agreement related to an offer under a prospectus or PDS at or about the time of the issue to investors under the prospectus or PDS.

As hinted at in its discussion paper, ASIC has removed the category of relief that applied in the interim relief to companies simply because they were in the ASX/S&P 200 Index. ASIC accepts that the larger a company the more research will be conducted by analysts. However, it does not believe this is a substitute for an issuer keeping the market fully informed. ASIC also believes that such an exception results in a "regulatory inconsistency". That is, it would be inconsistent if some companies were provided with relief on the basis of making specific disclosures, including information withheld under ASX Listing Rule 3.1 (eg, the "Dump" category), while equivalent relief was provided to issuers that had not released such information purely because such entity is in a particular index because of its size.

Cruising through the class order

If you are an entity considering a placement you will need to look closely at categories 1 and 3 (Dump) and 2 and 4 (Same Class Prospectus).

You will be particularly tempted by categories 2 and 4 (Same Class Prospectus) if you are doing both an institutional placement and a retail offering. Of course, for the retail offering you need a prospectus or PDS.

However, if you are not planning on doing a retail prospectus or PDS at about the same time then you might need to look very closely at category 5 (Dump). This involves a complete disclosure of price sensitive information to the ASX (or confirmation that there is no such information withheld from the market).

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More detail on the class order

Here are a few other considerations that might influence an issuer's decision as regards which category it prefers to rely on.

  • To come within categories 1 and 3 (Dump) the securities offered in the institutional placement must be in a class that has been quoted at all times in the 12 months before the date of the placement. This does not apply to categories 2 and 4 (Same Class Prospectus). So, if you are an entity which has been listed for less than 12 months, or the class has not been quoted for a full 12 months, then categories 2 and 4 (Same Class Prospectus) may be the categories for you.
  • If you're thinking of relying on either category 2 or 4 (Same Class Prospectus) then note this: on-sales of the placed financial products cannot occur before the issue of a prospectus or PDS for financial products of the same class. Unless you are issuing a prospectus or PDS simultaneously with your institutional placement, it is unlikely that in practice this option will be available. Undertakings from issuers to issue a prospectus or PDS are unlikely to give institutional investors the protection and certainty they require. In such circumstances, you will need to rely on the relevant Dump category.

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Reliance Notices - no longer required

It was a condition of the interim relief that an issuer provided a Reliance Notice to ASIC within five business days after the institutional placement. That Reliance Notice, amongst other things, specified on which of the categories that issuer was seeking to rely. This is no longer required under the class order.

Do we need new undertakings/representations from placees?

Yes. For example, it is a condition of each category of relief that "there is a completed contract" for the issue of the relevant financial products, being the financial products comprised in the placement. This is to avoid the situation where a placee takes the stock but does not use its own funds but rather on-sells to, say, retail investors, collects their funds and uses those funds to pay the subscription price. A "completed contract" is defined to mean a contract where the placee has paid the consideration for the issue of the securities or products in full. So issuers should seek a representation or undertaking from placees that they will not on-sell unless and until they have paid the consideration for the issue of the placement securities in full.

Also, the information Dump category provides that the offer for on-sale must not occur until after the information dump to the market has occurred. A similar undertaking may be needed in this case ie, that the placee will not on-sell until after the information dump has hit the market.

Placees may require a warranty:

  • if the securities are debentures, that the issuer has entered into a trust deed that complies with section 283AB of the Corporations Act and has appointed a trustee that complies with section 283AC of the Corporations Act (see paragraph 3 of categories 1 and 2);
  • in relation to an issue of securities, that no determination under section 713(6) of the Corporations Act is in force with respect of the issuer (see paragraph 4 of categories 1 and 2); or
  • in relation to an issue of managed investment products, that the responsible entity of the scheme has not been notified in writing by ASIC that it may not, in respect of the scheme, rely on the relief provided under category 3 of the class order for a specified period because the entity has, in the previous 12 months, breached Chapter 2M, subsections 674(2) or 675(2) or sections 1016E or 1021E in respect of the scheme and that period has not ended (see paragraph 3 of category 3 – surprisingly, probably in error we suggest, this condition is not included in category 4 even though the equivalent provision is included in paragraph 4 of category 2).

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So where does that leave me?

Here is your checklist.

  • You decide you want to do a rapid institutional placement so you ask yourself the first question: "Do I know a good capital markets lawyer like the team from Capital Markets at Allens Arthur Robinson?"
  • Then you ask yourself "Does the class order apply?"

If no, then do a short-form prospectus or PDS or consider seeking one-off relief from ASIC.

If yes, then go to the next bullet point.

    • Ensure the board resolution has the right wording about the issuer's purpose, ie: no purpose that the placees on-sell and that the placement letters have the right representations and undertakings.
    • Prepare information dump to the market (if the Dump category is applicable).
    • Confirm that no order has been made by ASIC which would have prevented the issuer from doing a short-form prospectus (ie, a section 713(6) order) or, in relation to a placement of managed investment products under category 3 (Dump), the responsible entity has not received a notice from ASIC prohibiting the responsible entity from relying on  that category of the class order.
    • Effect placement.
    • Two business days after the issue under placement is the last time you can do the information dump (if it is applicable).

What about debentures and managed investment products?

Debentures are now protected by the class order (eg, convertible notes) provided that the issuer has entered into a trust deed in relation to the debentures that complies with section 283AB of the Corporations Act and the issuer has appointed a trustee that complies with section 283AC of the Corporations Act. ASIC is concerned that, where notes may ultimately end up in retail hands, there should be a retail type debenture deed. 

Managed investment products are also now covered by the class order.

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This dump of information - what is the liability position?

If you rely on category 1 or 3, then you need to provide to the market all the information which you would have needed to provide in a short-form prospectus or PDS (and which had not previously been provided to the market). In effect, this means all information which investors would reasonably expect to be told (even if it comes within one of the Listing Rule 3.1 exceptions eg, top secret etc).

This additional information will be relied on by buyers and sellers and accordingly the entity will have liability to those buyers and sellers under the continuous disclosure regime. Class actions have already occurred in the US where classes of shareholders have claimed that they have, for example, sold too cheaply because the company delayed providing good news to the market (like a takeover in the wings), or conversely, that a class paid too much for shares because a company delayed making bad news known to the market (like a profit downgrade).