ASIC RG 228 — ASIC Regulatory Guide – RG 228 Prospectuses: Effective disclosure for retail investors

Page 1 REGULATORY GUIDE 228 Prospectuses: Effective disclosure for retail investors August 2019 About this guide This guide is for issuers and advisers. It explains how to word and present prospectuses and other documents in a ‘clear, concise and effective’ manner. This guide also sets out our guidance about how to prepare prospectuses that satisfy the content requirements in s710 of the Corporations Act. Page 2 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in August 2019 and is based on legislation and regulations as at the date of issue. In June 2026, we updated this guide with references to remade legislative instruments and to reflect renamed regulatory guides. Previous versions:  Superseded Regulatory Guide 228, issued November 2011 and reissued November 2016 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 3 Contents A Overview ........................................................................................... 4 Disclosure requirements for prospectuses ........................................ 4 Purpose of this guide ......................................................................... 5 Other guidance you may need to consider ........................................ 6 Broader application of this guide ....................................................... 7 Industry guidance .............................................................................. 8 B ‘Clear, concise and effective’: Does your prospectus help retail investors make informed investment decisions? ...................... 10 Helping retail investors assess your offer ........................................ 10 What is ‘clear, concise and effective’ disclosure? ........................... 11 How can you achieve ‘clear, concise and effective’ disclosure? ..... 11 Is your prospectus as short as possible? ........................................ 16 C Investment overview: Have you highlighted key information for retail investors? ............................................................................. 19 Why do retail investors need an investment overview? .................. 19 What information should be in your investment overview? ............. 20 How should you present your investment overview? ...................... 22 D Business model: How will you make money and generate income or capital growth for investors? ..................................... 23 What is your business model and how should you explain it? ........ 23 Finance arrangements ..................................................................... 25 Important contracts .......................................................................... 26 Corporate structure .......................................................................... 27 Explanation of industry .................................................................... 27 Capital management policy ............................................................. 28 E Risks: What are the risks associated with your business model, the security and the offer?............................................................ 29 What risks do you need to disclose? ............................................... 29 Examples of common risks that may need to be disclosed............. 30 How should you disclose risks? ....................................................... 32 F Financial information: What is your financial position, performance and prospects? ....................................................... 35 Historical financial information ......................................................... 35 Prospective financial information ..................................................... 41 Pro-forma financial information ........................................................ 42 Financial ratios ................................................................................. 42 Meaning of financial terms ............................................................... 43 G Directors and key managers, interests, benefits and related party transactions: Do those in control have the appropriate expertise and who will benefit? ................................................... 44 What should you disclose about directors and key management? . 44 Corporate governance ..................................................................... 47 Continuous disclosure ..................................................................... 47 What should you disclose about interests and benefits? ................ 47 Related party transactions ............................................................... 49 H The offer: What are the effect and terms and conditions of your offer? ............................................................................................... 51 What is the effect of your offer? ....................................................... 51 What are the terms and conditions of your offer?............................ 52 Key terms ............................................................................................... 58 Related information ............................................................................... 60 Page 4 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 4 A Overview Key points This regulatory guide sets out our guidance on how to word and present prospectuses in a ‘clear, concise and effective’ manner. It also sets out our guidance to issuers and their advisers on how to satisfy the content requirement for prospectuses. Our guidance is general rather than prescriptive because the Corporations Act 2001 (Corporations Act) places responsibility on issuers to comply with the disclosure requirements. Our guidance may also be relevant for other disclosure that requires shareholders to make an investment decision. Disclosure requirements for prospectuses RG 228.1 Chapter 6D of the Corporations Act regulates when an offer of securities in Australia requires a disclosure document. Most offers of securities to retail investors in Australia require a disclosure document. The purpose of a disclosure document is to help retail investors assess the risks and returns associated with an offer and make informed investment decisions. RG 228.2 The most common type of disclosure document is a prospectus. When you prepare a prospectus, you must: (a) word and present it in a ‘clear, concise and effective’ manner (see s715A); (b) include the information required by the general disclosure test (see s710); (c) make specific disclosures, including disclosure about interests and benefits of persons involved in the offer (see s711); and (d) ensure it is not misleading or deceptive (see s728(1)). Note: For offers of continuously quoted securities or options over continuously quoted securities, you may be able to comply with the reduced disclosure requirements in s713. RG 228.3 The prospectus disclosure regime is focused on the needs of retail investors and their professional advisers. If an offer is not made to retail investors, a prospectus is generally not required: see s708(8), (10) and (11). The policy underlying the Ch 6D disclosure regime is that it would be difficult for retail investors to obtain the information they need without mandatory disclosure. Page 5 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 5 RG 228.4 Prospectuses are also used by sophisticated and professional investors and they are an important basis for trading securities on Australia’s financial markets. Purpose of this guide RG 228.5 This guide aims to assist you, as an issuer, and your advisers to produce s710 prospectuses that help retail investors assess the offer and make informed investment decisions. RG 228.6 Table 1 summarises our guidance on prospectus disclosure. This guide explains: (a) how you can word and present your prospectus so it is ‘clear, concise and effective’ (see Section B); (b) how you can use an investment overview to highlight key information about the offer for retail investors (see Section C); and (c) the information retail investors generally require and expect to find in a prospectus. This is the information that is required under the general disclosure test in s710 and the specific disclosures required by s711 (see Sections D–H). RG 228.7 Our guidance is general rather than prescriptive because the Corporations Act places responsibility on you to comply with the disclosure requirements. You have the flexibility to determine what information the Corporations Act requires for your prospectus and you need to critically analyse how our general guidance applies to your offer and individual circumstances. RG 228.8 The guidance is also general because it applies to a broad spectrum of companies in different sectors. This guide does not require you to either include specified information in your prospectus or explain in the prospectus why it is not relevant. RG 228.9 We will consider this guide when we are reviewing prospectuses, but we will not use it as a checklist. ASIC’s wider role regarding prospectuses is described in Regulatory Guide 254 Offering securities under a disclosure document (RG 254) at Section L. Table 1: Summary of our guidance on prospectus disclosure Topic What our guidance covers Where to find it ‘Clear, concise and effective’ Your prospectus must be worded and presented in a ‘clear, concise and effective’ manner. You should consider incorporating by reference information that is not key to a retail investor’s assessment of the offer. Section B Page 6 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 6 Topic What our guidance covers Where to find it Investment overview The first substantive section of a prospectus should contain an investment overview for retail investors that:  highlights key information about the issuer and offer in a balanced way; and  gives cross-references to more detailed information. Section C Specific content guidance: Business model Your prospectus should explain your business modelthat is, how you propose to make money and generate income or capital growth for investors (or otherwise achieve your objectives). Section D Specific content guidance: Risks Your prospectus should explain the risks associated with:  you as the issuer, including the risks to your business model;  the security; and  the offer. Section E Specific content guidance: Financial information Your prospectus must explain your financial position, performance and prospects. Section F See also Regulatory Guide 170 Prospective financial information (RG 170) and Regulatory Guide 230 Disclosing non-IFRS financial information (RG 230) Specific content guidance: Directors and key managers, interests, benefits and related party transactions Your prospectus should set out the experience and background of directors and key managers. Your prospectus must also contain information on interests and benefits that persons connected with the issuer or offer will receive, as well as any related party arrangements. Section F See also Regulatory Guide 76 Related party transactions (RG 76) Specific content guidance: Effect and terms and conditions of the offer Your prospectus should clearly set out the effect of the offer on the issuer (including the proposed use of funds). Your prospectus must also set out the terms and conditions of the offer. Section H Note: The order of this guide is not intended to prescribe how you organise your prospectus. Other guidance you may need to consider RG 228.10 This guide focuses on the general disclosure test in s710 and other disclosures required in a s710 prospectus. You should also carefully consider RG 254, which is our specific guidance on: (a) the different types of Ch 6D disclosure documents (and when each can be used for different types of offers of securities); (b) the procedural requirements that must be met when offering securities for issue or sale under a disclosure document (under Div 5 of Pt 6D.2 of the Corporations Act); and Page 7 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 7 (c) how, when and why we may exercise ASIC’s statutory powers in relation to a disclosure document. RG 228.11 You may also need to consider guidance that we have published on specific aspects of Ch 6D disclosure and for particular sectorsfor example, Regulatory Guide 69 Debentures and notes: Improving disclosure for retail investors (RG 69). These are referred to throughout this guide, where relevant, and are also listed in the ‘Related information’ section. RG 228.12 We have also published guidance that mainly relates to disclosure in Product Disclosure Statements (PDSs) under Pt 7.9 for registered managed investment schemes that operate in particular sectorsfor example, Regulatory Guide 45 Mortgage schemes: Improving disclosure for retail investors (RG 45). For companies operating in these sectors that are preparing a prospectus, the more specific PDS guidance may also give a useful explanation of the type of information we consider to be relevant and important to investors in these sectors. Broader application of this guide RG 228.13 Our guidance on the information that will generally be required in a s710 prospectus may also be relevant to other disclosure that requires shareholders to make an investment decision relating to securities: see the examples set out in Table 2. The extent to which our content guidance is relevant will depend on the type of decision that shareholders are being asked to make and the information available in the market. RG 228.14 Our guidance on content may also help you comply with continuous disclosure requirements. Retail investors need the type of information set out in this guide to make an informed investment decision and they may also need to understand significant changes to that information to monitor your ongoing performance, whether as existing shareholders or as potential investors in the secondary market. RG 228.15 Our guidance on ‘clear, concise and effective’ disclosure is relevant to a broad range of corporate communications that you provide to retail investors: see Table 2. Some of these documents are not subject to a statutory requirement to be ‘clear, concise and effective’ but we consider similar duties arise under the general law (e.g. directors’ duty to inform members and prohibitions on misleading or deceptive conduct). Note: See Santow J (in the context of an expert report for a scheme) in Re Australian Cooperative Foods Ltd (2001) 38 ACSR 71 at 77: ‘This is so those members can make an informed decision with the benefit of a report that is as simple, clear and useful as possible’. See also the Takeover Panel’s decision in Northern Energy Corporation Limited [2011] ATP 2 at paragraphs 111–112. Page 8 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 8 Table 2: Application of this guide to other documents Document type Sections of this guide that apply and other relevant guidance A bidder’s statement under Ch 6 where securities are being offered as consideration under a takeover offer: see s636(1)(g) Sections B–H See also Regulatory Guide 9 Takeover bids (RG 9) An explanatory statement under Pt 5.1 where securities are being offered as consideration under a scheme of arrangement Sections B–H See also Regulatory Guide 60 Schemes of arrangement (RG 60) A Ch 6 takeover document or a Pt 5.1 scheme of arrangement (other than those described above) Section B A transaction-specific prospectus under s713 where the aim of the offer is to finance a transaction that involves a major change in the nature or scale of the entity’s business or finances Sections B–H See also RG 254 A transaction-specific prospectus under s713 (other than those described above) Sections B, E and F–H See also RG 254 An offer information statement under s715 Sections B–H See also RG 254 A combined prospectus and PDS for an offer of stapled securities Sections B–H See also Regulatory Guide 168 Product Disclosure Statements: Disclosure and other obligations (RG 168) An ‘offer document’ for a rights issue under s708AA Section B A notice of meeting under s249L Section B An independent expert report Section B See also Section C of Regulatory Guide 111 Content of expert reports (RG 111) Industry guidance RG 228.16 Industry guidelines, standards and codes have a useful role to play in determining the information required by s710 of the Corporations Act. This is because investors will generally expect you to comply with accepted industry guidelines and reasonably require compliant information in your prospectus. Note: The Corporations Act has additional and more extensive disclosure requirements than those set out in an industry code or guidelines. You should ensure your prospectus complies with any relevant industry code and the Corporations Act. RG 228.17 Two important industry codes are the JORC Code and the Valmin Code. The JORC Code covers the reporting of exploration results, mineral Page 9 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 9 resources and ore reserves. The Valmin Code covers technical assessments and valuation reports. If you are a mining or exploration company, your prospectus should comply with these codes. Information that complies with these codes is considered to be information that investors require and expect to see in a prospectus. Failure to provide information in a manner that complies with the JORC Code or the Valmin Code may make your prospectus misleading. Note: The listing rules of the relevant financial market may require reports by mining companies to comply with the JORC Code. RG 228.18 There are also other widely accepted industry guidelines that relate to specific types of issuers or disclosure topics, such as hedging arrangements, prudential requirements or accounting treatments. If your prospectus diverges materially from these guidelines, you should prominently explain the reason for the divergence. Page 10 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 10 B ‘Clear, concise and effective’: Does your prospectus help retail investors make informed investment decisions? Key points Your prospectus must be worded and presented in a ‘clear, concise and effective’ manner. In this section, we suggest various communication tools to help you comply with this requirement. We also give guidance on how you can make your prospectus as short as possible and use incorporation by reference. Helping retail investors assess your offer RG 228.19 Section 715A states that information in a disclosure document must be worded and presented in a ‘clear, concise and effective’ manner. This requirement applies to both the wording of information (i.e. choice of language) and the presentation (i.e. choice of communication tools). We may issue a stop order if this section is contravened: see s739. RG 228.20 The requirement for ‘clear, concise and effective’ disclosure is intended to help retail investors make informed investment decisions. The Explanatory Memorandum for the Corporate Law Economic Reform Program (Audit and Corporate Disclosure) Bill 2003 (Explanatory Memorandum) explains the reasons for including s715A in the Corporations Act. The Explanatory Memorandum states that ‘a disclosure document’s main aim is to inform unsophisticated investors of relevant information’ and that s715A is intended to: (a) ‘ensure it effectively conveys the required information to the investing public’; and (b) ‘improve the comprehensibility and readability of disclosure documents’. Note: See paras 4.190 and 5.513 of the Explanatory Memorandum. RG 228.21 Your prospectus should therefore focus on communicating with retail investors while also catering to the needs of professional advisers and other sophisticated investors. For suggestions about ways you can cater to these different audiences, see RG 228.25–RG 228.71. Page 11 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 11 What is ‘clear, concise and effective’ disclosure? RG 228.22 The requirement for ‘clear, concise and effective’ disclosure should be read as a compound phrase so that each word qualifies the other. This means that it is inappropriate to focus on one word in the phrase at the expense of others. Note: See Story v National Companies and Securities Commission (1988) 13 NSWLR 661, where the court considered another compound phrase, ‘effectively, honestly and fairly’, which is now included in s912A(1). RG 228.23 For example, complex information should not be omitted to make your prospectus more clear and concise because then your prospectus may not be effective. Note: See para 5.514 of the Explanatory Memorandum, which states that s715A is not intended to limit information or result in oversimplification. RG 228.24 We consider that your prospectus will generally be ‘clear, concise and effective’ if it: (a) highlights key information (e.g. through an investment overview as explained in Section C); (b) uses plain language (see Table 3); (c) is as short as possible (see RG 228.30–RG 228.40); (d) explains complex information, including any technical terms (see Table 3); and (e) is logically ordered and easy to navigate (see Table 4). How can you achieve ‘clear, concise and effective’ disclosure? RG 228.25 Table 3 and Table 4 set out some widely accepted methods and tools for creating ‘clear, concise and effective’ documents. These tools are not mandatory and will not always be appropriate. You should analyse how best to word and present your information in your particular circumstances. RG 228.26 You should also consider using other tools to help you create ‘clear, concise and effective’ documents, including reviewing research on the communication needs of retail investors. RG 228.27 We encourage you to critically evaluate your draft prospectus before finalising it. Some questions for you to consider include the following: (a) Is the key information prominent (see Section C)? (b) Is the disclosure on benefits and risks balanced? (c) Does the document flow logically? (d) Does the document convey clear messages? Does it explain concepts and terms? Would it be confusing to someone not familiar with the offer or the issuer? Page 12 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 12 (e) Does the document contain unnecessary repetition? Can some of the information that is repeated be summarised or referenced to more detailed information? (f) Is every piece of information essential to a retail investor’s assessment of the offer? Can any information be deleted, further summarised or incorporated by reference (see RG 228.34–RG 228.40)? Wording information so it is ‘clear, concise and effective’ RG 228.28 Table 3 sets outs some suggested methods for ‘clear, concise and effective’ wording of information. These tools are not mandatory but they may be useful in ensuring the document is not misleading. Table 3: Communication tools for ‘clear, concise and effective’ wording Tool Explanation Examples Use the active voice Avoid using the passive voice, where possible, as it can hide details such as who is responsible for actions. In many cases, the passive voice also requires more words and is less engaging. ‘The Offer Information Line is available for more information’ can be rewritten as, ‘You should call the Offer Information Line for more information’. Use direct language (personal pronouns) It is more engaging to refer to an ‘applicant’ as ‘you’ and the ‘company’ as ‘we’. It can also be more concise. You should ensure there is no confusion about who ‘you’ and ‘we’ are. ‘Applicants should consider obtaining legal advice’ can be rewritten as, ‘You should consider obtaining legal advice’. Use the positive and avoid double negatives It is generally easier to understand sentences that are phrased positively rather than negatively. ‘It is not unlikely that the company will have trouble paying its debts if the offer is not successful’ can be rewritten as ‘It is likely that the company will have trouble paying its debts if the offer is unsuccessful’. Use verbs rather than nouns, where possible Verbs and the present tense are usually simpler, more direct and concise. ‘Payment should be made by cheque’ can be rewritten as ‘Please pay by cheque’. Avoid overusing definitions Definitions are very useful in providing clarity of meaning, but should not be overused. Use one definition that is specific rather than a definition that will lead readers to other definitions, where possible. Avoid defining commonly understood terms. If a term is only repeated two or three times, it may not need to be defined (depending on the length of the definition). ‘Applicant’ is a commonly understood term and may not require a definition. Page 13 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 13 Tool Explanation Examples Choose simple words for definitions The defined terms should be short. Select a defined term that has meaning and facilitates easy reading of sentences that include the defined term. Avoid using a defined term that has a common meaning that is contrary to or not compatible with the meaning given in the definition. ‘Eligible Investor’ and ‘Takeover Event’ are meaningful labels. Avoid including additional content in definitions and using the defined term within the definition You should avoid including important information about the offer in a definition. You should also avoid including important qualifications in a definition—for example, ‘The Offer Price is $1.00 per share plus a further $10.00 per share due on the Instalment Date’. If you include important information in the definition, it is likely the information will not be given appropriate prominence and may be missed. The definition should make sense each time it is used. You should avoid using the defined term within its own definition as this can be circular and confusing. ‘Closing date’, defined as ‘The date on which the offer closes. Applicants should ensure their application is submitted by the closing date’ could be rewritten as ‘The date on which the offer closes, being 1 June 2011 unless extended’. Avoid jargon, where possible If technical terms are necessary, they should be explained the first time they are used or in a glossary, or both. Terms such as ‘pari passu’, ‘swaps’, ‘passive portfolio management’ and ‘leveraged’ should be defined or explained. Use short sentences Long sentences prevent readers from understanding information easily. Each idea should be presented in a separate sentence. You should also remove any surplus words. ‘Shortening the length of a prospectus’ can be rewritten as ‘Shortening a prospectus’. Use industry accepted terms You should use terminology that is consistent with widely accepted industry guidelines, and use it in the same sense that it is used in the guidelines. ‘Ore reserve’ and ‘mineral resource’ should be used in a way that is consistent with the JORC Code. Disclaimers A disclaimer will be more effective if it is prominent. A disclaimer should generally be able to be seen and understood by those who might otherwise be misled. Note: Any disclaimer must not be inconsistent with the liability regime in Pt 6D.3. A disclaimer that the underwriter accepts no liability in connection with the prospectus is inconsistent with Pt 6D.3. Tailor boilerplate text; omit it where possible Boilerplate text should be reviewed for relevance to each offer and should be tailored to reflect the offer. Blank cell Page 14 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 14 Presenting information so it is ‘clear, concise and effective’ RG 228.29 Table 4 sets out suggested methods for ‘clear, concise and effective’ presentation of information. They are aimed at allowing retail investors to quickly access key information and identify where more detail can be found. The methods are not mandatory, but they may be useful in ensuring the document is not misleading. Table 4: Communication tools for ‘clear, concise and effective’ presentation Tool Explanation and how to use the tool Summaries: Highlighting key information Summaries introduce a reader to a matter and highlight key information. See Section C for our guidance on preparing an investment overview (which is our term for a summary of key information in a prospectus). Balance and prominence You should give appropriate prominence to positive and negative or less positive information (e.g. a loss for the previous year, retirement of key personnel, poor weather conditions affecting continued operations, and risks). This is particularly important when highlighting key information in an overview or summary. You should ensure that:  positive information is not given undue prominence in a way that is potentially misleading; and  information of equal importance to the investment decision is treated in a balanced way, with equal prominence (see RG 228.51). Navigation aids Investors will find your prospectus easier to read if it is logically organised and has good ‘signposts’ to different sections of the document. For example:  page numbers are important;  a table of contents should be sufficiently detailed to enable retail investors to locate key information on specific topics (e.g. ‘use of funds’ rather than simply ‘the offer’);  headings should be meaningful (e.g. ‘How is my shareholding affected?’). This will also help produce a useful table of contents; and  cross-references should be meaningful and include page numbers. For example, unless it is otherwise obvious from the text, say ‘See Table 5 on page 150 for a list of substantial shareholders’, rather than simply ‘See Table 5’. Logical order of information For information to be accessible to readers, the information in your prospectus should flow logically and related information should be grouped together (if possible). Important information should be given more prominence than less important information—for example, by using an investment overview at the front of your prospectus (see Section C) and emphasising key risks (see RG 228.83– RG 228.86). Page 15 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 15 Tool Explanation and how to use the tool Layout A well laid-out document is more accessible to retail investors. White space is important in creating pages that are easy to read. ‘White space’ refers to the amount of space on a page resulting from the use of margins, paragraph breaks and spacing between lines and headings. Different levels of headings, fonts, underlining, italics and colour can help indicate the importance of information. For example, placing text in very small font may give readers the impression they do not need to read it. Tables, diagrams, graphs, charts and maps These tools can help present information in a way that is easy for retail investors to absorb. You should:  present tables, diagrams and other illustrative charts in the simplest way possible, providing clear captions and including key assumptions;  provide keys for more complex diagrams and graphs; and  select scales, time periods and other inputs that fairly represent the information and do not give skewed outputs. Where graphs or maps are used to compare information, the same scale should be used, or the document should explain that the same scale has not been used and the reasons for this. Photographs Photographs can break up large sections of text. Photographs (other than those on the front cover) should only be included after the investment overview. Photographs should be meaningfully labelled and only included where they are relevant to the issuer’s business or the offer. You may also need to explain how the image is relevant to your business or the offer if this is not self-evident. For example, if you include a photograph of a celebrity, you should label the photograph and explain why the celebrity is relevant. Photographs should not be used if they are likely to misrepresent the nature, stage or scale of your business. This is the case whether or not the photograph has a disclaimer. Examples and case studies Examples present information in a way that retail investors can more easily relate to and understand (e.g. to illustrate how formulas work). Examples should be provided on a consistent basis. They should be accompanied by a clear explanation about the purpose for which they are included and the assumptions on which they are based. If an example is used to show an increase or upward change, an example showing a decrease or downward change should also be included (and vice versa). Case studies can effectively demonstrate various concepts, such as investment strategies. Glossaries Glossaries explain the meaning of defined terms in one place. They should be easy to find. If your prospectus includes other reports, the reports should use the same terms as those used throughout your prospectus, where possible. Page 16 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 16 Tool Explanation and how to use the tool Replacement prospectus Give a short explanation at the front of the replacement prospectus about the key differences between the replacement prospectus and the original one. This will help investors navigate the replacement prospectus if they have already read the original prospectus. For example, this may involve explaining that you have removed certain forecast information or provided more information about the risks associated with your major project in the investment overview and risk section. Is your prospectus as short as possible? RG 228.30 Your prospectus should be as short as possible, while satisfying the disclosure requirements. This is because excessive length is problematic for retail investors and s715A requires a prospectus to be ‘concise’ (subject to also being clear and effective: see RG 228.22–RG 228.23). Note: For an example of research that supports the proposition that excessive length is problematic for retail investors, see Report 230 Financial literacy and behavioural change (REP 230) and I Ramsay, ‘Use of prospectuses by investors and professional advisers’ (PDF 481 KB), (2003) University of Melbourne Legal Studies Research Paper No. 76. RG 228.31 You can achieve a prospectus that is as short as possible by using the tools in Table 3 and Table 4, omitting extraneous information (see RG 228.32– RG 228.33) and using incorporation by reference (see RG 228.34–RG 228.40). Omitting extraneous information RG 228.32 Your prospectus should only contain information that investors need to make their decision. Extraneous information in a prospectus undermines the document’s compliance with s715A. As noted by Santow J in Re Australian Co-operative Foods Ltd (2001) 38 ACSR 71 at 77 in relation to an expert report, ‘A plethora of peripheral information is more likely to distract than illuminate’. RG 228.33 Whether information is relevant for investors will depend on all the circumstances. Examples of extraneous information might include the following: (a) repetitive summary sections; (b) copies of ASIC relief instruments; (c) long, descriptive summaries of contracts or reproducing the terms of an agreement (e.g. copying out the text of standard termination clauses from an underwriting agreement); (d) the issuer’s constitution in its entirety or detailed extracts from the constitution; Page 17 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 17 (e) claims about compliance with provisions of the Corporations Act or the listing rules of the relevant financial market (investors should be able to presume you comply with these requirements); (f) general marketing statements that convey very little information; (g) photographs (e.g. one photograph of your factory may be sufficient); and (h) industry background of a general nature that is unlikely to affect your business model. Using incorporation by reference RG 228.34 Section 712 allows information to be incorporated by reference into a prospectus. Incorporation by reference can help cater for the needs of different audiences. Note: For the procedural requirements for lodging incorporated documents with ASIC, see Section B of RG 254. RG 228.35 We recommend you consider using s712 for information that is relevant but not key to an investor’s assessment of the offer. This might include detailed corporate governance policies, contracts, trust deeds, accounting policies and secondary specialist expert reports (such as an intellectual property report for minor intellectual property). For an international offering, it may be useful to incorporate the foreign offer document by reference. Note: You should not use s712 for information that you would not otherwise include in your prospectus. Including information about incorporated documents in your prospectus RG 228.36 A reference to an incorporated document in an issuer’s short-form prospectus must identify the document or part of the document that contains the information and tell investors about their right to obtain a copy under s712(5). RG 228.37 If the document is primarily of interest to professional analysts or advisers or investors with similar specialist information needs, an issuer’s short-form prospectus must state this and merely describe its contents: see s712(2)(a). In any other case, an issuer’s short-form prospectus must include sufficient information to allow an investor to decide whether to obtain a copy of the incorporated document or part of it: see s712(2)(b). RG 228.38 We consider that it is prudent for an issuer to provide ‘sufficient information’ about the incorporated document (i.e. rely on s712(2)(b)) if there is any doubt about the primary audience. We think it is highly unlikely that a court would decide that a document has not been validly incorporated because it is primarily of interest to professional investors and therefore the short-form prospectus provides more information than may have been strictly necessary. Page 18 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 18 Providing sufficient information under s712(2)(b) RG 228.39 Providing ‘sufficient information’ for investors under s712(2)(b) involves an issuer’s short-form prospectus disclosing the substance of matters that would be likely to take the investor by surprise if they read the incorporated document or part of it. Rather than merely summarising the incorporated document, an issuer’s short-form prospectus should focus on details that may affect the investor’s decision about whether to obtain a copy of the document, including how the information is relevant to the offer and an investor’s investment decision. RG 228.40 We think that it is unlikely that a court would decide a document has not been validly incorporated where the issuer has made a good attempt to give investors a ‘fair indication’ of the document’s character. This would include highlighting any significant negative information and explaining the document’s relevance to the offer and an investor’s investment decision. Note: Our guidance is based on Superseded Practice Note 63 Incorporation by reference: s1024F (SPN 63). Section 712(2)’s reference to ‘sufficient information’ was enacted to reflect the guidance in SPN 63: see CLERP Paper No. 2, p. 17. CLERP Paper No. 2 also said that investors should be given a ‘fair indication of the character of the information’. Examples of providing sufficient information Incorporation of a trust deed Providing sufficient information for incorporation of a trust deed may include a discussion of the role of the trustee and investor meetings. It would be unnecessary to list all the obligations of the trustee or describe the actual method of calling meetings. An issuer’s prospectus should also refer to any ongoing obligations that investors will have under the trust deed and any consequences of failing to comply. Secondary specialist expert report Providing sufficient information about a secondary specialist expert report that is not key to an investor’s assessment of the offer (such as an intellectual property report for minor intellectual property) is likely to mean explaining the scope and purpose of the report, the conclusions, methodologies and major assumptions. It would also include the expert’s qualifications, any benefit that the expert will receive in connection with the report and any interests of the expert. Issuers could include a concise specialist expert report in the short-form prospectus and incorporate the entire report (including the more technical parts of the report) by reference. Note 1: For guidance on what might be included in and excluded from a concise expert report, see Table 2 in RG 111. Note 2: These are examples of what may constitute ‘sufficient information’ for the purposes of s712(2)(b). They are a guide only. Page 19 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 19 C Investment overview: Have you highlighted key information for retail investors? Key points You should use an investment overview to highlight key information to help retail investors make informed investment decisions. This section has guidance on what information should be in your investment overview and how you should present the information. Why do retail investors need an investment overview? RG 228.41 Your prospectus should contain an investment overview that helps retail investors make an informed investment decision by highlighting key information. An investment overview will ensure your prospectus is ‘clear, concise and effective’ for retail investors (while the prospectus also provides sufficient information for sophisticated and professional investors). RG 228.42 An investment overview is an introduction to the issuer and the offer. It is not intended to replace the prospectus and investors should read the whole document. The investment overview should: (a) be the first substantive section of your prospectus—generally this will be after the Chair’s letter; Note: The Chair’s letter should generally be short (one or two pages). Otherwise, it may detract from and repeat information that is in the investment overview. (b) highlight and provide a meaningful summary of information that is key to a retail investor’s investment decision (see Table 5); and (c) provide balanced disclosure of the benefits and risks. RG 228.43 The investment overview should help retail investors navigate your prospectus by: (a) explaining what information they need to focus on; and (b) providing clear cross-references to where the key issues are more fully explained. RG 228.44 An overview of this type is more useful to a retail investor than: (a) upfront sections that lack substantive information about the issuer and the offer and are dominated by general marketing statements and numerous photographs; Page 20 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 20 (b) multiple summaries (such as ‘investment highlights’ followed by ‘frequently asked questions’) that are repetitive and add to the length of the prospectus; or (c) unbalanced information that only raises the benefits without explaining the associated risks. What information should be in your investment overview? RG 228.45 The investment overview should highlight information that is key to a retail investor’s investment decision. Key information does not mean all information that is required under s710. Highlighting key information may involve explaining why the information is important or placing the information in some context. Descriptive information without an explanation is usually not sufficient. RG 228.46 We have set out some categories of key information in Table 5 that should generally be explained in the investment overview. You need to use your judgement to decide what information will be relevant for your investment overview given your individual circumstances. Information included in broker reports and investor presentations may be a guide to the categories of information you should cover. Note: Any significant information that you give sophisticated investors in investor presentations should also be included in the prospectus. RG 228.47 The investment overview’s discussion of key benefits and risks should be balancedwith a balanced level of detail about both. Often the sections at the front of a prospectus have a lot of information about the benefits but only very cursory information about the risks. This can give retail investors the misleading impression that they do not need to pay much attention to the risks. The number of risks set out in the overview and the amount of detail will depend on the circumstances of the issuer and the offer. Note: The need to be balanced applies to all sections at the front of your prospectus, including the Chair’s letter. RG 228.48 The investment overview should indicate if achieving your objectives is high risk. RG 228.49 Photographs (other than those on the front cover or title pages) should only be included after the investment overview. Page 21 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 21 Table 5: Key information that you should generally explain in your investment overview Topic What to include Business model: How will you make money and generate income or capital growth for investors? Explain the key features of your business modelthat is, how you propose to make money and generate income or capital growth for investors, or otherwise achieve your objectives. This will include any key dependenciesthat is, factors you rely on in order to make money or achieve your objectives. For example, if your ability to make money is dependent on an important contract, the overview should explain this. Risks: What are the key risks associated with your business model, the security and the offer? Explain the key risks to your ability to make money and generate income or capital growth for investors, or otherwise meet your objectives (i.e. the risks inherent in your business model) and the key risks associated with the offer and the security. See RG 228.75 for our guidance on key risks. You may also need to explain a risk that specifically relates to a benefit that is included in the overview: see RG 228.86. It is not usually effective for the overview to list all the risks. Rather, it should focus on giving adequate information on key risks: see RG 228.84. It is not effective to give very brief information with no explanation. For example, it is not sufficient to simply say, ‘Financing risk’. Financial information: What key financial information do investors need to know about your financial position, performance and prospects? Give key financial information about your financial performance (e.g. earnings before interest and taxes (EBIT), price/earnings (P/E) ratio), financial position (e.g. gearing, interest cover ratios) and prospects. Key financial information may include financial ratios (as indicated by the above examples). For some factors that we encourage you to consider when deciding which ratios may be relevant for your prospectus, see RG 228.114– RG 228.115. If you include financial ratios, we encourage you to include in the overview a brief explanation of what the ratio means and how it is calculated (or at least a clear cross-reference to this explanation in the financial information section if the formula is complex): see RG 228.116–RG 228.118. Directors and key managers: Who will be in control and do they have the appropriate expertise? If you are an investment company, a company that has a limited operating history or your shares have not previously traded on a stock exchange, give details about the relevant expertise and experience of your directors and key managers. Interests, benefits and related party transactions: Who will benefit? Explain any significant interests and benefits payable to directors and other persons connected with the issuer or offer and any significant related party transactions. These benefits and related party transactions will not always be significant and require disclosure in the overview. You need to determine whether they are significant in your circumstances (e.g. if the fees or other consideration paid to directors make up a large proportion of the offer proceeds). Page 22 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 22 Topic What to include The offer: What will an investor get, how much will they pay? Describe the key terms and conditions of the offer (e.g. the consideration payable, any minimum or maximum subscription amounts). If the offer price is payable in instalments, this should be highlighted in the overview. You should also highlight key risks associated with an offer of this type (e.g. the risk that the amount owing on the securities at the instalment date(s) may exceed the trading price of the securities at that time). How will you use the offer proceeds? Briefly explain the effect of the offer. This would include the effect on your capital structure (e.g. the number of securities pre-offer and post-offer). Identify any shareholders that have a voting power of 20% or more (to the extent that this can be determined before the offer). Explain how you plan to use investors’ funds. Clearly state if you will need to raise more equity or debt capital (if this is known at the date of the offer). For example, if the offer will fund 30 drill holes but your geologist report indicates you will need a minimum of 60 holes to establish whether you have a resource, you should flag the likelihood of raising further funds in the overview. How should you present your investment overview? RG 228.50 Retail investors focus on the front sections of a prospectus so it is important that your investment overview is ‘clear, concise and effective’. We encourage you to consider all the communication tools set out in Section B, in particular the use of: (a) cross-references so that retail investors can easily find further information; (b) questions as headings, which can help explain how the information is relevant to an investor; and (c) a table format, which can be effective for a summary section such as the investment overview (depending on the amount of information included). RG 228.51 Presentation of the benefits and risks in the overview should be balanced, with the risks having similar prominence to the benefits. For example, the benefits and risks should be presented in a similar way using similar layout and fonts. RG 228.52 Your investment overview should be short compared with your prospectus as a whole, but not so brief as to omit key information. Your investment overview should be a summary of information that is key to the investment decision, rather than a summary of the prospectus as a whole. An overview that is a mere sign-post to other parts of the prospectus will tend to be so brief as to be meaningless. An overview that attempts to provide all relevant information about each key issue will tend to be too long. We have not given any indication of how long your investment overview should be because this will depend on your circumstances and the circumstances of your offer. Page 23 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 23 D Business model: How will you make money and generate income or capital growth for investors? Key points Your prospectus should explain your ‘business model’. This involves explaining the main components of your business and how they relate to each other: see RG 228.53–RG 228.60. This section explains some common components of business models: see Table 6 and RG 228.61–RG 228.71. What is your business model and how should you explain it? RG 228.53 Your prospectus should explain your business model so that retail investors can assess the potential risks and returns associated with an investment in your securities. Your business model is how you propose to make money and generate income or capital growth for investors. RG 228.54 If you do not expect to make money or generate income in the short term (e.g. if you are an early stage exploration company), your business model may involve an explanation of your short-term objectives and how you propose to meet those objectives. Your prospectus should make it clear that you do not intend to make money or generate income in the short term. Components of your business model RG 228.55 Your prospectus should explain the main components of your business model, the key assumptions underlying the model (e.g. ‘interest rates do not rise’) and the associated risks. Table 6 lists some common components of business models. Each component listed may not be relevant for every issuer and you should also consider whether there are other components relevant to your business model. RG 228.56 Your prospectus should contain a substantive analysis of your business model’s components rather than simply a description. You should also explain how your business model works (i.e. how the components relate to each other) and your ability to make money and generate income or capital growth for investors, or otherwise meet your objectives. RG 228.57 The investment overview of your prospectus should include a summary of the key components, assumptions and risks associated with your business model (with cross-references to more the detailed content provided elsewhere in the prospectus): see Section C. Sophisticated and professional investors may have the expertise to understand your business model, and the risks to Page 24 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 24 this model, from separate disclosures throughout your prospectus and elsewhere, but retail investors require a clear explanation in the overview. Confidential information about your business model RG 228.58 Section 710 may require disclosure of confidential information relating to your business modelespecially if the information might deter investors from acquiring the securities if that information were generally known. RG 228.59 If you do not disclose confidential information in your prospectus, insiders may be prohibited from trading under Div 3 of Pt 7.10 (if the information satisfies s1042A’s definition of ‘inside information’). You may also be liable under Pt 6D.3 for omitting required information: see also our guidance on disclosure of confidential information in Section D of RG 170. RG 228.60 However, although there is no express exception for confidential information in the prospectus disclosure requirements, this will not automatically mean that you need to disclose commercially sensitive information or trade secrets. For example: (a) Often confidential information may not be relevant to the investor’s investment decision (e.g. investors may need to understand how a key contract affects your business model and earnings but they may not need the detailed pricing terms). (b) It may also be unreasonable for investors to expect you to disclose commercially sensitive information that could be used by competitors to harm your business: see s710(1)(a). It will be necessary to weigh the usefulness of information to investors against the potential harm to your business. Table 6: Business models: Common components Components What to include Nature of your business Explain what you do and the main function of your business. It may also be relevant to discuss:  the stage of development; and  the sector or industry in which your business operates (see RG 228.67– RG 228.68), provided the disclosure is specific and relevant to the investment decision (see RG 228.33(h)). Significant dependencies Explain the factors you depend on to make money (or achieve your main objective). Some common examples are:  important contracts (see RG 228.63–RG 228.64);  key suppliers or customers and distribution channels;  intellectual property and its legal status (e.g. whether you have a patent or rely on a licence); Page 25 REGULATORY GUIDE 228: Prospectuses: Effective disclosure for retail investors © Australian Securities and Investments Commission August 2019 Page 25 Components What to include Significant dependencies (cont.)  income such as dividends from investments (other than wholly owned subsidiaries);  key personnel (see Section F); and  essential assets and whether they are owned or leased. For exploration companies that have tenement assets, this may include, at a minimum, the history of tenement assets, the seller of the asset, how much it was sold for, why it was not previously developed and the amount spent on exploration to date. Your strategy and plans Explain your business strategy, even if this needs to be at a high level. For example, ‘We plan to ex