International Trade and Business Law Review
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Christopher J Peters[*]
Since 1993, Australia’s system of corporate law has been subject to an ongoing program of appraisal and reform, referred to as the Corporate Law Economic Reform Program (CLERP).[1] According to High Court Justice Ian Callinan, the program is ‘intended to effect a fundamental review of corporate law [in Australia].’[2] Among the most significant recent reforms introduced by CLERP were those enacted by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act) on 13 March 2000. In addition to addressing issues as diverse as corporate governance, accounting standards, takeovers and compulsory acquisitions,[3] the Act specifically targeted the regulation of equity capital fundraising by corporate entities.
While canvassing possible alternatives, the Act retained the basic disclosure requirements of the prevailing fundraising system, including those relating to financial projections. However, the Act also included:
According to the explanatory memorandum to the CLERP Bill 1998, these reforms were designed to ‘minimise the costs of fundraising while improving investor protection’.[5]
CLERP’s review of the existing fundraising regime was ostensibly influenced by regulation in other jurisdictions. The explanatory memorandum to the CLERP Bill 1998 indicated that ‘the CLERP program … seeks to … improve harmonisation of Australia’s laws with those applying in major financial markets’.[6] Similarly, the CLERP Issues Paper[7] made explicit reference to relevant fundraising initiatives in Canada,[8] New Zealand, the United Kingdom and the US. However, in both documents, analyses of such overseas approaches were merely cursory, and did not appear to effect any substantive findings. This paper places considerably more emphasis on the comparative methodology. It builds on the brief analyses conducted by CLERP by evaluating whether the CLERP Act fundraising reforms could have been improved by incorporating aspects of the US fundraising system.
Such an approach makes an incremental contribution to academic literature. While academic works have previously considered the effectiveness of the CLERP reforms,[9] a detailed comparative approach has not yet been employed. Moreover, according to Paul Redmond, ‘the US experience … neatly demonstrates alternative approaches [to fundraising] which might be taken by government’.[10] Therefore, a comparative study focusing on the US represents a particularly constructive extension of the extant literature.
The paper compares the two regimes across six dimensions. These dimensions relate to key issues discussed in the CLERP Issues Paper:
While the six dimensions do not constitute a complete coverage of all subjects raised by the CLERP Issues Paper, they are intended to represent the most contentious aspects of the pre-CLERP Act Australian system.11
The paper is structured to consider the six dimensions in turn. Each section commences with a discussion of the relevant aspects of the law in Australia and the US, and then undertakes a critical analysis of the alternatives. Given the methodology employed, these sections do not purport to be comprehensive surveys. Rather, the latter are intended as broad overviews that may inspire further, more detailed research. The section headed Conclusion draws together the findings from each dimension and derives an overall conclusion. The jurisdictions exhibit considerable divergence in relation to basic disclosure requirements, although there is evidence of closer harmonisation regarding financial projections and SME fundraising. The differences, however, are justifiable and overall the CLERP reform choices are supported as appropriate to the Australian market.
Prior to the CLERP Act, the Corporations Law (Cth) primarily regulated Australia’s equity capital fundraising.[12] In general, the Corporations Law (Cth) mandated the disclosure of certain information in a prospectus distributed to potential investors,[13] although some issues were exempted from this requirement.[14] Section 1021 of the Corporations Law (Cth) outlined a limited list of specific items to be included in all prospectuses,[15] while Corporations Law (Cth) s 1022 also required issuers to include ‘all such information as investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus’.[16] Academic commentary relating to ss 1021–22 of the Corporations Law (Cth) suggested that issuers were therefore left with some discretion in assessing the requisite disclosure.[17]
The fundraising reforms introduced by the CLERP Act were incorporated directly into the Corporations Law (Cth) on 13 March 2000. The Corporations Law (Cth) has since been succeeded by the Corporations Act 2001 (Cth) (Corporations Act),[18] which currently regulates corporations in Australia. In general, the Corporations Act continues to mandate the disclosure of certain information in a disclosure document,[19] subject to certain exemptions.[20] Although articulated in slightly different language, the basic requirements of ss 1021–22 of the Corporations Law (Cth) are now encapsulated in the Corporations Act ss 710–11. Thus, the Corporations Act s 711 contains a limited checklist of required disclosures,[21] while the Corporations Act s 710 sets out a general test requiring the disclosure of ‘all the information that investors and their professional advisers would reasonably require’. The similarity of these provisions and ss 1021–22 of the Corporations Law (Cth) suggests that the discretion available to issuers in relation to disclosure effectively remains unchanged.[22]
In the US, the Securities Act of 1933 (Securities Act) primarily governs equity capital fundraising.[23] The Securities Act also mandates the disclosure of certain information in a registration statement,24 although ranges of exemptions are available.[25] That registration statement must include a prospectus,[26] to be distributed to prospective investors. The disclosure requirements for these two documents are essentially identical. The Act outlines a strict checklist of 32 items that must be included in a registration statement,[27] 28 of which must be included in a prospectus.[28] These items include not only technical details such as the name of the issuer,[29] the state in which the issuer is incorporated[30] and the address of the issuer31 but also substantive items such as an audited balance sheet[32] and three years of audited profit and loss statements.[33]
It follows from the above that significant differences exist between the basic disclosure requirements in Australia and the US. To varying degrees, both systems mandate disclosure.[34] However, the extensive checklist of specific disclosures required in the US is considerably more restrictive than the combined checklist/general disclosure test approach maintained in Australia.
The key argument in favour of checklist disclosure is that it establishes a standard form for disclosure documents, thereby enabling market participants efficiently to compare potential investments.[35] However, the force of this argument is reduced by the fact that a checklist must necessarily include broadly worded requirements, thereby effectively limiting comparability.36 Proponents of the checklist approach also argue that the existence of a standard form limits the costs of compliance, due to the development of precedents.[37] However, the counterargument is that a checklist in fact encourages unnecessarily complex and costly detail.[38] Empirical evidence supports the latter interpretation. In Australia, fundraising costs averaged 10% of the funds for Australian Stock Exchange listings during 2001.[39] In the US, empirical evidence suggests that such costs average approximately 11%.[40]
The strengths of a general disclosure test are less ambiguous. In particular, such an approach achieves greater flexibility[41] in two senses. First, a general disclosure test permits flexibility across issues, thereby allowing factors such as issue size to influence the level of disclosure for particular capital raisings. According to the Australian Financial System Inquiry Final Report, released in 1997, ‘this [Australia’s general disclosure test] approach … is flexible and places responsibility for the content of a prospectus squarely on the issuer which is in the best position to judge the information needed by investors to make an informed investment decision’.[42] Secondly, the general disclosure test approach allows flexibility in a temporal sense. In a rapidly changing market, an open-ended general disclosure requirement is better equipped to evolve across time in response to the requirements of investors.[43]
Both the checklist approach and the general disclosure test approach therefore have attractive attributes, although the strengths of the general disclosure test approach are subject to fewer criticisms. It follows that the ideal regulatory system should combine a general disclosure test with some form of checklist disclosure. The Australian regime effectively achieves such reconciliation, by supplementing the general disclosure test in the Corporations Act s 710 with a basic checklist in s 711 of this Act. In contrast, the US system relies solely on a comprehensive checklist, thereby restricting the flexibility available to issuers and discouraging issue-specific disclosures. On these bases, CLERP’s decision to perpetuate the existing flexible approach is compelling.
Prior to the CLERP Act, financial projections constituted a particularly controversial aspect of prospectus disclosure.[44] Although not required as part of the checklist in the Corporations Law (Cth) s 1021, interpretations of the general disclosure test in s 1022 of the Corporations Law (Cth) suggested that financial projections would be required in certain circumstances. In ASIC Practice Note 67 (Financial Forecasts in Prospectuses),[45] the regulator stated ‘directors must assess [whether a forecast must be included in a prospectus] on a case-by-case basis.’[46] While there is no case law directed at this aspect of s 1022 of the Corporations Law (Cth), the Federal Court of Australia addressed similar issues in relation to statements in a takeover context.[47] In the first such case, Pancontinental Mining Ltd v Goldfields Ltd,48 Tamberlin J held that a statement issued by the bidder, Goldfields Ltd, in relation to its proposed scrip bid for Pancontinental Mining Ltd was deficient in failing to include an earnings forecast.[49] However, his Honour also noted that ‘what is material … is a matter for judgment and assessment in the light of all the evidence, facts and circumstances in each particular takeover context and this will necessarily differ from case to case’.[50] Subsequent decisions supported Tamberlin J’s conclusion.[51] The view held by ASIC and the court was confirmed by academic commentary.[52]
The CLERP Act’s effective retention of the existing disclosure requirements means that the financial projections are now regulated by the general disclosure standard in the Corporations Act s 710 .[53] Given the similarities between the Corporations Act s 710 and s 1022 of the Corporations Law (Cth), the law relating to the disclosure of financial projections is effectively unchanged.[54] ASIC Policy Statement 170 (Prospective Financial Information), which was issued on 6 September 2002 and which replaced ASIC Practice Note 67,[55] supports this interpretation. It suggests that ‘an issuer must assess on a case-by-case basis if prospective financial information needs to be disclosed’.56
Historically, the regulation of the disclosure of financial projections has also been a controversial issue in the US. Issuers are not legally required to include any form of financial projection pursuant to the checklist contained in the Securities Act.[57] Indeed for many years, the securities market regulator, the Securities and Exchange Commission (SEC),[58] took an active position that registration statements and prospectuses should include only verifiable facts.[59] However, this position was heavily criticised[60] and, in 1978, the SEC indicated that it ‘encourages the use … of management’s projections of future economic performance that have a reasonable basis and are presented in a reasonable format’.[61] In 1979, the regulator introduced the SEC r 175, which provides a ‘safe harbour’ for financial projections, dictating that no liability exists for a ‘forward-looking statement’[62] unless that statement is ‘made … without a reasonable basis or … disclosed other than in good faith’.[63] Subsequent interpretations of the SEC r 175 have indicated that while overly optimistic financial projections may form the basis for liability,[64] the mere failure to realise a financial projection is not actionable under securities law.[65]
The regulation of financial projections trades off two competing considerations. First, the academic literature indicates that projections are often highly inaccurate, and optimistically biased.[66] This suggests that projections are liable to mislead the market and should be prohibited on the basis of investor protection. Secondly, however, the academic literature also indicates that financial projections are value relevant to the market, in the sense that their disclosure has a significant impact on the share price of the disclosing firm.[67] This argument suggests that projections are considered useful by investors and should be mandated.
The approaches taken by the Australian and US legislatures to balance these considerations differ. The US approach provides encouragement for issuers to include financial projections where such information can reasonably be made available in good faith.[68] Under this regime, the paramount consideration is the issuer’s capability accurately to predict future earnings, while the highly relevant nature of such predictions is a secondary consideration. In contrast, the disclosure of a financial projection is required in Australia wherever investors would reasonably require such information.[69] While a solitary reading of this provision suggests a singular focus on the value relevance of projections, ASIC Policy Statement 170 effectively limits the requirement to disclose a projection to situations in which ‘there are reasonable grounds for its inclusion’.70
It follows that the Australian approach achieves a more effective reconciliation between the two competing considerations of accuracy and value relevance. Consistent with the observed inaccuracy of financial projections, it limits Australia’s disclosure to circumstances in which accuracy can be reasonably assured. Moreover, in those circumstances of relatively assured accuracy, it actively requires disclosure, consistent with the value relevance of such projections. While similar limitations are placed on disclosure in the US, the mere encouragement to disclose provided by the SEC r 175 fails to place sufficient emphasis on the value relevance of financial projections. As there is no universally accepted disclosure for financial projections, the CLERP Act’s omission of a safe harbour for financial projections is appropriate.
Prior to the CLERP Act, ASIC had a significant role in overseeing prospectus disclosure in Australia. This role derived from the requirement that prospectuses were to be lodged with and registered by ASIC prior to their release to the market.[71] ASIC was required to register a prospectus within 14 days of lodgment,[72] provided the prospectus did not contain a false or misleading statement or omission, and otherwise complied with the Corporations Law (Cth)[73] However, despite these requirements, the CLERP Issues Paper noted that, ‘in practice, [ASIC] only examines prospectuses in a limited manner prior to registration.’74 Consequently, non-complying prospectuses were often registered.75 Accordingly, ASIC often reviewed prospectuses subsequent to registration (post-vetting), especially where concerns about compliance with the Corporations Law (Cth) arose.[76] In cases of non-compliance, ASIC had the power to issue a stop order to prevent further issues of the securities.77
The CLERP Act introduced certain procedural changes that ostensibly affect ASIC’s role, although the practical effect of the reforms is limited. In particular, disclosure documents continue to be lodged with ASIC,78 but need not be registered by the regulator.[79] Instead, an exposure period of seven days[80] begins from the date of lodgment, during which time the issuer may accept no subscriptions.[81] According to the explanatory memorandum to the CLERP Bill 1998, this exposure period is designed:
to give … ASIC and the market an opportunity to consider the disclosure document
before the commencement of subscriptions for the securities on offer … where the
disclosure document was defective, the market could draw it to the attention of ASIC or
aggrieved parties could, if appropriate, seek injunctions preventing the fundraising.[82]
Consistent with the procedural change, ASIC Policy Statement 152 (Lodgment of Disclosure Documents)83 confirms that the regulator’s oversight role in relation to disclosure documents is effectively confined to post-vetting.[84] In conjunction with the procedural changes, the CLERP Act has retained ASIC’s power to issue a stop order upon the discovery of non-compliance with the Corporations Act by a disclosure document,[85] and ASIC has indicated its continued willingness to exercise that power.[86]
The SEC also plays an active role in regulating equity capital raisings in the US. Pursuant to the Securities Act, the registration statement and prospectus prepared by an issuer must be lodged with the SEC before securities are issued.[87] Moreover, the regulator actively reviews most registration statements and prospectuses before lodgment (the pre-filing period), between lodgment and registration (the effective period) and after registration (the post-effective period).
During the pre-filing period, the SEC staff have no formal involvement, but are generally willing to provide advice for a potential issuer.88 During the effective period, the SEC ‘review[s] the contents of almost every registration statement filed by an issuer which has not previously registered securities with the SEC’.[89] This review often leads to concerns about defects in the registration statement, in which case the Commission must inform the issuer of those perceived defects within 10 days of lodgment.[90] Once the Commission is satisfied with the registration statement, it has the power to register the statement immediately.91 Alternatively, the registration statement automatically becomes effective 20 days after it is lodged or after the SEC informs the issuer of required amendments.[92] Finally, during the post-effective period, the Commission continues to oversee the fundraising process, and has the power to issue a stop order if it discovers defects in a distributed prospectus.93
The CLERP Act effectively formalised a clear divergence between the roles of ASIC and the SEC. Whereas the SEC has historically undertaken an aggressive program of informal and formal review of registration statements and prospectuses, both before and after the release of prospectuses to the market, ASIC’s focus remains almost entirely upon post-vetting disclosure documents.
The most attractive aspect of the US approach is its comprehensive coverage. A three-phase review process that incorporates the pre-filing period, the effective period and the post-effective period clearly maximises the SEC’s opportunities to detect improper disclosure, thereby also maximising the level of investor protection. However, there are two key arguments in favour of a less comprehensive approach. First, because a prospectus is generally unavailable to the market for at least 20 days after lodgment, the US approach limits the timeliness of the information disclosed.[94] In a fast-moving market, such a delay may be detrimental to the success of an issue. Secondly, the comprehensive coverage of the SEC’s approach is associated with considerable cost. As many as 2,900 people staff the US regulator,95 and it has an annual budget exceeding US$423 million.[96] In contrast, ASIC’s total staff is currently 1,221,[97] and its annual budget is AUS$143 million.[98]
Ultimately, these arguments must be balanced according to the particular characteristics of the relevant market. The costs associated with operating a large, aggressive regulator are feasible for a global financial centre such as the US, whereas it is more difficult for the relatively minor Australian market to bear similar costs. Moreover, concerns relating to the level of investor protection in the Australian market are partly allayed by recent evidence relating to the transition effected by the CLERP Act. According to ASIC, the number of stop orders issued in the 2000–01 financial year increased[99] ‘because we no longer have the power to refuse to register inadequate prospectuses’.[100] It follows that ASIC’s increasing focus on post-vetting has merely shifted, rather than diminished, its intervention in the equity capital market. Therefore, since ASIC’s existing approach appears to be appropriately adapted to the Australian market, a move to a more comprehensive SEC-style review process would be unlikely to achieve a better cost-benefit relationship.
Prior to the CLERP Act, the basic fundraising provisions of the Corporations Law governed SME fundraising in Australia. Thus, SMEs were generally required to issue a prospectus in order to issue securities, in the same manner as any other issuer.[101] However, two exceptions to the prospectus disclosure requirements were particularly relevant to SMEs:
One of the most important aspects of the CLERP Act was the introduction of additional measures to assist SMEs in raising equity capital.[104] First, issuers now have the opportunity to raise up to AUS$5 million on a single occasion using an Offer Information Statement (OIS).[105] The disclosure requirements for an OIS are considerably less onerous than those relating to a prospectus.[106] Secondly, the requirements of the personal offers exception have been reformulated. An issuer may now raise up to AUS$2 million over a rolling 12-month period from up to 20 issues of securities (rather than offers of securities), to persons with a connection to the issuer, without the need for a prospectus.[107] Thirdly, the Act effectively amended the definition of sophisticated investor. According to the Corporations Act, a sophisticated investor is a person who invests AUS$500,000 or more in the securities (the pre-CLERP Act requirement),[108] or a person with net assets of AUS$2.5 million or more,[109] or a person who has a net annual income of AUS$250,000 or more.[110]
SME fundraising in the US is regulated under a similar framework. Although the Securities Act generally requires issuers to comply with its disclosure requirements, it exempts certain issues from its registration requirements and empowers the SEC to permit further exemptions. The most relevant exemptions for SMEs are contained in the SEC’s reg A[111] and reg D,112 promulgated pursuant to s 3(b) Securities Act (which empowers the SEC to exempt certain issues where the aggregate amount raised does not exceed US$5 million) and clarifying s 4(2), (6) Securities Act (which exempts private issues and issues to accredited investors).
The[113] In particular, required financial statements are simpler and need not be audited.[114] Therefore, according to Thomas Hazen, ‘the [SEC] Regulation A offering will prove to be significantly less expensive than registration, especially in terms of legal, printing, underwriting and accounting fees’.[115]
The SEC’s reg D was promulgated in 1982 to encourage capital raising by small businesses.[116] The key components of reg D are SEC rr 504-506. First, the SEC’s r 504 allows an issuer to raise up to US$1 million during a rolling 12-month period in a general solicitation, without any disclosure. Secondly, the SEC’s r 505 allows an issuer to raise up to US$5 million from an unlimited number of accredited investors and up to 35 unaccredited investors, provided certain reduced disclosure requirements are met.117 Accredited investors include eligible financial institutions,118 as well as individuals with an annual income of US$200,000119 or net worth of US$1 million.[120] Thirdly, the SEC’s r 506 allows an issuer to raise an unlimited amount from accredited investors, without any disclosure.
The SME fundraising reforms implemented by the CLERP Act are relatively novel in an Australian context. In many respects, however, they closely resemble the SME-targeted fundraising provisions of the Securities Act. For example, the OIS under the Corporations Act is directly comparable to the Offering Circular under the Securities Act. Similarly, the Australian sophisticated investor exception essentially replicates the SEC’s r 506, albeit using slightly different definitions.
The key difference between the two regimes lies in the opportunities to undertake general solicitations. In Australia, although the personal offers exception allows issuers to make personalised offers, these offers must be based on ‘previous contact between [the issuer] and [the offeree]’,[121] ‘some professional or other connection between [the issuer] and [the offeree]’[122] or ‘statements or actions by [the offeree] that indicate that they are interested in offers of that kind’.[123] In the US, an issuer may undertake a general solicitation for up to US$1 million without a prospectus,[124] and may raise up to US$5 million from unaccredited investors with limited disclosure.[125]
On the basis of this comparison, the US approach appears to provide greater assistance to SME in accessing equity capital markets. Given that SMEs provide approximately 40% of Australia’s private sector output and almost 50% of private sector employment,[126] a case can certainly be made for the introduction of even less stringent SME fundraising requirements. However, the imperative of investor protection balances any argument further to relax Australia’s SME fundraising regime. In the US the SME capital raising system has been criticised as favouring the interests of business ahead of investors. As Marvin Mohney points out, ‘Regulation D … achieves a precarious balance between investor protection and capital formation, and might sacrifice too much of the former to benefit the latter’.[127] On balance, Australia’s legislature has achieved a reasonable compromise between encouraging SME fundraising and ensuring an adequate level of investor protection. Therefore, the introduction of more relaxed provisions seems unnecessary in the prevailing Australian fundraising climate.
Australia’s Corporations Law (Cth) prospectus disclosure requirements were underpinned by the principle that ‘investors should not be induced to invest in securities until they have had the benefit of reviewing a prospectus in relation to the offer’.[129] Accordingly, the disclosure requirements were supplemented by restrictions on the advertising of securities issues. Until a prospectus was registered by the ASIC, an issuer was prohibited not only from advertising security issues, but also from even referring to a prospectus in advertisements.[130] Additionally, in order to avoid circumvention of that prohibition through apparently objective publications such as newspaper articles, the Corporations Law (Cth) prohibited persons from publishing reports that were ‘reasonably likely to induce a person to apply for the securities’.[131] However, factual independent reports were permitted,[132] and the ASIC was given a mandate to exempt persons or classes of persons from the advertising restrictions.133 Moreover, after a prospectus was registered, an advertisement could be published provided it drew attention to the availability of the prospectus.[134]
The CLERP Act introduced a number of changes to the advertising restrictions. Until the end of the exposure period, the Corporations Act generally continues to prohibit issuers of unlisted securities from advertising,135 although basic objective statements (such as the identity of the issuer) are now permitted.[136] In contrast, however, issuers of listed securities may advertise to any extent, provided such advertisements note the availability of a disclosure document.[137] The basis of this ‘significant relaxation’[138] is that adequate information relating to the issuer exists through the continuous disclosure requirements of the Corporations Act.[139] Factual independent reports continued to be permitted,[140] while the ASIC retains its power to exempt persons or classes of persons from the advertising provisions.[141] After the exposure period expires, advertising is unrestricted provided a warning specified in the Act is included.[142]
In the US, advertising is heavily regulated. In accordance with s 5 of the Securities Act, all offers of securities must be made through a prospectus.[143] An offer is defined in the Securities Act to mean ‘every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value’.[144] This has been interpreted to include advertising relating to the issue.145 However, this rule has been relaxed somewhat by the SEC. During the pre-filing period, the SEC’s r 135 permits an issuer to publish a purely factual notice detailing such items as the name of the issuer and the proposed date of the issue.[146] In the subsequent effective period and post-effective period, the SEC’s r 134 provides only slightly more latitude, allowing an issuer to publish a factual notice detailing the issuer and the terms of the offer.
Since the CLERP Act, the Australian advertising restrictions are significantly less strict than those laws applicable in the US. That is, in Australia:
In both cases, the US more clearly restricts the level of advertising allowed.
There is significant support for the maintenance of a strict, US-style approach to advertising. In particular, certain commentators argue that investor protection may be compromised by allowing investors effectively to invest on the basis of unregulated advertising. According to Nicole Calleja, ‘advertising, press reports and publicity … can lead to an atmosphere of investor hysteria’.[147] This argument implies that significant intervention is necessary in order to protect vulnerable investors.[148] However, the strongest counter-argument is that sufficient protection exists for investors without the specific advertising requirements.[149] Even in Australia, investors ultimately cannot invest in securities without viewing a disclosure document and completing an application form. Moreover, any misleading or deceptive statements contained in advertising are subject to legal liability (discussed below in under the heading Statutory liability for inadequate disclosure). These counter-arguments suggest that in fact, Australia’s advertising restrictions could be further relaxed or even eliminated.
On balance, the Australian approach seems to achieve an appropriate level of intervention. In circumstances in which investor protection is very important, such as in relation to initial public offerings, advertising remains heavily restricted. In contrast, where information is already in the market, such as in relation to seasoned issues or subsequent to the lodgement and exposure of a disclosure document, advertising is not so strictly constrained. On those bases, it does not appear that the CLERP Act advertising reforms could have been improved by incorporating stricter, US-style restrictions.
Prior to the CLERP Act, liability for inadequate disclosure arose from a variety of legislative sources.[150] The most specific provision was s 996(1) of the Corporations Law (Cth), which directly prohibited false material or misleading statements in, or omissions from, prospectuses. Contravention of the Corporations Law (Cth) s 996(1) led to criminal liability, and a maximum penalty of AUS$20,000151 or imprisonment for five years, or both,152 or civil liability for the recovery of damages under the Corporations Law (Cth) s 1005.[153] However, s 996(1) of the Corporations Law (Cth) was subject to two defences in s 996(2) of the Act, where reasonable grounds existed for believing that a false or misleading statement was true,[154] or where a false or misleading omission was inadvertent.[155] The various entities liable under s 1005 of the Corporations Law (Cth) were outlined in s 1006 of the Act,[156] a provision accompanied by specific additional defences in the Corporations Law (Cth) ss 1007–11.[157]
Less specific, but arguably more effective bases for liability also existed under s 995(2) of the Corporations Law (Cth), s 52 Trade Practices Act 1974 (Cth) (TPA) and the state and territory Fair Trading Acts. Section 995(2) Corporations Law (Cth) prohibited conduct that was misleading or deceptive in connection with any dealing with securities. The broader scope of s 995(2) contrasted with the targeted prospectus focus of s 996(1) of the Corporations Law (Cth). Contravention of the Corporations Law (Cth) s 995(2) gave rise only to civil liability under s 1005 of the Act,[158] for the entities outlined in s 1006 Corporations Law (Cth). However, it appeared that the defences in ss 1007–11 did not apply to an action pursuant to s 995 of the Corporations Law (Cth), although that issue was ‘the subject of much debate’.[159] Section 52 of the Trade Practices Act provided a more general prohibition in relation to misleading or deceptive conduct, or conduct likely to mislead or deceive, and formed the basis for a civil action for damages against the issuer under s 82 Trade Practices Act. An action brought in relation to s 52 of the Trade Practices Act was subject to no defences. Similar civil causes of action existed under the state and territory Fair Trading Acts.[160]
This complex liability overlap was the subject of significant criticism, notably from the Lonergan Committee, a sub-committee of the Companies and Securities Advisory Committee,[161] the Corporations Law Simplification Task Force (the predecessor of CLERP)[162] and the Financial System Inquiry.[163] In response, the CLERP Act provides a ‘self-contained liability regime’ in the Corporations Act.164 Accordingly, the Trade Practices Act [165] and the state and territory Fair Trading Acts no longer apply to prospectus disclosure. Under the Corporations Act, false or misleading statements or omissions in disclosure documents are now prohibited under s 728 of the Corporations Act. This prohibition forms the basis for criminal liability,[166] subject to penalties of up to AUS$20,000[167] or five years’ imprisonment, 200 penalty units. or both.[168] A single civil cause of action exists under the Corporations Act s 729, which also outlines the entities liable.[169] Defences to such actions are contained in ss 731–33 of the Corporations Act.[170]
The Securities Act incorporates an exacting liability regime, described by some as draconian,[171] envisaging both criminal and civil liability for improper disclosure. Criminal liability arises under s 17(a) Securities Act, the Act’s general anti-fraud provision, in relation to any person who offers securities for sale through a registration statement that contains a material misstatement or omission. The maximum criminal penalty is US$10,000 or five years’ imprisonment.[172] Civil liability arises from two principal sources:
section 12(a)(1) of the Securities Act makes any person who offers or sells a security without fulfilling the registration requirements liable to pay damages to the purchaser of that security;
section 11 of the Securities Act extends liability to a number of entities[173] where a registration statement contains a material misstatement or omission, and where an investor relied on that statement or omission.[174]
The issuer is effectively strictly liable in this respect,175 while a number of due diligence defences are available to individual defendants.[176] Civil liability may also arise under s 17(a) Securities Act, although the interpretation of that provision remains unclear.[177]
The above discussion serves primarily to highlight the clear parallels between the Australian and US liability systems. In both jurisdictions, criminal sanctions are available, if rarely implemented.[178] Similarly, in each country, civil liability arises for misleading statements or omissions, subject to due diligence defences that centre on reasonable investigations and reasonable beliefs.
If any distinction is apparent, it lies in the relative complexity of the two regimes. As a consequence of the CLERP Act, Australia’s fundraising system is now characterised by a relatively clear set of self-contained liability provisions. In contrast, the US relies primarily on a range of provisions whose clarity is somewhat diminished by the lack of certainty relating to their application.[179] While the US system is nonetheless serviceable, the straightforward nature of Australia’s liability provisions suggests that the CLERP Act changes could not have been significantly improved.
At a basic doctrinal level, the evidence presented above confirms Paul Redmond’s comment that ‘the US experience … neatly demonstrates alternative approaches [to fundraising] which might be taken by government.[180] In particular, there is considerable divergence in relation to the basic disclosure requirements, the role of the securities market regulator and restrictions on advertising. To a lesser extent, differences are also apparent in relation to the disclosure requirements for financial projections, SME fundraising regulation, and liability for inadequate disclosure.
At a more fundamental level, the evidence also supports a consistent finding in relation to each of the six dimensions. In each case, after an analytical evaluation of the alternative approaches, the Australian approach appears to be appropriately suited to the features of the Australian market. Thus, the paper’s conclusion is that while a comparative examination of the US fundraising regime provides valuable insights, it is unlikely that the CLERP Act reforms could have been significantly improved by implementing aspects of the US system.
Such a conclusion is necessarily subject to certain limitations. Most importantly, the scope of this study is strictly constrained. Rather than narrow its methodology by focusing on a particular component of the CLERP Act fundraising reforms, the study seeks to provide a broad overview of those reforms in a comparative context. Future studies may extend this work by examining particular aspects of the Australian system by reference to other jurisdictions. Similarly, the study disregards certain potentially important changes implemented by the CLERP Act in order to provide a succinct and concise coverage.[181] Subsequent works may build on the study by addressing a different range of reforms.
* LLB, TC Beirne School of Law, The University of Queensland, Brisbane, Queensland. 1 The program, initially named the Corporate Law Simplification Program, was established in 1993 by the Labor federal government. It was renamed CLERP in 1996 by the Liberal federal government upon its accession to power. 2 Callinan, I, ‘The Corporate Law Economic Reform Program: an Overview’, paper presented at the Corporations Law Update Conference, 1998, Sydney, 2. 3 For a general summary of these reforms, see Baxt, R et al, Clerp Explained: The Corporate Law Economic Reform Program Act 1999, 2000, Sydney: CCH Australia Ltd; Black, A et al, CLERP and the New Corporations Law, 2nd edn, 2000, Sydney: Butterworths; Callinan, op cit, fn 2; Ford, HAJ, Austin, RP and Ramsay, IM, An Introduction to the CLERP Act 1999: Australia’s New Company Law, 2000, 1st edn, Sydney: Butterworths. 4 See www.asic.gov.au. Until 1 July 1998, ASIC was named the Australian Securities
Commission (ASC). 5 Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 1.
[6] See www.asic.gov.au.
[7] CLERP, Fundraising: Capital Raising Initiatives to Build Enterprise and Employment, 1997, Canberra: AGPS.
[8] Given the primarily state-based nature of Canada’s corporations regulation, the Issues Paper focuses on Ontario law.
[9] Op.cit, Baxt, fn 3; op cit, Black et al, fn 3; op cit, Callinan, fn 2; op cit, Ford, Austin and Ramsay, fn 3; Grose, C, ‘Will the small business fundraising reforms proposed by CLERP really make it easier for SMEs to raise capital in Australia?’ (1998) 16(4) Company and Securities Law Journal 297; Hone, G, ‘Fundraisings and prospectuses – the CLERP proposals’ (1998) 16(4) Company and Securities Law Journal 311; Lessing, J, ‘Overview of the CLERP reforms regarding fundraising and takeovers’ [1999] BondLawRw 19; (1999) 11(2) Bond Law Review 287.
[10] Redmond, P, Companies and Securities Law: Commentary and Materials (2001) Lawbook Co [1–2], Chapter 12: ‘Corporate fundraising’, www.lawbookco.com.au at 25 August 2002.
[11] The six dimensions identified are broadly consistent with the ‘key features of the new regulatory arrangements’ identified by the Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 13. They are also consistent with issues identified in the prior literature as being of greatest importance. See Golding, G, ‘The CLERP fundraising proposals’, paper presented at the Corporations Law Reform Conference, 1998 Sydney; see also op cit, Hone, fn 9.
[12] The Corporations Law (Cth) was subsidiary legislation contained in s 82 of the Corporations Act 2001 (Cth). It commenced on 1 January 1991, replacing earlier co-operative schemes of companies and securities codes. For a summary of those schemes, see Ford, HAJ, Austin, RP and Ramsay, IM, Ford’s Principles of Corporations Law, 2001, 10th edn, Sydney: Butterworths, 42–48; Lipton, P and Herzberg, A, Understanding Company Law, 2001, 10th edn, Sydney: LBC, 4–6; Redmond, P, Companies and Securities Law: Commentary and Materials, 2000, 3rd edn, Sydney: LBC, 51–52; Tomasic, R, Jackson, J and Woellner, R, Corporations Law: Principles, Policy and Process, 2002, 4th edn, Sydney: Butterworths, 21–24. This study is principally concerned with the transition effected by the CLERP Act 1999 (Cth), and therefore focuses on the regulatory environment existing under the Corporations Law (Cth).
[13] Section 1018 of the Corporations Law (Cth).
[14] Section 1017 of the Corporations Law (Cth). A list of excluded issues, offers and invitations was contained in s 66 of the Corporations Law (Cth). See Azzi, J, ‘Disclosure in Prospectuses’ (1991) 9(4) Company and Securities Law Journal 205, 219–22; Baxt, R, Ford, HAJ and Black, A, Securities Industry Law, 1996, 5th edn, Sydney: Butterworths, 41–48; Ford, HAJ, Austin, RP and Ramsay, IM, Ford’s Principles of Corporations Law, 1999, 9th edn, Sydney: Butterworths, 883–90; Lipton, P and Herzberg, A, Understanding Company Law, 1999, 8th edn, Sydney: LBC, 131–33; Taylor, M, ‘Capital raising in Australia’, in Walker, G, Fisse, B and Ramsay, I (eds), Securities Regulation in Australia and New Zealand, 1998, 2nd edn, Sydney: LBC, 293–96. Some of these exclusions related to SME fundraising, and are discussed in detail in the section in this paper headed SME fundraising.
[15] The specific requirements included the use of type no smaller than eight point Times (s 1021(2) of the Corporations Law (Cth)), the inclusion of the issue date of the prospectus (Corporations Law (Cth) s 1021(3)), the inclusion of a statement that no securities would be allotted later than 12 months after the issue date of the prospectus (s 1021(5) of the Corporations Law (Cth)) and the disclosure of the interests of directors, proposed directors and experts in the company (s 1021(6) of the Corporations Law (Cth)).
[16] Further guidance as to the meaning of this general disclosure test was provided in s 1022(2) and (3) of the Corporations Law (Cth). Pursuant to Corporations Law (Cth) s 1022(2), such disclosure was limited to information that was known to the issuer, or to information that would be reasonable for the issuer to obtain by making inquiries. Section 1022(3) of the Corporations Law (Cth) also indicated a number of factors that could be taken into account in determining what information to include in a prospectus. These factors included the nature of the securities and the corporation, the kinds of persons likely to consider subscribing for the securities, the reasonable knowledge of professional advisers and the extent to which likely subscribers already have information relating to the securities.
[17] Op cit, Azzi, fn 14, 226–28; op cit, Baxt, Ford and Black, fn 14, 64–65; op cit, Ford, Austin and Ramsay, fn 14, 898–02; op cit, Lipton and Herzberg, fn 14, 135; op cit, Taylor, fn 14, 298.
[18] The Corporations Act 2001 (Cth) commenced on 15 July 2001. Between the introduction of the CLERP Act 1999 (Cth) and the commencement of the Corporations Act 2001 (Cth), the relevant provisions of the Corporations Act 2001 (Cth) were simply provisions of the Corporations Law (Cth).
[19] Sections 704–08 of the Corporations Act 2001 (Cth). The section in this paper headed Disclosure requirements focuses on the disclosure requirements relating to prospectuses. However, the section headed SME fundraising in this paper considers in detail some alternative disclosure documents of particular relevance to SMEs.
[20] Such exemptions are now largely contained in s 708 of the Corporations Act 2001 (Cth). See op cit, Ford, Austin and Ramsay, fn 12, 954–64; op cit, Lipton and Herzberg, fn 12, 149–52; op cit, Tomasic, Jackson and Woellner, fn 12, 732–33. Some of these exclusions relate to SME fundraising and are discussed in detail in the section headed SME fundraising in this paper.
[21] The specific requirements include the disclosure of terms and conditions of the offer (s 711(1) of the Corporations Act 2001 (Cth)), the disclosure of the interests of the directors, the proposed directors, the advisors, the promoters and the underwriters of the company (s 711(2) and (4) of the Corporations Act 2001 (Cth)), the disclosure of the fees and benefits to the directors, the proposed directors and the advisers of the company (s 711(3) of the Corporations Act 2001 (Cth)), the disclosure of the admission of the securities or the application for the admission of the securities to quotation on a financial market (s 711(5) of the Act 2001 (Cth)), the disclosure of the expiry date of the prospectus (s 711(6) of the Corporations Act 2001 (Cth)) and the disclosure of the fact that the prospectus has been lodged with ASIC (s 711(7) of the Corporations Act 2001 (Cth)).
[22] Op cit, Baxt, fn 3, 177; op cit, Black et al, fn 3, 23; op cit, Ford, Austin and Ramsay, fn 3, 53.
[23] In conjunction with the Securities Exchange Act of 1934 (which regulates the secondary market in securities trading), the Securities Act of 1933 represented a response by President Franklin Roosevelt’s federal government to the Great Depression. See Keller, E and Gehlmann, GA, ‘A historical introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934’ (1988) 49 Ohio State Law Journal 329, 337–42; Seligman, J, ‘The historical need for a mandatory corporate disclosure system’ (1983) 9 Journal of Corporation Law 1, 27. It is also important to note that because art I United States Constitution § 8 restricts federal securities regulation to interstate commerce, the Securities Act of 1933 is supplemented by individual state laws regulating fundraising. Indeed, some controversy initially surrounded the ability of the federal government to undertake securities regulation at all, although the United States Supreme Court rejected such constitutional objections in Jones v SEC, [1936] USSC 73; 298 US 1 (1936). While state laws are important, especially given that they often require review of the merits of a prospectus, the pre-eminence of the Securities Act 1933 (jurisdiction) renders their consideration beyond the scope of this paper.
[24] Securities Act of 1933, 38 USC § 5(a) (1994).
[25] See Dunfee, TW et al, Modern Business Law, 1989, 2nd edn, New York: Random House, 910–15; Eisenberg, M, Corporations and Other Business Organisations: Cases and Materials, 2000, 8th edn, New York: Foundation Press, 1310–42; Hazen, TL, The Law of Securities Regulation, 1996, 3rd edn, St Paul: West Publishing Co, 162–286; Pinto, AR and Branson, DM, Understanding Corporate Law, 1999, 1st edn, New York: Matthew Bender, 143–47. Some of these exceptions relate to SME fundraising, and are discussed in detail in the section in this
paper headed SME fundraising.
[26] Securities Act of 1933, 38 USC § 7 (1994).
[27] Ibid.
[28] Ibid, § 10 Sched A.
[29] Ibid, § Sched A(1).
[30] Ibid, § Sched A(2).
[31] Ibid, § Sched A(3).
[32] Ibid, § Sched A(25).
[33] Ibid, § Sched A(26).
[34] Accordingly, a discussion of the extensive debate relating to the need for mandatory
disclosure in securities markets is beyond the scope of this paper.
[35] Op cit, CLERP, fn 7, 13–14.
[36] Section 1017 of the Corporations Law (Cth).
[37] Ibid, s 1018.
[38] Op cit, Golding, fn 11, 6–7.
[39] PricewaterhouseCoopers, Survey of Sharemarket Floats 2001, 2002, Sydney:
PricewaterhouseCoopers, 15.
[40] Lee, I et al, ‘The costs of raising capital’ (1996) 19 Journal of Financial Research 59, 62. See also Decker, W, ‘The attractions of the US securities markets to foreign issuers and the alternative methods of accessing the US markets: from the issuer’s perspective’ (1994) 17 Fordham International Law Journal 10; Jensen, F, ‘The attractions of the US securities markets to foreign issuers and the alternative methods of accessing the US markets: from a legal perspective’ (1994) 17 Fordham International Law Journal 25.
[41] Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 56; Explanatory Memorandum, Corporations Bill 1988 (Cth) 743, 747; op cit, Azzi, fn 14, 227; op cit, Baxt, fn 3, 177; op cit, CLERP, fn 7, 13–14; Wallis, S, Financial System Inquiry: Final Report,
[1997] , Canberra: AGPS, 265.
[42] Ibid, Wallis, 265.
[43] Op cit, CLERP, fn 7, 13.
[44] See Callum, C and Law, L, ‘Soft information disclosure requirements under the Corporations Law’ (2001) 29(2) Australian Business Law Review 149; Kyrwood, J, ‘Disclosure of forecasts in prospectuses’ (1998) 16(5) Company and Securities Law Journal 350; Callum, C and Law, L, ‘Is there an obligation to disclosure earnings forecasts in IPO prospectuses?’ (1997) 10(1) Accounting Research Journal 44; Kriedmann, R and Walker, S, ‘Forecasts: misleading or essential?’ (1997) 15(1) Company and Securities Law Journal 47.
[45] Issued 4 August 1997.
[46] ASIC Practice Note 67 at 1.
[47] In a takeover context, s 750 of the Corporations Law (Cth) required an offeror to produce a disclosure document, referred to as a Part A statement, for the information of shareholders and directors of the target company. Section 750 cl 17 of the Corporations Law (Cth) required a Part A statement to include ‘information material to the making of a decision by an offeree whether or not to accept an offer’.
[48] (1995) 16 ACSR 463. For a discussion of Pancontinental Mining Ltd v Goldfields Ltd, see Nathanson, D, ‘A modest judgment of what should and should not be in takeover documents? Or a new disclosure standard for scrip takeovers and new issue prospectuses?’ (1995) 18(2) University of New South Wales Law Journal 523.
[49] Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463, 475.
[50] Ibid.
[51] See Solomon Pacific Resources NL v Acacia Resources NL (1996) 19 ACSR 238; GIO Australia
Holdings Ltd v AMP Insurance Investment Holdings Pty Ltd (1998) 30 ACSR 102; AAPT v Cable & Wireless Optus Ltd (1999) 32 ACSR 63.
[52] Op cit, Callum and Law, fn 44, 150; op cit, Ford, Austin and Ramsay, fn 14, 901; op cit, Kyrwood, fn 44, 358; op cit, Callum and Law, fn 44, 57; op cit, Kriedmann and Walker, fn 44, 50–51.
[53] Op cit, Baxt, fn 3, 179; op cit, Black et al, fn 3, 27; op cit, Ford, Austin, Ramsay, fn 3, 54.
[54] Op cit, Baxt, fn 3, 177. Note, however, that while the obligation to disclose a financial projection is effectively unchanged by the CLERP Act 1999 (Cth), the onus of proof in establishing liability for improper disclosure of a financial projection is now upon the claimant rather than the defendant (s 728(2) of the Corporations Act 2001 (Cth) compare to
s 765(2) of the Corporations Law (Cth)).
[55] ASIC Policy Statement 170 at 1.
[56] Op cit, Baxt, fn 3.
[57] Securities Act of 1933, 38 USC § 7, 10, Sched A (1994).
[58] See www.sec.gov.
[59] Goldring, GF, ‘Mandatory disclosure of corporate projections and the goals of securities regulation’ (1981) 81(7) Columbia Law Review 1525, 1525; op cit, Hazen, fn 25, 151; Ratner, DL, Securities Regulation, 1988, 3rd edn, St Paul: West Publishing Co, 38-39; Schneider, CW, ‘Nits, grits and soft information in SEC filings’ (1972) 121(2) University of Pennsylvania Law Review 254, 254–55.
[60] See, for example, Mann, BA, ‘Prospectuses: unreadable or just unread? – A proposal to reexamine policies against permitting projections’ (1971) 40(2) George Washington Law Review 222; op cit, Schneider, fn 59.
[61] Item 10 SEC Regulation S–K.
[62] The term ‘forward-looking statement’ is defined in SEC r 175(c) to mean: ‘(1) a statement containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items; (2) a statement of management’s plans and objectives for future operations; (3) a statement of future economic performance contained in management’s discussion and analysis of financial condition and results of operations …; or (4) disclosed statements of the assumptions underlying or relating to any of the statements’.
[63] SEC r 175(a).
[64] See, for example, Eisenberg v Gagnon, 766 F 2d 770 (3rd Cir, 1985); Goldman v Belden, [1985] USCA2 146; 754 F 2d 1059 (2nd Cir, 1985); In re Washington Public Power Supply System Securities Litigation, 650 F Supp 1346 (WD Wash 1986). See generally op cit, Hazen, fn 25, 152.
[65] See, for example, Hillson Partners Ltd Partnership v Adage, 42 F 3d 204 (4th Cir, 1994); Kowal v MCI Communications Corp, [1994] USCADC 27; 16 F 3d 1271 (DC Cir, 1994). See generally op cit, Hazen, fn 25, 152–53.
[66] Foundation papers establishing the inaccuracy and positive bias of management earnings forecasts include Basi, B, Carey, K and Twark, R, ‘A comparison of the accuracy of corporate and security analysts’ forecasts of earnings’ (1976) 51 Accounting Review 244; Daily, R, ‘The feasibility of reporting forecasted information’ (1971) 46 Accounting Review 686; Imhoff, E, ‘The representativeness of management earnings forecasts’ (1978) 53 Accounting Review 836; McDonald, C, ‘An empirical examination of the reliability of published predictions of future earnings’ (1973) 48 Accounting Review 502.
[67] Foundation papers establishing the value relevance of management earnings forecasts include Gonedes, NJ, Dopuch, N and Penman, S, ‘Disclosure rules, information-production, and capital market equilibrium: the case of forecast disclosure rules’ (1976) 14 Journal of Accounting Research 89; Lev, B and Penman, S, ‘Voluntary forecast disclosure, nondisclosure, and stock prices’ (1990) 28 Journal of Accounting Research 49; Penman, S, ‘An empirical investigation of the voluntary disclosure of corporate earnings forecasts’ (1980) 18
Journal of Accounting Research 132.
[68] SEC r 175.
[69] Section 710 of the Corporations Act 2001 (Cth).
[70] ASIC Policy Statement 170 at 3.
[71] Section 1018(1)(c) of the Corporations Law (Cth).
[72] Ibid, s 1020A(1). See also reg 7.12.08 of the Corporations Regulations (Cth), which prescribes
the 14-day period.
[73] Section 1020A(2) of the Corporations Law (Cth).
[74] Op cit, CLERP, fn 7, 65. See also op cit, Ford, Austin and Ramsay, fn 14, 898; op cit, Lipton and
Herzberg, fn 14, 134; Australian Securities Commission, ‘Vetting of prospectuses’ (1993) 11 Company and Securities Law Journal 119, 120; op cit, Taylor, fn 14, 308.
[75] Op cit, Ford, Austin and Ramsay, fn 14, 898; op cit, Lipton and Herzberg, fn 14, 134.
[76] Australian Securities Commission, ASC Procedures Manual – Prospectuses, 1993, Sydney: LBC, 6–7; op cit, Baxt, Ford and Black, fn 14, 73–74; op cit, Ford, Austin and Ramsay, fn 14, 910; op cit, Lipton and Herzberg, fn 14, 134–35; op cit, Taylor, fn 14, 324.
[77] Section 1033 of the Corporations Law year (Cth). The objectives of the post-vetting program were outlined in ASIC Policy Statement 56 (Prospectuses) at 8. ASIC Policy Statement 56 was issued on 20 May 1996, and was last updated on 9 February 2000.
[78] Sections 718 and 727(1) of the Corporations Act 2001 (Cth).
[79] Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 65.
[80] According to s 727(3) of the Corporations Act 2001 (Cth), the seven-day period may be
extended to 14 days by ASIC.
[81] Section 727(3) of the Corporations Act 2001 (Cth).
[82] Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 65.
[83] Issued 17 February 2000; updated 7 June 2000.
[84] ASIC Policy Statement 152 at 12. See also Richard Cockburn, ASIC Speaks on Fundraising,
Takeovers and CLERP (2001) Australian Securities and Investments Commission, www.asic.gov.au at 25 August 2002.
[85] Section 739 of the Corporations Act 2001 (Cth).
[86] ASIC Policy Statement 152 at 12–13.
[87] Securities Act of 1933, 38 USC § 5 (1994).
[88] Op cit, Hazen, fn 25, 82; Thomson, J and Cramer, K, ‘United States’, in Euromoney Books, International Securities Law, 1996, Euromoney Books: London, 444.
[89] Op cit, Thomson and Cramer, fn 88, 444–45. See also op cit, Dunfee, fn 25, 908-10; op cit, Hazen, fn 25, 138; Lieberman, JK and Siedel, GJ, Business Law and the Legal Environment, 1988, 2nd edn, New York: Harcourt Brace Jovanovich, 1032–33; PricewaterhouseCoopers, Securities Regulations, www.pwcglobal.com at 20 September 2002; op cit, Ratner, fn 59, 40; US Securities and Exchange Commission, The Laws that Govern the Securities Industry, www.sec.gov/about/laws.shtml at 10 September 2002.
[90] Securities Act of 1933, 38 USC § 8(b) (1994).
[91] Ibid, § 8(a).
[92] Ibid, § 8(a).
[93] Ibid, § 8(d).
[94] Op cit, CLERP, fn 7, 65.
[95] US Securities and Exchange Commission, ‘The SEC: who we are, what we do’, www.sec.gov
at 25 September 2002.AQ again???
[96] Securities and Exchange Commission, 2001 Annual Report, 2001, Washington DC: SEC, 170.
[97] Australian Securities and Investment Commission, Annual Report 2000-2001, 2001, Sydney:
ASIC, preamble. 98 Ibid.
[99] Op cit, CLERP, fn 7, 13–14. ASIC did not reveal the number of stop orders issued in 1999–2000, but directly stated that the 81 stop orders issued in 2000–01 represented an increase on the previous period.
[100] Op cit, CLERP, fn 7, 13–14.
[101] Section 1018 of the Corporations Law (Cth).
[102] Ibid, s 66(2)(d), (3)(d).
[103] Ibid, s 66(2)(a), (3)(a), (3)(ba).
[104] Op cit, CLERP, fn 7, 7; Explanatory Memorandum, Corporate Law Economic Reform
Program Bill 1998 (Cth) at 1, 13. See also op cit, Baxt, fn 3, 152; op cit, Black et al, fn 3, 2–3; op cit, Ford, Austin and Ramsay, fn 3, 41; op cit, Grose, fn 9; op cit, Hone, fn 9, 312; Whincop, MJ, ‘Due diligence in SME fundraising: reform choices, economics and empiricism’ (1996) 19(2) University of New South Wales Law Journal 433, 434.
[105] Section 709(4) of the Corporations Act 2001 (Cth). The AUS$5 million limit includes all amounts previously raised by the issuer.
[106] Section 715 of the Corporations Act 2001 (Cth). Essentially, s 715 of the Corporations Act 2001 (Cth) sets out a checklist of the following disclosures: (a) the issuer and the nature of the securities; (b) the body’s business; (c) what the funds raised by the issuer are to be used for;
(d) the nature of the risks involved in investing in the securities; (e) details of all amounts payable in respect of the securities (including any amounts by way of fee, commission or charge); (f) a statement that: (i) a copy of the OIS has been lodged with ASIC; and (ii) ASIC takes no responsibility for the content of the OIS; (g) a statement that the OIS is not a prospectus and that it has a lower level of disclosure requirements than a prospectus; (h) a statement that investors should obtain professional investment advice before accepting the offer; (i) a copy of a financial report for the body; and (j) any other information that the regulations require to be included in the OIS. See also op cit, Grose, fn 9; op cit, Hone, fn 9; Chapple, L, Kazakoff, A and Karl, A, ‘Market response to offer information statements’, paper presented at the AAANZ Conference, July 2001, Auckland, since published as 21(4) Company and Securities Law Journal 231–47); op cit, Lessing, fn 9, 290.
[107] Section 708(1) of the Corporations Act 2001 (Cth).
[108] Ibid, s 708(8)(a), (b).
[109] Ibid, s 708(8)(c)(i).
[110] Ibid, s 708(8)(c)(ii).
[111] SEC rr 251–63.
[112] SEC rr 501–08.
[113] The required contents of an offering circular are outlined in SEC r 253.
[114] SEC r 253. See also op cit, Eisenberg, fn 25, 1323.
[115] Op cit, Hazen, fn 25, 198.
[116] Op cit, Eisenberg, fn 25, 1318–19; op cit, Hazen, fn 25, 207; Mohney, MR, ‘Regulation D: coherent exemptions for small businesses under the Securities Act of 1933’ (1982) 24(1) William and Mary Law Review 121.
[117] The disclosure requirements are defined in SEC r 502 to include relatively limited financial and non-financial information.
[118] SEC r 501(1)(1).
[119] Ibid, r 501(1)(6).
[120] Ibid, r 501(1)(5).
[121] Section 708(2)(b)(i) of the Corporations Act 2001 (Cth).
[122] Ibid, s 708(2)(b)(ii).
[123] Ibid, s 708(2)(b)(iii).
[124] SEC r 504.
[125] Ibid, r 505.
[126] Op cit, CLERP, fn 7, 51.
[127] Op cit, Mohney, fn 116, 166.
[128] The issue of securities hawking, although related to advertising, is beyond the scope of this paper.
[129] Calleja, N, ‘Current issues relating to prospectus advertising and securities hawking’ (2000) 18(1) Company and Securities Law Journal 23.See also op cit, Baxt, Ford and Black, fn 14, 37; op cit, CLERP, fn 7, 33; Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 58; op cit, Ford, Austin and Ramsay, fn 3, 893; op cit, Hone, fn 9, 314;
op cit, Lipton and Herzberg, fn 12, 144; op cit, Taylor, fn 14, 311.
[130] Section 1025(3) of the Corporations Law (Cth).
[131] Ibid, s 1026(3).
[132] Ibid, s 1026(2). A report could be published under s 1026(2) of the Corporations Law (Cth) if it was: (a) a report relating to the affairs of a listed body corporate submitted to and published by ASIC; (b) a report of proceedings at a general meeting; (c) a report published on behalf of a body corporate by or on behalf of its directors with ASIC’s consent; or (d) a news report or genuine comment published in a newspaper, periodical or on radio or television.
[133] Section 1084 of the Corporations Law (Cth).
[134] Section 1025(2) of the Corporations Law (Cth). An advertisement could be published under s 1025(2) of the Corporations Law (Cth) if it: (a) was published by the issuer; (b) stated that a prospectus had been lodged with ASIC; (c) specified the date of the prospectus; (d) stated where a copy of the prospectus could be obtained; (e) stated that issues would only be made on receipt of an application form referred to in and attached to a copy of the prospectus; and
(f) specified the interest that the publisher of the advertisement had in the success of the issue.
[135] Section 734(2) of the Corporations Act 2001 (Cth).
[136] Ibid, s 734(5)(b). An advertisement may be published under s 734(5)(b) of the Corporations Act 2001 (Cth) if it: (a) identifies the issuer; (b) states that a disclosure document will be available in relation to the issue; (c) states that issues will be made on the basis of an application form that will be in the disclosure document; and/or (d) states how to arrange to receive a copy of the disclosure document.
[137] Section 734(5)(a) of the Corporations Act 2001 (Cth). The minimal disclosure required by s 734(5)(a) of the Corporations Act 2001 (Cth) is a statement that a disclosure document will be made available in relation to the issue, and that issues will be made on the basis of an
application form that will be in the disclosure document.
[138] Op cit, Calleja, fn 129, 38.
[139] Op cit, Calleja, op cit, fn 129, 38; op cit, CLERP, fn 7, 33; Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 58; op cit, Ford, Austin and Ramsay, fn 3, 966. Under s 674 of the Corporations Act 2001 (Cth) and ASX Listing Rule 3.1, entities listed on the ASX are obliged to disclose information that is not generally available and which a reasonable person would expect to have a material effect on the price of the security.
[140] Section 734(7) of the Corporations Act 2001 (Cth). According to s 734(7) of the Corporations Act 2001 (Cth), a report may be published if it: (a) is a notice or report by the issuer about its affairs to ASIC; (b) is a notice or report of the issuer’s general meeting; (c) is a notice or report published by the issuer in relation to other matters; (d) is a news report or genuine comment in a newspaper or periodical or on radio or television; or (e) is a report about the issue published by an unrelated party.
[141] Section 741 of the Corporations Act 2001 (Cth).
[142] Ibid, s 734(6). In particular, s 734(6) of the Corporations Act 2001 (Cth) requires an advertisement to include a notice that issues will be made on the basis of an application form
in the disclosure document.
[143] Securities Act of 1933, 38 USC § 5(c) (1994).
[144] Securities Act of 1933, 38 USC § 2(a)(3) (1994).
[145] See, for example, In the Matter of Carl M Loeb, Rhoades & Co and Dominick and Dominick, 38
SEC 843 (SEC, 1959).
[146] Violations of s 5 of the Securities Act during the pre-filing period are referred to as gun-
jumping. See, for example, op cit, Hazen, fn 25, 81. 147 Op cit, Calleja, op cit, fn 129, 27.
[148] See also op cit, Black et al, fn 3, 39; McKenzie, R, ‘“Jumping the gun” – an examination of the
law relating to pre-prospectus advertising of securities issues in Australia’ (1993) 1 Murdoch
University Electronic Journal of Law 1, Part 5.
[149] CASAC, Prospectus Law Reform Sub-Committee Report, 1992, Sydney: CASAC, para 73; op cit, Calleja, fn 129, 27.
[150] The common law was also relevant to liability for inadequate disclosure. See op cit, Ford, Austin and Ramsay, fn 3, 910–13. However, a discussion of the common law is beyond the scope of this paper.
[151] 200 penalty units.
[152] Schedule 3 to the Corporations Law (Cth).
[153] Alternative remedies were also possible; see in particular ss 1324–25 of the Corporations Law
(Cth).
[154] Section 996(2)(a) of the Corporations Law (Cth).
[155] Ibid, s 996(2)(b).
[156] The entities liable to pay compensation included the company, the directors of the company, certain proposed directors, promoters, certain experts, certain stockbrokers, share brokers and underwriters, certain auditors, bankers and solicitors, and certain other advisors.
[157] No entity was liable if the plaintiff knew of the false or misleading nature of the relevant representation (s 1007 of the Corporations Law (Cth)). No liability attached to directors who did not consent to becoming directors (s 1008 of the Corporations Law (Cth)), or to directors who had reasonable grounds for believing that the relevant representation was correct (s 1008A of the Corporations Law (Cth)). The liability of experts was limited to their own statements (ss 1009–10 of the Corporations Law (Cth)), while a further general defence was available if the false or misleading statement or omission was due to a reasonable mistake, due to reasonable reliance on information supplied by another person, or due to the act or default of another person, to an accident, or to some other cause beyond the entity’s control (s 1011 of the Corporations Law (Cth)).
[158] Section 995(3) of the Law (Cth).
[159] Croker, D, Prospectus Liability Under the Corporations Law, 1998, Melbourne: CCLSR, 37. Whereas a direct linguistic connection existed between s 996 of the Corporations Law (Cth) and s 1006 of the Corporations Law (Cth) (both provisions were phrased in terms of ‘false or misleading’ statements or omissions), s 995 of the Corporations Law (Cth) was instead expressed in terms of misleading or deceptive conduct. Moreover, it was the drafters’ expressed intention that Corporations Law (Cth) s 995 should operate in terms similar to s 52 of the Trade Practices Act 1974 (Cth), a strict liability provision. See also Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 59; op cit, CLERP, fn 7, 38; op cit, Golding, fn 11, 21; op cit, Hone, fn 9, 318; Legg, M, ‘Misleading and deceptive conduct in prospectuses’ (1996) 14(1) Company and Securities Law Journal 47.
[160] Fair Trading Act 1985 (Vic); Fair Trading Act 1987 (NSW); Fair Trading Act 1987 (Qld); Fair Trading Act 1987 (SA); Fair Trading Act 1987 (WA); Fair Trading Act 1990 (Tas); Fair Trading Act 1990 (NT); Fair Trading Act 1992 (ACT).
[161] CASAC, op cit, fn 150.
[162] Corporations Law Simplification Task Force, Section 52 Trade Practices Act and Dealings in
Securities, 1996, Canberra: AGPS.
[163] Op cit, Wallis, fn 41.
[164] Explanatory Memorandum, Corporate Law Economic Reform Program Bill 1998 (Cth) 60.
[165] The Trade Practices Act 1974 (Cth) was not directly amended by the CLERP Act 1999 (Cth). It was amended by the Financial Sector Reform (Consequential Amendments) Act 1998 (Cth), which provided, inter alia, that the Trade Practices Act 1974 (Cth) had no operation in relation to prospectuses after 1 July 1998. See Trade Practices Act 1974 (Cth) s 51AF(2)(a) (inserted by Financial Sector Reform (Consequential Amendments) Act 1998 (Cth)) Sched 2
(27) which reads ‘sections 52 and 55A [TPA] do not apply to conduct engaged in relation to financial services’. Schedule 2 item 7 inserts Division 2 ASIC Act, including ASIC Act 2001 (Cth) s 12DA, transferring powers previously held by the Australian Competition and Consumer Commission (ACCC) under the Trade Practices Act 1974 (Cth) to ASIC. See op cit, Ford, Austin and Ramsay, fn 3, 930.
[166] Section 728(3) of the Corporations Act 2001 (Cth). 167
[168] Schedule 3 to the Corporations Act 2001 (Cth).
[169] Ibid, s 729(1). The entities liable include the issuer, directors of the issuer (including proposed directors), the underwriter and any other person named in the disclosure document with their consent.
[170] Essentially, these defences are due diligence defences, available in circumstances where an issuer made reasonable inquiries and had a reasonable belief in the adequacy of the disclosure (ss 731–32 of the Corporations Act 2001 (Cth)), or where reasonable reliance was
placed on another person’s statement (s 733 of the Corporations Act 2001 (Cth)).
[171] Op cit, Pinto and Branson, fn 25, 141.
[172] Securities Act of 1933, 38 USC § 24 (1994).
[173] The entities liable are outlined in Securities Act of 1933, 38 USC § 11(a)(1)–(5) (1994), and include persons who signed the registration statement, directors (including proposed directors), experts such as accountants, engineers or appraisers, and underwriters.
[174] Securities Act of 1933, 38 USC § 11(a) (1994). See also Securities Act of 1933, 38 USC § 12(a)(2) (1994), which provides a similar but supplementary basis for liability, albeit not dependent on the Act’s registration requirements.
[175] Securities Act of 1933, 38 USC § 11(b) (1994).
[176] Ibid, § 11(b) (1994). The primary defence, under Securities Act of 1933, 38 USC § 11(b(3)) (1994), is available where a defendant ‘had, after reasonable investigation, reasonable ground to believe, and did believe … that the statements … were true and that there was no omission’.
[177] Op cit, Dunfee, fn 25, 916; op cit, Hazen, fn 25, 363–64; op cit, Lieberman and Siedel, fn 89, 1033.
[178] In relation to Australia, see op cit, Golding, fn 11, 2. In relation to the United States, see op cit, Keller and Gehlmann, fn 23, 344; ‘Federal regulation of securities: some problems of civil liability’ (1934) 48(1) Harvard Law Review 107, 108.
[179] See in particular the discussion in fn 177 relating to Securities Act of 1933, 38 USC § 17(a) (1994).
[180] Op cit, Redmond, fn 10, 1–2.
[181] For example, the CLERP Act 1999 (Cth) also implemented changes in relation to securities hawking, electronic commerce and governmental immunity.
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