Companies aim to fool investors
NOT only does the rot start from the top in the corporate world, it also starts at the beginning of a company’s existence – the fundraising stage.
Embarrassingly for our reputation and tragically for investors, almost one in four prospectuses the Australian Securities and Investments Commission checked during the past six months had areas of concern and required correction.
No surprise that most of these concerns involved hiding information from would-be investors, including inadequate risk and business model disclosure, and insufficient details about directors and what the money would be used for – basically trying to get people to part with their money by keeping important stuff from them.
The latest ASIC report about corporate finance activity also highlighted plenty of other dodgy practices by board members.
There is the old sneaky downgrade trick. After issuing the prospectus with its attractive profit forecast, the board issues a downgrade (or two) – all in the name of continuous disclosure, of course. And when it comes to reporting the actual profit, the board only compares it with the latest downgrade, not the original forecast in the prospectus.
This more honest profit comparison, even if it’s belated for all those investors who hand over their money, is still very important. It can help new investors see warning signs about the calibre of the board members and how the company is being run.
Speaking gobbledygook in a prospectus was another practice used to deceive or confuse investors, particularly in the resources sector, where 150-pageplus technical or geological reports had been included. Nothing like a bit of technical jargon to muddy the waters and glaze the eyes.
Dodgy advertising, before and after lodging a prospectus, was another issue. This included social media commentary and advertising, no doubt to help lure young novice investors.
Using unlicensed underwriters was another problem the report found. An equity or debt issue that is underwritten gives potential investors confidence the minimum money will be raised. A dodgy underwriter without a licence could skip out at the drop of a hat and leave all those new investors exposed to the risk of the shortfall.
ASIC’s latest report included a few key factors that failed companies had in common, such as being a “back-door listing”. One in three back-door listings fail, compared with one in nine brand-new listings.
Not hard to reduce the risks using those numbers – 33 per cent failure compared with about 10 per cent.
Companies operating in “emerging markets” are also high risk. You know the type – they are operating in newfangled overseas sectors and markets that nobody really knows anything about but are hyped up like the Emperor’s new clothes.
They are also among the highest failures and have some of the worst boardroom practices in the country.
Technology companies were another high-risk area of failure – ASIC describes failure as shareholders losing 80 per cent of their money, not just companies that are declared insolvent.
Typically these tech companies were not properly set up or formed but the owners were so greedy they made the grab for public money anyway, leaving new shareholders and investors to suffer the losses.