ASIC CLASS ORDER [CO 10/322]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
The Australian Securities and Investments Commission (ASIC) makes ASIC Class Order [CO 10/322] On-sale for convertible notes issued to wholesale investors under s741(1)(b) and s1020F(1)(c) of the Corporations Act 2001 (the Act).
Paragraph 741(1)(b) provides that ASIC may declare that Chapter 6D of the Act applies to a person as if specified provisions were omitted, modified or varied as specified in the declaration. Paragraph 1020F(1)(c) provides that ASIC may declare that Part 7.9 of the Act applies in relation to a person or a financial product, or a class of persons or financial products, as if specified provisions were omitted, modified or varied as specified in the declaration.
1. Background
Some offers of convertible notes are only marketed to wholesale or institutional investors (including offshore institutional investors). These offers do not require a prospectus since there is no retail participation. Similarly, the secondary sale of convertible notes is limited to institutional investors and does not require a prospectus. However, a prospectus or PDS will often be needed so that the underlying quoted securities can be on-sold to retail investors.
2. Purpose of the class order
What is the problem addressed by the class order?
The need to prepare a specific prospectus so that the underlying quoted securities can be on-sold to retail investors may act as an impediment to entities that wish to raise funds by issuing convertible notes to wholesale investors.
In the absence of relief, an issuer’s ability to issue convertible notes to institutional investors is limited by the fact that the underlying securities may generally only be on-sold to retail investors within 12 months if the issuer provides:
- a transaction-specific prospectus in relation to the convertible notes; or
- a cleansing notice on each conversion.
Why is a class order necessary to address this problem?
The purpose of [CO 10/322] is to grant relief from the on-sale provisions of the Act so that the quoted securities underlying convertible notes can be on-sold without a prospectus if a cleansing notice containing prospectus-like disclosure is provided to the relevant market operator at the time the convertible notes are issued.
The relief should make it easier for entities to issue convertible notes without undermining protection for retail investors. This is because:
- no relief is provided in relation to any issue or on-sale of convertible notes to retail investors—it is only the underlying quoted securities that may be on-sold to retail investors; and
- the issuer will be subject to continuous disclosure obligations and there will be prospectus-like disclosure at the time the convertible notes are issued, meaning that the market should receive sufficient information about the issue of convertible notes and the underlying quoted securities.
3. Operation of the class order
Declaration
Paragraph 5 of [CO 10/322] modifies the Act so that persons who have been issued convertible notes will not be required to prepare a prospectus or PDS where they on-sell the underlying quoted securities (once converted) to retail investors.
Where relief applies
The relief will apply where certain requirements are met, including:
- the underlying securities are continuously quoted securities, and were issued by reason of the conversion of convertible notes;
- trading in the relevant class of underlying securities has not been suspended for more than five days in the 12 months prior to the first issue of the convertible notes; and
- ASIC has not made certain determinations to prevent an issuer from relying on its relief.
Furthermore, the relief will only apply where prior to the issue of the convertible notes, the issuer of the convertible notes gives the relevant market operator a notice that contains certain information, including prospectus-type disclosures for the convertible notes and the underlying quoted securities.
In the period that the convertible notes are on issue, the issuer's annual financial reports will be required to include information on: the number of underlying securities issued during the financial year as a result of conversion and the average conversion price paid for those securities; the number of convertible notes that remain on issue at the end of the year (and the issuer's remaining liability to make payments on those securities); and any other matters relating to the notes that holders of the issuer’s enhanced disclosure securities would reasonably require to make an informed assessment of the issuer’s financial position and its prospects for future financial years. The annual report may omit material that would otherwise need to be included in relation to the issuer's prospects for future financial years if it is likely to result in unreasonable prejudice to the issuer.
4. Consultation
Before making [CO 10/322], ASIC consulted generally with relevant industry stakeholders. The consultation process included the publication of Consultation Paper 126 Facilitating debt raising in December 2009, which outlined ASIC’s proposals for this class order relief and sought comments from stakeholders. Submissions were in favour of the proposed relief, with the majority noting that the relief would benefit prospective issuers without impeding the level of protection available to retail investors.