The Australian Securities and Investments Commission (ASIC) has today released an overview of common defects identified in its surveillances relating to debenture prospectuses, and the actions it has taken to halt defective prospectuses.

ASIC has issued five interim stop orders and one final stop order involving debenture prospectuses seeking to raise more than $80 million from the public, since 1 January this year.

‘ASIC has focused on debt raising in the past year because of our concern that the prospectuses may not adequately identify the different risks associated with these fixed interest investments’, ASIC Director of Corporate Finance, Mr Richard Cockburn, said.

‘Since debenture offerings can differ, it is important for investors to assess the different levels of risk to ensure they are comfortable with the risk level and believe they are adequately rewarded by the returns for those risks’, he said.

The publication of the various defects identified in ASIC’s most recent surveillance is intended to assist issuers and the advisers who prepare these documents, to adequately discharge their duties.

Common defects identified in debenture prospectuses since January 2004 include:

• The mis-description of debentures in prospectuses.

Some issuers continue to incorrectly describe unsecured notes as debentures. This can be misleading and deceptive, as it leads investors to believe that the instruments may be more secure than they actually are.

When issuing debentures issuers and their advisers must have regard to section 283BH of the Corporations Act 2001 (the Act). This section sets out in very clear terms how debentures can be described. ASIC is concerned that issuers continue to misdescribe debentures despite previous guidance on this issue. (See Media Release 04-02:ASIC focuses on defective debenture prospectuses).

• Failure to comply with the requirement to enter into a trust deed and with the requirement to appoint a trustee.

These requirements are important protection mechanisms for investors and must be strictly adhered to. Prior to issuing debentures, all issuers need to be aware of their obligations under Chapter 2L of the Act.

• Insufficient disclosure on the prospects of the issuer.

This information is critical in allowing investors and their professional advisers to make a fully informed investment decision, and to compare potential investments. Where the issuer on lends the money within a corporate group, a description about the operations of the group may be necessary to enable an investor to assess the prospects.

• Inadequate disclosure on borrowing limitations.

Without this information, investors will have difficultly in making an accurate call on the risk/reward returns in the offer.

In the current low interest rate environment, ASIC considers that it is extremely important that debenture issuers provide adequate disclosure to enable investors to understand the risk profile of the products and make a fully informed decision about whether to invest in the issuer.