Small and mid-sized companies seeking to float on the share market often lack documentation to back up claims in their prospectus, the corporate watchdog has found.
The Australian Securities and Investments Commission (ASIC) says its review of 12 initial public offerings found poor due diligence processes among small to mid-sized issuers, in a worrying sign for investors.
"In a number of our reviews we found poor documentary evidence of the due diligence processes conducted by the issuer, indicating little due diligence was conducted," ASIC's report said.
"We often found that reasonable inquiries were lacking and that there was a low level of care and effort in the verifications of the statements made in the prospectus."
In many instances, the lack of documentation suggested that there was no reasonable basis for certain statements in the prospectus, ASIC said.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
In general, issuers with poor due diligence practices produced prospectuses with misleading and deceptive statements, it added.
The report said it was common practice for directors to be involved in the due diligence process, but often directors of small to mid-sized issuers had "a superficial level of involvement."
There is no legal requirement for issuers to conduct due diligence when preparing a prospectus, but it has become common market practice to cross-check statements in a prospectus to reduce the risk of future liability.
ASIC conducted the reviews of two major IPOs and 10 small to mid-sized IPOs between November 2014 and January 2016.
Large issuers usually have a high standard of due diligence, ASIC said.
In June, concerns about the financial prospects of music streaming company Guvera forced the ASX to block its high profile IPO, which had received the green light from ASIC.
In a statement, the ASX said it must be satisfied that a company is appropriate to list on the exchange.
