The flurry of recent capital raisings has provided an opportune time to draw attention to an often overlooked aspect of capital raisings: cleansing notices. Often misperceived as a ‘tick-the-box’ exercise, the following article sets out food for thought that should be considered in order to release a compliant cleansing notice.
What is a cleansing notice?
Generally, under the Corporations Act 2001 (Cth) (Corporations Act), securities cannot be traded or sold for 12 months after their issue unless they were offered under a disclosure document, such as a prospectus. Of course, to every rule there are exemptions, including where a company releases a cleansing notice within five days of issuing quoted securities.
The effect of a cleansing notice is to “cleanse” the market with information that may not have otherwise been disclosed, or confirm that no such information exists, to create a level playing field and allow the issued securities to be traded by recipients. This means that in some circumstances early disclosure of information that is otherwise not required to be released to the market must be made.
Cleansing notices may only be issued in limited circumstances including:
- The securities issued are of a class that were quoted securities for at least the last three months;
- Trading in the class of securities has not been suspended for more than five trading days in the previous 12 months (this has been temporarily extended by ASIC, to 10 days where the company meets certain conditions, as covered in our previous article) (does not include days the company was in trading halt); and
- The company was not covered by certain exemptions or orders under the Corporations Act.
Section 708A(6) of the Corporations Act sets out the details cleansing notices must include. Most importantly a cleansing notice must include any “excluded information“, which includes information:
- The company is presently not releasing to the market due to a continuous disclosure carve out in Listing Rule 3.1A (common examples include but are not limited to an incomplete and confidential acquisition, sale or new material customer contract negotiation, plans for an imminent capital raising, results of studies or experiments and exploration results); and
- That investors and their professional advisers would reasonably require to allow them to make an informed assessment of the company’s assets, liabilities, financial position, performance and prospects or the rights attaching to the securities issued.
Minimise your risk – due diligence should be undertaken and recorded
A statement in a cleansing notice that a company is not aware of any excluded information, or that discloses specific excluded information, should be backed by a due diligence process. This is not an onerous exercise, and involves completion of a simple checklist and questionnaire by key management personnel to check for the existence of excluded information.
Too often companies release cleansing notices that confirm there is no excluded information, then shortly thereafter release information under Listing Rule 3.1 that could have a material effect on the price and value of its securities. Entities that release material information in these circumstances risk having their securities suspended from trading by ASX whilst enquiries are made by ASX (or ASIC) as to when the company became aware of the material information that was not referred to in the cleansing notice. These suspensions can be lengthy, and could also lead to an insider trading investigation by ASIC, which can be costly and cause reputational harm.
Please contact us if you have any queries or if you would like guidance on the correct procedures and safety nets that can be put in place when issuing a cleansing notice.
This article was written by Shaun Hardcastle, Partner, Deanna Carpenter, Partner and Adrienne Mallinson, Solicitor.