The Australian Securities and Investment Commission (ASIC) has issued a warning to resources and industrials companies seeking to transition into technology companies, that they must fully disclose their intentions to the market and shareholders.
ASIC commissioner John Price held a press conference in WA yesterday to identify regulatory issues and emerging trends, in particular "backdoor listings", according to the ABC.
Price said that ASIC has been seeing a trend in mining companies changing their business into technology or bio-tech companies, in an effort to expand or survive in a depressed mining industry.
There were 12 junior resource and industrial companies identified that have already made the leap into other industries by acquiring tech companies, including:
- Minerals Corporation Limited acquired PRM Cloud Solutions, a limited Cloud-based software development company.
- Latin Gold Limited acquired Mig33, a social networking site.
- Macro Energy Limited acquired Digital CC Holdings Pty Ltd, a Bitcoin trader.
- Nemex Resources Limited acquired Wavefront Biometric Technology, which specialises in biometric security technology.
- InterMet Resources Limited acquired 1-Page, a US cloud-based recruitment software company.
On top of the 12 named in the press conference, the consumer watchdog believed another 22 to 25 companies were interested in making similar moves, although ASIC has intevened to improve reporting by these companies.
Price said in some cases the audited financial reports of the incoming company had not been disclosed to shareholders or the ASX, despite their legal obligations, and there were also problems with the full disclosure of new business models.
"Where there is this change of business activity there needs to be a good discussion about what the new business model is going to be," Price said.
"Some of the disclosure we're seeing around this unfortunately is not up to scratch at the moment."
Price said shareholders needed to be given sufficient information about any changes, such as capital raising, which involved their approval, and would generally needed an independent expert report on valuation of the firm.
ASIC has also had concerns with such expert reports, but were conducting case-by-case reviews where necessary, to ensure that experts were not under the undue influence of their retainers.
According to ASIC, some of the problems with backdoor listing include:
- Financial reporting – in some cases audited financial reports of the incoming company have not been disclosed. They need to be disclosed to meet legal obligations.
- Disclosure of business models and business plans – in a number of deals the disclosure about the company’s business model or business plans has not been up to scratch. There is also often a lack of disclosure on whether the company will need to raise additional money in the short term, how much might be raised and the effect on any existing shareholders.
- Asset valuations – a backdoor listing often requires shareholder approval e.g. because it involves a significant change to the company’s business. In granting approval, shareholders need to be given sufficient information and generally that means getting an independent expert report on valuations etc.