The Australian Shareholders’ Association yesterday wrote an excellent note to their members warning them about the risks of investing in the upcoming float of music streaming business Guvera.
But they also, according to the AFR, took a swipe at ASIC and the ASX for allowing businesses like Guvera come to the market at all:
“It is really concerning that a loss-making company which expects operating losses and negative operating cash flow to continue into the future may list on the ASX, particularly where its ongoing viability is dependent on the proceeds from the IPO”
Personally, I think that’s asking way too much of the regulator. There are plenty of businesses come to the stock market in a loss-making position – often that’s why they need the money. Cloud accounting software business Xero (ASX:XRO) been losing an increasing amount of money every year since it listed on the ASX, yet I think our market is a lot better for having it listed here. How is ASIC to know whether Guvera is the next Xero or not?
Their job should be to make sure the disclosures are accurate and sufficient enough to allow an investor to make an informed decision. If those disclosures say the company hardly has any revenue, is going to lose a small fortune and will probably go bust if it doesn’t raise enough money, and investors are still stupid enough to invest their money, I say let them go for it.
I don’t see how this is any different to a junior resource exploration company listing on the ASX which is likely to return to the market/shareholders for capital many times before (if it ever does) produce income.
Absolutely correct! Many people want to be “investors” but will not take any responsibility when things go badly. We have become a bunch of whingers and victims! Self reliance, once an Australian virtue, is dead!
Within reason Steve.
So long as the obvious ‘failings’ are spelt out clearly and not hidden in the small print (which is often the case with many prospectuses and annual reports – take the Dick Smith one as a case in point).
I think when most public companies have their own legal advisers (or access to the big end of town insofar as legal advice goes) and paying them to ensure they comply with the letter of the law on disclosure requirements even if that means the true situation can be obscured, then it makes it hard for the ordinary investor.
You ask yourself how much time you and your staff have to work to ‘decipher’ and ‘read between the lines’ to get to the true situation of a company. Caveat Emptor has its limits, and the responsibilities that go with looking after a company (which really is what the board and management are required to do) is that they are transparent and up-front with potential investors. There are some ‘shades of grey’ in that I appreciate and it is only too easy for analysts and fund managers who are actively involved in the investment business to be a little more ‘distant’ and ‘oh well that’s the way it goes’ when corporate fraud occurs. What silly investors.
I would think that’s where the role of ASIC comes into play. You consider how difficult it is for ASIC to achieve success with their prosecutions (when they do act) in what are some seemingly clear cut cases of corporate misdemeanours to appreciate that ‘white collar crime’ is a pretty easy way to ‘legally’ get ahead.
Companies need to be held to a higher standard than just caveat emptor surely. Why have the Corpprations Act at all if that is the case. Corporate history would suggest we should not be naive on these matters.
Legal heists is a contradiction in terms
I sort of agree with you Steve, but also feel that the regulators have a duty of care too, to protect the ‘stupid’ investors – particularly with so many question marks over the company’s ability to continue as a going concern, related party issues, law suits etc.
What about the reports that many accountants have got their SMSF clients into Guvera? Is that the accountants fault or are the SMSFs ‘stupid’ investors too? Naive perhaps and far too trusting probably.
I think there’s a fine line for the regulators when it comes to allowing unprofitable companies to list but this IPO may have crossed the line.
I just don’t see how you can ask that of the regulator. How can they possibly weigh up risk and reward on behalf of investors? As for the SMSFs, if they had access to the same information then yes it was stupid. I know it sounds harsh but it’s true. It is not possible to legislate away greed. And if the accountants were taking commissions and not disclosing it, then that is exactly the sort of thing ASIC should be getting involved with (but it doesn’t absolve SMSF trustees from asking the right questions).
Probably where ASIC need to be sniffing around is the accounting firm. Property tax accountants come online music investment introductory agents?
As an accountant and smsf auditor myself, these property spruiker accountant pricks need to be shut down. They are bad for my industry. Accounting is a lot about trust and they are breaking society’s trust. I have seen too many SMSFs get sucked into a property deal. Hopefully, with the FOFA changes applying to accountants from 01 july 2016 things will change but i doubt it.
There are generally a few professionals in cahoots with each other because each pushes inadequate paperwork from the other through. Especially when it comes to LRBAs. Accountant, financial planner, banker, property developer, real estate agent and solicitor all in the same group. The notion of “independence” that applies to auditors should also apply to any other form of advice.
Where there is money involved there will always be some people trying to push the ethical boundaries.
I find it difficult to believe that accountants could be introducing clients to a private equity group for a fee without at some point in the process providing financial advice, even if they try to disclaim it. Dennis is right – ASIC need to focus on smashing up the accountants who are ditching their clients into this type of crap for a cut of the spoils.
I’ve been stewing over this overnight. I wonder if another issue here is that the hurdle for managing an SMSF is too low? Perhaps there should be some sort of test or qualification, at least if you want to invest outside regulated asset classes.
I think that makes a lot of sense Steve. I’d be interested to hear Mikes thoughts (comment above) on that given his being a SMSF auditor.
One has to question the ethical standing of the AMMA Private Equity group on this IPO given that Darren Herft is the co-founder of Guvera, and is also one of the joint owners of AMMA along with an accounting firm in Canberra (Benchmarc Group). The closeness of the relationship would make me want to dig a bit deeper. One presumes all the accountants who have advised their clients invest in Guvera have good reasons for doing so beyond the commissions they make, and any share options they will receive.
I think the best red flag(s) for this IPO is just to say last year its revenue was $1.2 million, it’s loss was $81.1 million and a successful float values it at $1.3 billion. Mmmm. A red flag for potential investors, ASIC and the ASX. Wonder if there is not a potential red flag in terms of conflicts of interest and professional standards for the accounting bodies also. Oh well, time will tell.
Problem is that any sort of qualification either ends up as more useless SMSF paperwork (most likely) or an unfair barrier. But the ATO could have more of a go at proactively going after SMSF trustees who have no idea what’s they are doing (under sole purpose test for instance) and force them to shut down their SMSF before they lose all their money. You could perhaps also introduce some sort of diversification requirement but that would upset the property industry.
However the unfortunate fact is that a bunch of gullible investors getting sold down the river by their accountants, while bad for them, isn’t really a systemic problem that’s going to get Canberra’s attention.
Steve,
By law 1 of the trustees of a SMSF must be a member. Considering most SMSFs are for mums and dads, you could say that SMSF members “eat what they kill”; the single biggest incentive.
Adding further regulation to probably the most heavily regulated corporate structure is a poor idea. Once a SMSF attains a certain size it is audited virtually every year by the ATO; thereby ensuring compliance with the investment plan of the trustees.
There are a whole range of human bias that work against trustees and their advisors. I think the real deficiency is over reliance on a single trusted advisors opinion, rather than obtaining opinions from multiple, independent sources.
Agreed, the ASX should not involve itself in the merits of the offering, only that the offering meets the various requirements that the various rules and regulations require. The most important being full disclosure. So if the ASX wants fuller disclosure then that is exactly what they should do. Whether or not they can achieve a valuation of $1.3B is going to be how institutions feel about a position. Xero has significant institutional support, it remains to be seen if this is true of Guvera.
Even more concerning is the fact that the Federal Govt has given Guvera $10m in R&D grants. Taxpayers money backing a Gold Coast company streaming Indian music to Indian customers for free? Not quite the innovation I thought Malcolm and his mates might have had in mind…..
I think it was Peter Lynch that said he once saw a company list in the U.S at the height of the dotcom boom with the following prospectus. “We have no business model, no products and no revenue nor do we intend to”. The company name had dotcom in it so upon listing the price skyrocketed.
In my opinion, where a prospectus is this blatant, either the ASX or ASIC needs to step in.
But you are also right that it is not ASIC’s job to save investors. It is the nature of the stock market – businesses come with a business model and product to the market to raise capital to grow. Sometimes it just doesn’t work out.
Although it is true to say that SMSF like all investors have to do their own investigation, but don’t let the regulators off the hook.
If a company lists on the ASX an investor should have a reasonable expectation that it is a fit and proper company, this is why ASX has listing requirements. Obviously Guvera doesn’t meet the minimum profit requirements, as to the net tangible assets tests that is big question. Of course ASX has not ruled if Guvera meets its listing requirements, why not? Then to ASIC to give it its due after there was a publicity about ASA comments, they have suspended the listing for a week do they can look further. As investors we should rightly expect ASIC to examine a prospectus to see that the statements are true understandably these bodies don’t have the funds to look at all documents, however a company that last year had revenue of 1.2M, losses of 81M, for the 2016 half year projects revenue of 1.2M and losses of 55M, wants to raise 100M to give it a market value of 1.3 B should raise a giant red flag.
When further you see the listing funds will be used to primarily pay down debt, no forward projections and a warning that if the IPO is not successful it will have trouble to continue trading.
And you say the regulators should not be involved,Please!
Well said Allan. Totally agree.
Caveat emptor is not a licence for anything goes.
For a company to go public means it needs to meet certain requirements. To not have those requirements (ASX Listing Rules, Corporations Act, and ASIC as the watchdog and/or policeman on the job) means the capital market and investor confidence would go down the tube.
You just need to pick through the history of companies from the mid 1800’s to today and most of the laws come in response to a combination of greed, wilful contempt of investors and oftentimes downright abuse of the corporate law by usually boards and management of companies (often aided and abetted by their professional advisers).
I am always amused when groups like the AICD and BCA come out and wax lyrical about the integrity and good standing of their members. I then read the financial press and think they must be living in a parallel universe. Ditto for many of the professional organisations with the legal and accounting ones leading the charge.
I have been doing some research on the franchise industry recently, and I would say ditto with even more emphasis in relation to their ‘professional’ body, the FCA. Now there is a can of worms needing to be opened. One director (a partner in a leading legal firm in Australia with many franchisor clients) has been on the FCA board for 17 years. Wow, 17 years. Have to look at what the good corporate governance standards say but I would suggest anything >10 years would be a red flag.
Surely it’s ‘caveat emptor’ for buying shares and any IPO.
As for stupid investors and running a SMSF we have been doing both for 20 years and have become a little less stupid and naive over that period.
Predict further future stupid share speculations for us and others.
Can’t see that the law against stupid advice (for the client) will be enforceable. There will just be more and more legalese.
The security test is too hard. How does it help security?
What are the names of the accounting firms that have been allegedly recommending an investment in Guvera?
It is the public interest that these firms be named.
If on the other hand no specific firms can be named you can only assume its another case of the media looking for a story where none exists.
I think Steven you could assume that the accounting firms will not be too keen to be coming forward given that they have been encouraging/recommending to their clients that they invest in Guvera. One presumes that is where the 3000 ‘sophisticated’ investors came from. A google search will reveal quite a few.
My guess is that many of those accountants (who reportedly were paid commissions on clients investing in Guvera) will be endeavouring now to explain to their clients why they did so. The clients will be no doubt considering their legal options re their accountants, as I’m sure will the accountants against AMMA and Guvera.
You just need to read the prospectus to see where the proceeds were to be spent to appreciate who the real beneficiaries of this float were going to be.
The emphasis by the investigating accountant (EY) in their independent limited assurance report on the risk of Guvera being a going concern if the IPO is not successful is a big red flag. “If the capital raising under the Prospectus is unsuccessful and the Company is not able to achieve profitable operations and receive the continues support of its creditors, lenders and shareholders to continue its operating activities, there is significant uncertainty whether the Company will be able to continue as a going concern..be able to pay its debts…realise its assets….and extinguish its liabilities..”
Congratulations to the ASX for stopping this listing as it’s the sort of IPO that really does destroy confidence in the integrity of the stock market.
Not so sure about ASIC, they still leave in a bureaucratic bubble divorced from the real world (‘but if they dot the i’s and cross the t’s what can we do’ sort of mentality).
Why people love the idea of a nanny state is utterly beyond me. I believe that wearing helmets or seatbelts should be optional on our roads, and recreational drugs should be legal (albeit taxed at a level that reflects their negative externalities), and that many of the restrictions on tobacco should be lifted.
I say this despite having been a lifelong non-smoker, who has never used any recreational drug more than once, and have potentially had my life saved by seatbelts (twice), a motorcycle helmet (once) and a bicycle helmet (once).
Most people think I’m out of my mind, but I think that the role of the government should be limited to preventing or taxing negative externalities and encouraging or subsidising positive ones, and nothing else.