Coalition costings, savings and forecasts: Lessons for companies seeking to raise capital

Issuing shares to raise capital?  You may need to be more cautious with your headline grabbing statements than a politician at election time!

Much has been written in the last few days about the basis on which the Coalition has costed their announced savings relating to public sector job cuts.  Those costings (and others made by all sides of politics during the election campaign) are really nothing more than forecasts of the likely financial outcome of a set of expected actions.

While there is currently no legal requirement for the content of political advertising to be factually correct, there are very specific obligations on companies that are seeking to raise capital to ensure that their statements are true and accurate, particularly where those statements relate to prospective financial information such as forecasts.

If you are looking to raise capital then your first consideration is whether you need a formal disclosure document (such as a prospectus or product disclosure statement).  In general, the answer to this is that you will, unless all the offers that you are seeking to make will be to wholesale clients (including professional or sophisticated investors under the terms of the Corporations Act) or in any 12 month period you make offers to less than 20 people that are not wholesale clients and the amount raised from them does not exceed $2m.

If a formal disclosure document isn’t required, then your only obligation in respect of information provided to prospective investors is to ensure that the information you provide is not misleading or deceptive.  If a prospectus or product disclosure statement is required then you will have additional obligations (including to disclose all matters that an investor may reasonably require to decide whether to make that investment).  This information may include forecasts.

Generally it is possible for a company to ensure that the information it makes available is not misleading or deceptive by verifying that information and ensuring that it is presented in such a way that no one could misinterpret it.  However, the problem with prospective financial information (such as a forecast) is that it is taken to be misleading unless it is based on reasonable grounds.

To demonstrate reasonable grounds, you must be able to point to some facts or circumstances existing at the time you publish the forecast and on which you actually relied.  Those facts must be objectively reasonable and support your forecast.  In order to further limit the risk of a claim, you should (as the politicians have been doing) publish your key assumptions to your forecast, so that a prospective investor can form their own view as to the reasonableness of your assumptions and the forecast itself.

If you’re planning on raising capital and want to avoid the public scrutiny that the politicians have been facing, Kain C+C can help you by assessing whether you need a formal disclosure document and checking whether your presentation of information to investors may be likely to be misleading or deceptive.