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Vertex offer document likely to mislead investors

Vertex offer document likely to mislead investors

The Securities Commission has released a report of its inquiry into the initial public offering (IPO) of Vertex Group Holdings Limited (Vertex)

The inquiry considered whether the offer document for Vertex’s IPO adequately described the risks associated with the share offer; whether the prospective financial information in the offer document properly identified and set out the principal assumptions on which it was based; and whether the process followed by the directors of Vertex in preparing for the IPO was appropriate.

The inquiry found that the offer document was likely to mislead investors because it did not adequately disclose the risks associated with the offer.

“The offer document emphasised certain business units of Vertex as being the most significant source of potential growth, but did not give sufficient information about risks associated with those business units,” Chairman Jane Diplock said.

“When particular emphasis is given to part of a business as a selling point for the investment, equal emphasis should be placed on material risks associated with that part of the business.”

The Commission examined certain assumptions underlying the prospective financial information for the growth business units. It concluded these were not sufficiently supportable for the information for these two business units to be presented as forecasts.

… more … The assumptions for the other business units were sufficiently supportable to produce forecasts.

“In such cases, businesses should distinguish between those units for which they can forecast, and those for which only projections can be given,” Jane Diplock said.

“The Financial Reporting Standards do not provide clear guidance on this point and we have referred this matter to the Institute of Chartered Accountants of New Zealand (ICANZ).”

Several corporate governance issues arose: There were deficiencies in the communication of information about the performance of the individual business units from management to the Vertex Board.

Several Vertex directors lacked understanding about how to present the prospective financial information in offer documents. Some directors did not appear to know that prospective financial information can be presented as either a forecast or a projection.

There was confusion as to the role of PricewaterhouseCoopers (PwC) as financial adviser to Vertex, concerning PwC’s responsibilities in relation to the prospective financial information.

There is no professional guidance for auditors relating to examining prospective financial information. The Commission also refers this matter to ICANZ.

The Commission has not found evidence to suggest that the directors of Vertex believed the offer document was misleading. Nor has it found evidence to suggest that at the date of allotment the directors knew the offer document was misleading.

The Commission’s report is available from http://www.sec-com.govt.nz to view and to download.

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