Sell Side Research

Chanticleer suggested in the AFR on 24 October 2019 that last year’s changes to the rules for sell side IPO research had a part to play in Latitude Financial’s recent failure to IPO. Latitude was seeking to raise $1.0 billion in its IPO.

Chanticleer said that:

“On the morning of October 14, the Latitude issue price was slashed from a range of $2.20 to $2.25, to $1.78 in a bid to get the deal away….

… But between midday and 4pm, the Latitude IPO died. …

One plausible explanation is that the structural changes in the market caused by the introduction of stricter rules on IPO research by analysts working for the investment banks handling the sale may have left the bankers in the dark about the mood in the market.

Last year the securities regulator changed the rules for IPO research. As a result, IPO research cannot contain stock valuations. Instead, the IPO research has become lengthy summaries of the information in the prospectus.

Previously, analysts were the conduit for conveying institutional investor views on market valuations. Latitude went from having its share price slashed by 20 per cent to being unsaleable in the space of four hours.”

The stricter rules that Chanticleer was referring to were the rules in ASIC Regulatory Guide 264 “Sell Side Research” which was issued in December 2017. RG 264 deals comprehensively with the obligations on a sell-side research analyst in the preparation and dissemination of an investor education report (IER) before the issue of a pathfinder or final prospectus to potential investors.

In this context, the ASIC see a sell-side research report as a report prepared by a licensee to help its clients (or potential clients) make investment decisions concerning an IPO offering. Thus an analyst preparing an IER needs to act independently of any influence from their colleagues in the corporate division that might be acting on the IPO and have a different agenda.

The ASIC does not mandate that IERs must not contain valuation information, as implied by Chanticleer. What ASIC does say is that the IER must be the analyst’s unbiased professional view and should not contain non-public market information that is not going to be in the IPO prospectus. The ASIC cautions research analysts in making their own forecasts that cannot be subject to scrutiny and are not based on reasonable assumptions. The ASIC also says in summary:

  • an IER may provide potential wholesale investors in an IPO useful information about the issuing company;
  • valuation information in an IER should be expressed as an enterprise or total value for the issuing company;
  • an IER should include a warning that any initiating coverage value may not be consistent with any IER valuation; and
  • material issuer company information (including its forecasts and plans) provided to a research analyst but not included in the prospectus may also be inside information relating to the company until such time as that information becomes generally available in the market. Possession of inside information may disqualify an analyst from preparing a research report until that information becomes public information.

So, although the new rules may have led to a belief in the market that IERs are now of little additional use to a professional investor looking to invest in a float, that does not have to be the case. IERs can include an analyst’s view on the enterprise value of the company to be floated provided that the valuation information and assumptions in the IER are based on the financial information to be found in the IPO prospectus and reasonable assumptions.

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