News & Insights

Focus on spread by regulators (ASIC ban)

Focus on spread by regulators

Authors: Dave Filov, Jeremy Newman

Last week, ASIC banned a former financial advisor from providing financial services for seven years for falsifying spread.

Following an investigation, ASIC found that Mr Mark Kawecki knowingly provided the ASX with false information regarding the identity of the beneficial holders of shares that he applied for in the name of entities he owned and controlled, submitted share applications in which he deliberately inserted false addresses, received a fee per application provided and did so to ensure his share applications would count toward meeting ASX’s spread test.

ASX Guidance Note 1 (shortly to become subject to comment via a public consultation for changes to the Listing Rules) presently provides that ASX will not accept holdings obtained by artificial means as counting towards spread. For these purposes, ASX regards the following as ‘artificial’:

  • paying for spread;
  • fictitious applications or giving securities away;
  • offering loans to prospective investors to acquire securities that are non-recourse or expected to be repaid a short period after listing;
  • having investors pre-complete transfers of their securities to a third party ahead of listing;
  • having investors enter into purchase agreements, call or put options that allow the acquisition or disposal of their securities after listing;
  • brokers, financial advisers or other intermediaries completing applications for clients without their knowledge or consent, or allocating securities to discretionary managed accounts without the knowledge or consent of the client;
  • lead managers, brokers, financial advisers or other intermediaries being incentivised to procure spread through the payment of abnormally high fees, brokerage or commission; and
  • splitting holdings across family members.

In addition to reviewing spread prior to listing, given some of the methods ASX considers artificial involve the transfer of securities after listing, ASX and ASIC also monitor post-IPO (or back-door listing) trading, particularly off-market trades.

The ASIC investigation into Mr Kawecki and related conduct concerning the provision of spread through artificial means is ongoing, and he has the right to appeal ASIC’s decision to the Administrative Appeals Tribunal. We note a seven-year ban is at the higher end of the spectrum.

It should be noted that dishonest conduct relating to minimum spread may fall into criminal offence provisions under the Corporations Act and may be punishable by a fine of up to $945,000 and/or imprisonment for up to 10 years for an individual, or a fine of up to $9,450,000 for a corporation. State based fraud offences may also apply.

The consequences of obtaining spread by artificial means extends beyond those individuals involved. ASX may also remove a listed entity or refuse to list an entity, if minimum spread requirements are not legitimately met, and may take this action well after an entity lists.

For example, Winha Commerce and Trade International Limited (ASX Code: WQW) listed in January 2017 and went into suspension on 30 November 2017, following allegations by the ASX that WQW obtained spread largely by artificial means. WQW obtained an urgent injunction preventing the ASX from removing them from the official list in May 2018 but remains in suspension pending the outcome of Federal Court proceedings. Obtaining spread via artificial means was one of the grounds ASX based its decision to delist WQW. The market is awaiting an update on the Federal Court proceedings.

Further, in August 2017 ASX removed Birch and Prestige Investment Group Limited (ASX Code: BOP) as evidence to ASX suggested the company used artificial means to obtain spread. At the time of the removal the company had been listed for just over four years.

ASIC’s banning order on Mr Kawecki serves as a timely reminder that spread should be scrutinised by entities seeking admission to the official list and their advisors, and a failure to do so could have significant consequences for the entity and the individuals involved.

Read the ASIC media release.

For more information, please contact:

Jeremy Newman

Senior Associate