Lots Of Losers To Come, Warn Lawyers

Sydney Morning Herald

Monday August 30, 1999

By KATRINA NICHOLAS

Failure to read prospectuses, teamed with changing company valuation processes, will see more Mum and Dad investors lose money by investing in as-yet-unproven Internet ventures, warn lawyers.

Mr Richard Gelski, corporate partner with Blake Dawson Waldron, said the law firm was approached by many Internet hopefuls wishing to list on the Australian Stock Exchange and was amazed at the number of people willing to give up their hard-earned cash and invest in such ventures.

``We see a lot of blue sky companies wanting to float and people have to be careful they are investing in something of value," Mr Gelski said.

Mr Gelski said retail investors would do better to read prospectuses rather than rely on the advice of over-zealous stockbrokers pushing the shares.

Not being informed before buying shares was as bad as taking stockmarket advice from a cab driver, he said. ``And what will happen is that you'll end up with the inevitable bust and those Internet companies without proven earnings and tangible assets will be hit hardest.

``The best advice for investors is to read the prospectus and make up their own minds," he said.

Blake Dawson Waldron intellectual property senior associate Mr Duncan Giles said the Australian public's gullibility and ``overwhelming greed" was illustrated by the Australian Securities and Investment Commission earlier this year when it put out a bogus invitation to invest in ``millennium bug insurance" and received offers of $4 million from the public.

However, the public may not be entirely at fault, according to corporate partner with law firm Freehill Hollingdale and Page, Mr Leon Pasternak.

Mr Pasternak said the ``dim view" taken by ASIC regarding business forecasts was restricting the amount of information able to be printed in Internet prospectuses.

Freehills has recently completed work on two large Internet-related floats Austar United Communications and Hutchison Telecom and is working on the possible float of Fairfax Online.

``ASIC takes a dim view of forward-looking statements which rely on hypotheticals," Mr Pasternak said.

``This is an unreasonable view which is tying down boards of directors."

Mr Pasternak said that ASIC prohibited any forward-looking statements or figures which were projections rather than forecasts, that is, statements based ona possible future occurrence,rather than a given one.

This, he said, meant Internet companies were restricted in what they could put in their prospectuses, since many such companies rely on ``hypothetical" situations for their businesses to succeed. These situations could include the projection that Internet usage would increase by a certain amount in five years' time a reasonable assumption, but not a guaranteed event.

Mr Pasternak also said unrealistic valuation tags were given to some Internet companies.

``There is such competition between brokers to win jobs, it's like a beauty parade where one broker says we can value your company at this price and the next promises to go one up and do better to get the job."

Developments in modern underwriting methods were also causing Internet companies to be overpriced, Mr Pasternak said.

``With the traditional underwriting systems, brokers value a company and then agree to underwrite the issue in an event of a shortfall. So brokers have an intrinsic interest to be conservative in their pricing," he said.

``But the US methods of book-building and `greenshoe' are becoming increasing popular in Australia, meaning there is less conservatism when pricing a company."

A greenshoe operation is a market stabilisation method whereby the underwritingbrokers can buy or sell shares into the market up to 30 days after a company's listing in order to stabilise the company's share price.

© 1999 Sydney Morning Herald

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