What constitutes an "offer to the public" for the purposes of the Securities Act?

The court has rejected an argument that an offer of a debt security was not an offer to the public because the investors were all participants in a joint venture.

In this case1, a company received over $1 million from 25 investors. The funds were deposited into a United States bank account and subsequently disappeared.

When the company was placed into liquidation, the liquidators brought proceedings on behalf of six of the investors to try to recover their investment from the directors, arguing that the company offered securities to members of the public in breach of the Securities Act 1978.

The defendant counter-argued that:

• the investment was not an offer of securities because the investors were participants in a joint venture with the company; and
  
  
• if the offer was of securities, it was not made to members of the public.

Rejecting these arguments and finding a breach by the defendant of the Securities Act, the court noted that:

• there was no joint venture - the risk taken by the investors was not shared by the company;
  
  
• there was a debtor/creditor relationship between the company and the investors - the investment was a debt security;
  
  
• the investors were all asked to participate in the venture and this constituted an offer; and
  
  
• despite the fact that the investors heard about the venture by word of mouth, approached the directors of the company themselves and were told that the investment was not open to the public generally, the offer was made to the public because the investors did not fall within the exceptions in the Securities Act.

Summary judgment was granted against the defendant.

1 Parsons & Kenaly v Archer (High Court, Tauranga, CIV 2003-470-395, 26 February 2004, Master Lang)

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