Discussion document on "securities offerings" released in September

The fourth and final part of the Government's four part securities law reform programme forms part of its Review of Financial Products and Providers (RFPP).

This follows on from:

• the introduction of the Takeovers Code in 2001;
  
  
• the reform of the stock exchange and the regulation of listed issuers in 2002; and
  
  
• the passage of the omnibus Securities Legislation Bill in October 2006.
  

In addition to the review of securities offerings, the RFFP considers the regulation of insurance (health, life and general), superannuation, collective investment schemes, platforms and portfolio management services, non-bank financial institutions (friendly societies, credit unions, building societies, finance companies, industrial and provident societies) and consumer dispute resolution and redress in the financial sector.

Nine separate discussion documents have been released for each of these areas as part of the Government's third stage of the RFPP .

Problem areas identified

The discussion document on securities offerings identifies a number of areas of the regime under the Securities Act which require improvement. These include ensuring that:

• the Securities Act is targeted at those investors who need the protection of regulatory intervention;
  
  
• there are appropriate entry requirements for all issuers who offer securities to public investors;
  
  
• investors receive effective disclosure over the life of the security;
  
  
• the Securities Commission has sufficient and appropriate enforcement powers; and
  
  
• trustee supervision provides appropriate and consistent protections for investors, without reducing the flexibility of trustees and issuers to tailor a trust deed to a particular issue of securities.

Objectives

The Government's aim is to ensure that any improvements made:

• provide clarity for issuers as to when the disclosure regime applies;
  
  
• simplify access to capital for those making offers to sophisticated and professional investors; and
  
  
• ensure that the disclosure regime is more relevant and more accessible.

The discussion document also reiterates that the review is being conducted in the context of the Memorandum of Understanding on Business Law Coordination between New Zealand and Australia and the trans-Tasman mutual recognition regime for securities and compliance with IOSCO objectives, principles and standards, where appropriate. This will mean that any changes to New Zealand's securities regime will need to be consistent with the Australian regime unless there are good reasons for the laws to be different.

Application of Securities Act being re-considered

The Government proposes to retain the concept of "offer of securities to the public" for the purposes of determining what type of offers are regulated under the Act. However, in practice, it is not always clear whether an offer is made to the public.  The proposal is that the Securities Act be amended to clarify this issue.  In particular, the scope of the existing exemptions for "relatives and close business associates" and "professional and habitual investors" would be clarified.

As a related point, the discussion document also seeks feedback on whether investors under these exempt offers should nonetheless have the protection of certain parts of the Securities Act.  For example, it might be that, while the disclosure regime in the Act would not apply to exempt offers, the misstatement liability regime would apply.

Proposal for single offer documents

Currently, the disclosure regime in the Act is based upon a dual offering document approach – that is, a prospectus and an investment statement.  The discussion document proposes to revert to a single offer document, having a Part A and a Part B.  Part A will, like the investment statement, be targeted at retail investors.  It will be in a prescribed form for the relevant security type and will, in theory at least, be concise (the proposal is to limit it to five pages).  Part B will, like the prospectus, be targeted at professional investors.  It is not clear at all how this approach would differ from the not uncommon practice now of combining the prospectus and investment statement.

The financial literacy of the average New Zealand retail investor has long been of concern to the Government.  There is little point in requiring comprehensive disclosure by issuers if the target audience cannot understand the information provided.  In an attempt to improve financial literacy, it is proposed that the single offer document must contain educational material on financial concepts.

Extension of the continuous disclosure regime

Finally, a contentious issue raised by the discussion document is whether a continuous disclosure regime should be extended beyond listed securities to all securities where there is an established secondary market.  If adopted, this proposal would significantly increase the cost of capital for non-listed issuers.

Closing Date for submissions

Submissions on the nine discussion documents are due by 1 December.  The Ministry of Economic Development (MED) will then develop policy proposals for consideration by Cabinet by April 2007.  Assuming Cabinet endorsement, the supporting legislation will then be drafted.  The Government hopes to have the legislation in force by 2008.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.