Securities Commission enforcements

The Securities Commission has become involved in two recent breaches of the Securities Act.

The first breach was by two companies developing properties with common facilities for residents.

Each development set up an incorporated society to make and enforce bylaws for the development and to own and manage the facilities. The companies offered membership in the incorporated societies to prospective buyers of the properties. The memberships were participatory securities under the Securities Act 1978 (the Act) but the offers were made without an investment statement or registered prospectus, in breach of the Act.

While the directors of the companies were unaware that the offers breached the law, they have accepted that they did, and have given the following undertakings:

• Any future offers of securities to the public will be made in accordance with the provisions of the Act and the Securities Regulations 1983, subject to the terms and conditions of an exemption granted by the Commission.

• Procedures will be established so that advertisements for offers of securities to the public comply with the law.

• Investors who subscribed for the securities will have the opportunity to either:

• cancel their subscription and receive a refund within 15 working days of the closing date of the offer; or

• re-subscribe for their securities under the terms and conditions of an exemption granted by the Commission.

General Counsel for the Commission commented that: "Failure to comply with securities laws carries serious consequences. Issuers and their directors may be required to repay the subscription amounts with interest, and may face civil or criminal penalties".

He also noted that residential property developers should seek advice from a lawyer who is experienced in securities law. Developers may be able to rely on class exemptions to reduce compliance costs. Alternatively, they may seek an individual exemption from the Commission. These are considered on a case by case basis.

The second breach was by a company that issued a prospectus omitting material information.

The Securities Commission cancelled the prospectus because it failed to note that the company's sole director is bankrupt, banned from management, and facing charges of forgery and dishonestly using his position as a company officer, all in Australia.

The Commission's Director of Primary Markets stated that: "A prospectus must contain all material information about an offer of securities. [The director's] bankruptcy and management ban relate directly to his competence to handle investors' money and to run a finance company. The fact that he is facing criminal charges, although these have not yet been heard, would also be likely to influence people deciding whether or not to invest."

The company had been seeking to raise $15 million by issuing secured debenture stock. The Commission understood that no money had been invested.

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.