Corporate Advisory

27 Apr 2009

Proposal to Limit Simplified Disclosure Regime and Securities Regulations Rewrite

The Ministry of Economic Development (MED) is seeking submissions on proposals which, if implemented, will have a significant impact on public securities offerings in New Zealand. The relevant paper, entitled "Changes to the Securities Regulations", is available at:

A key proposal outlined in the paper is to limit the planned "simplified disclosure prospectus" (SDP) regime to non-complex products. The SDP regime is a key feature of the Securities Disclosure and Financial Advisers Amendment Bill (Bill), currently before Parliament. The SDP regime would allow listed issuers to use a SDP instead of preparing a full prospectus and investment statement, when offering certain types of new securities to the public. MED's proposal would constrain the capital raising flexibility that listed issuers will have, if the Bill is enacted.

MED also proposes an extensive revamp of offer document content requirements under the Securities Regulations 1983 (Regulations). The proposed changes are technical and designed to improve disclosure, remove unnecessary compliance costs, provide greater flexibility, and modernise outdated aspects of the Regulations.

The closing date for submissions on the proposed changes is 8 May 2009.

SDP Limitation

Background

The SDP regime will, if enacted, enable listed issuers to offer designated debt and equity securities to the public without complying with the detailed disclosure requirements of the Regulations. Instead of preparing a full prospectus and investment statement for such offers, listed issuers will be able to use a simplified offer document - the SDP. The rationale for this relief is that listed issuers have already disclosed most information which would be material to an investor in order to meet their continuous disclosure obligations under the Securities Markets Act 1988 and the NZX Listing Rules.

We support the introduction of the SDP regime in principle. That said, aspects of the Bill concern us, including the potential for additional director liability in connection with continuous disclosure statements, if the SDP regime is relied upon. We have made submissions to the Commerce Select Committee outlining our concerns.

Proposed Limitation

The detail of the SDP regime will be prescribed in regulations under the Securities Act 1978. The Government's current policy, outlined in a Cabinet paper in February, is that the SDP regime will be restricted to securities that rank equally with or preferentially to the issuer's existing listed securities.

In its paper MED seeks submissions on a proposal to further restrict the SDP regime to "non-complex products, such as shares, preference shares, securities that convert to ordinary shares of the same issuer, and debt securities repayable by the same issuer". A reason given for introducing this limitation is  the difficulty which may be encountered in applying the ranking test to hybrid securities.

Merits of Proposed Limitation

This limitation would address issues that may arise with securities that convert into a different issuer's security or debt securities that are repayable by a different issuer. We have some reservations about the blanket nature of the limitation. For example, it will not always be difficult to determine how complex securities fall within the ranking test.

We are considering this issue further, with a view to making submissions to MED on it. 

Technical Changes

Background

MED proposes changes to the detailed content requirements for prospectuses and advertisements (including investment statements) in the Regulations. The changes stem from:

• the Securities Commission's review of the Regulations in 1999-2000; and
• recommendations made in the Capital Market Development Taskforce's interim report in response to the current financial crisis.

We summarise four key proposed changes below.

Financial Statements

Financial statements prepared under the Financial Reporting Act 1993 must be prepared in accordance with generally accepted accounting practice (GAAP), while the Regulations prescribe particular requirements for financial statements in prospectuses for equity, debt and participatory securities. MED proposes that the Regulations be amended to require that the financial statements in prospectuses are prepared in accordance with GAAP. If adopted, this change will remove the requirement for issuers to prepare two different sets of financial statements. 

Definition of Borrowing Group

A debt issuer's obligation to repay the amount owing under debt securities may be guaranteed by related entities, such as the issuer's subsidiary companies. The Regulations require a prospectus for debt securities to include details about the issuer of debt securities and the "borrowing group". The term "borrowing group" is defined in the Regulations as the issuer of debt securities and all guaranteeing subsidiaries of the issuer. MED proposes that this definition be widened to include guaranteeing parent and sister companies. This change, if implemented, would result in disclosure to investors about all the entities that are guaranteeing the issuer's obligations.

Consideration for Securities

The Regulations require that a prospectus includes a description of the price or other consideration to be paid or provided for the securities offered. Other than for unit trusts, the Regulations do not currently provide for the price of securities to be determined by reference to a formula. In order to provide issuers with increased flexibility, MED proposes that the Regulations be amended to allow the price to be determined by a formula, so long as it is set out in full and clearly explained.

Prospective Financial Information

Currently prospective financial information required in a prospectus for an equity IPO or a participatory security is limited to a prospective statement of cash flows. MED proposes that a full set of prospective financial statements be required in these cases.

Conclusion

We welcome a number of the proposed changes to the Regulations, which reinforce the measures in the Bill to remove unnecessary impediments to raising capital, while ensuring the timely disclosure of relevant information to prospective investors.

We have reservations about the proposal to restrict the SDP regime to "non-complex products" and intend to make submissions to MED on this issue. 

Authors

Kevin Jaffe

Partner - Corporate & Commercial

DDI: +64 9 977 5057

Mobile: +64 21 987 430

Email:

View Profile

Shelley Cave

Partner - Corporate & Commercial

DDI: +64 9 977 5260

Mobile: +64 21 660 090

Email:

View Profile

Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

Mobile: +64 21 446 866

Email:

View Profile

Don Holborow

Partner - Corporate & Commercial

DDI: +64 4 924 3423

Mobile: +64 29 924 3423

Email:

View Profile

Michael Pollard

Partner - Corporate & Commercial

DDI: +64 9 977 5432

Mobile: +64 21 400 852

Email:

View Profile

Alex Campbell

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5177

Mobile: +64 21 918 311

Email:

View Profile