Commerce Minister Simon Power announced on 26 August that Cabinet had approved new securities regulations (the Securities Regulations 2009) which implement a range of recommendations made by the Capital Market Development Taskforce, including the implementation of the simplified disclosure prospectus regime. In this article, senior associate Stephen Layburn provides a brief overview of the new regulations.
The Securities Regulations 2009, which are a complete replacement of the Securities Regulations 1983, will come into force on 1 October 2009. However, under transitional provisions issuers will be able to elect to offer securities under the 1983 regulations until June 2010 and will be able to continue to allot securities under prospectuses registered under the 1983 regulations for the life of the prospectus.
While the key change arising out of the 2009 regulations is the implementation of the simplified disclosure prospectus (SDP) regime heralded with the changes to the Securities Act 1978 that were made at the end of July, the Ministry of Economic Development (MED) has seized the opportunity to modernise the 1983 regulations and introduce a range of other amendments recommended by the Capital Market Development (CMD) Taskforce.
The new regulations incorporate changes to the regulations arising from MED's exposure draft of the SDP regulations released in May 2009 and MED's discussion document "Changes to the Securities Regulations" released in April 2009. (For further information on these discussion documents see the articles "Fast track for capital raising: simplified disclosure prospectus" and "Proposed securities regulation changes released" in the Autumn 2009 issue of Commercial Quarterly.) They also contain a number of other substantive and minor drafting changes which were not released for public consultation.
Simplified disclosure prospectus
The new SDP regime will provide a significant opportunity for listed issuers to reduce the compliance costs associated with capital raising by removing the duplication of disclosure of information that is already available to the market, typically by means of the issuer's announcements under the NZX continuous disclosure regime.
Specifically, use of an SDP provides for:
Listed issuers who are already subject to continuous disclosure obligations being able to raise capital using one (simplified) disclosure document instead of a prospectus and an investment statement.
Two alternative forms of SDP disclosure:
a very short form offer document ("SDP lite") for offers of securities of the same class as existing listed securities already on issue (relying heavily on continuous disclosure); and
a longer form offer document for offers of securities that rank equally or in priority to existing listed securities (which will be less reliant on continuous disclosure).
Listed unit trusts will also be able to use the SDP regime for offers of additional listed securities, and to offer higher ranking debt securities.
We are pleased to see that a number of restrictions and anomalies contained in the initial draft of the regulations proposed earlier this year have been addressed or removed altogether. In particular, the proposed distinctions between debt and equity securities have been removed, thereby reducing concerns about one type of security receiving a more favourable regulatory treatment than others.
However, an issuer seeking to make an offer of further (listed) securities by means of the SDP must also:
identify the continuous disclosure information to draw the attention of investors to it;
correct or update that continuous disclosure information if it is misleading in the context of the offer; and
in the case of any material information that has not been disclosed pursuant to the issuer's continuous disclosure obligations, that is likely to assist would-be investors, make a statement to that effect.
Such disclosed information must also be made available for inspection. In addition, the directors of the issuer are required to state whether the issuer is in compliance with its continuous disclosure obligations.
Also absent from the SDP regime is the catch-all disclosure standard previously suggested by MED that the offer document contain all information that investors and their professional advisers would reasonably require to make an informed assessment of the offer (including information incorporated by reference to announcements made by the issuer under its continuous disclosure obligations).
We expect that issuers will continue to undertake a significant level of due diligence investigation to ensure that the issuer's directors can still rely on the due diligence defence provided by the Securities Act 1978. As a result, the use of an SDP is likely to reduce the level of duplication in disclosure information and achieve other savings but may not ultimately achieve a significant streamlining of the process of capital raising for a listed issuer.
Other changes incorporated in the 2009 regulations include:
aligning the requirements for financial statements in prospectuses with generally accepted accounting practice;
increasing the flexibility around the matters that may be included in securities advertising (including by enabling reference to information from interim and unaudited financial statements);
changing the requirements governing the inclusion of prospective financial information in a (long-form) prospectus so that the requirement for a 12-month prospective statement of cashflows is replaced by a requirement to provide a full set of prospective financial statements unless the directors of the issuer conclude that doing so would be misleading;
aligning the requirements for disclosing directors' and managers' interests across different types of issuer; and
a modernisation and alignment of the language used in the regulations, particularly the disclosure schedules, which is the first substantive updating since the prospectus disclosure regime came into force more than 20 years ago.
While the 2009 regulations are a welcome adoption of the recommendations of the CMD Taskforce to reduce the hurdles faced by listed issuers when raising capital, it is suggested that the new regulations do not substantially lower the standards expected of businesses seeking to raise capital from the public. This is particularly the case for new issuers seeking to undertake an initial public offer – who must still use both an investment statement and a long-form prospectus.
Existing issuers are also likely to put their market announcements under the microscope and, judging by recent Australian experience, seek to remove any doubts about the extent of disclosure by updating the market perhaps by means of an Australian-style 'cleansing statement'.
The Minister has indicated that the 2009 regulations will be reviewed as part of a larger review of the Securities Act which was begun this year. It is likely that the outcome of this review will result in further refinements to the disclosure process. A detailed discussion document on the Securities Act will be released by the end of this year and new legislation is expected to be in place by the end of 2011.
Bell Gully is working on a detailed analysis of the Securities Regulations 2009. If you would like a copy of that analysis or further information about the new regulations or the SDP regime, please contact your usual Bell Gully adviser.
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.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.