Appendix II
Business Law Reform Bill: Amendments to the Securities Act 1978 Concerning Offers of Securities to the Public
In general, offers of securities to the public for subscription are required to be made in a prospectus and investment statement which disclose all information necessary for a member of the public to assess the offer.
In certain circumstances offers may be made without such disclosure documents either because they are deemed not to be offers of securities to "the public", or because they are exempted from the relevant disclosure provisions in the Act.
Recent amendments to the Securities Act 1978 (through passage on 7 April 2004 of the omnibus Business Law Reform Bill) extend the number of situations where offers of securities are exempted from the prospectus requirements. Specifically, the Securities Amendment Act 2004:
- Extended the exemption for close business associates and relatives of the issuer to also exempt offers made to close business associates and relatives of directors of the issuer [section 3(2)(a)(i) Securities Act]. Such an offer is deemed not to be an offer to the public;
- Deemed that offers of securities to persons who are each required to pay a minimum subscription price of at least $500,000 before the allotment of those securities is not an offer to the public [section 3(2)(a)(iia) Securities Act];
- Created new exemptions from the disclosure obligations for offers made to certain "eligible persons". Eligible persons are those who are considered either wealthy, or experienced either in investing money, or in the particular industry or business to which the security relates [sections 5(2CB) to 5(2CG) Securities Act] -
- Eligible persons are wealthy where an independent chartered accountant certifies that the person (personally, and not through trusts or associated holdings) has net assets of $2 million or had an annual gross income of $200,000 for each of the last two years [section 5(2CD) Securities Act];
- Eligible persons are "experienced in investing money" or "experienced in the industry or business to which the security relates" (as the case may be) if an independent financial services provider (such as an investment adviser) is satisfied that the person can assess the merits, value and risks of the offer, together with their information needs, and the adequacy of information provided by the offeror. The financial services provider must give the person a written statement of the adviser's reasons for being so satisfied, and the investor must sign an acknowledgement that they have not received an investment statement or prospectus [section 5(2CE) Securities Act].
These extended exceptions are all based on the policy that the Act treats as "the public" only those investors who need its protection. The exemptions make it easier for businesses to raise capital - in particular small and medium enterprises - as they can dispense with producing expensive offer documentation.
Offers can still be prohibited if they are misleading, and criminal liability remains under the Act for any misstatements in the offer.
Pre-Prospectus Advertising
The Securities Amendment Act 2004 also introduced changes in respect of pre-prospectus advertising. Previously, only limited statements about a proposed offer could be made before a prospectus was registered and an investment statement made available. This restricted the ability for issuers to gauge interest in an upcoming offer without getting a specific exemption to do so.
The Act now permits an advertisement to state that an issuer is considering making an offer and, if the issuer wishes, to seek preliminary expressions of interest [section 5(2CA) Securities Act].
A number of protections are spelled out to ensure that members of the public understand that the advertisement does not amount to an offer, including:
- Restricting the information that can be contained in the advertisement;
- Requiring that the advertisement state that no money is being sought and that no applications will be accepted or money received unless the subscriber has received an investment statement; and
- Prohibiting distribution of the advertisement if 6 months have lapsed since its release date.
- Further protections for investors remain by virtue of section 38B of the Securities Act which allows the Securities Commission to prohibit advertisements where they are likely to mislead, deceive or confuse, or are inconsistent with the Securities Act. Under section 58 of the Securities Act criminal liability attaches to misstatements in advertisements, although certain defences apply.
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