Details of the Proposed Model
5.1 The Scope of the Proposed Mutual Recognition Regime
Under the proposed regime, an offer of securities which is a "regulated offer" in one jurisdiction and is able to be lawfully made in that jurisdiction will be able to be lawfully made in the other jurisdiction in the same manner and with the same offer documents, provided that the entry criteria for the regime are satisfied and the offeror complies with the ongoing requirements of the regime (both these issues are discussed later).
An offer will be treated as a "regulated offer" for these purposes if the home jurisdiction requires the offer to be made using a regulated offer document,7 and if the offeror is amenable to the jurisdiction of the home jurisdiction, that is, is incorporated or constituted under the home jurisdiction's laws, has an established place of business in the home jurisdiction, or is registered in the home jurisdiction as an overseas company.
The regime will apply to offers of all securities (including shares, debt securities/debentures, participatory securities, options to acquire securities and equitable interests in securities) and interests in collective investment schemes.8 It will not extend to other financial products such as life insurance, superannuation products, or derivatives (other than options to acquire securities).
The regime will only be relevant in practice where offers of the security in question are regulated under the securities laws of both Australia and New Zealand, and a regulated offer document is required in both countries.
The regime will encompass the activities that are inherent in the making of offers, including:
- content and registration requirements for offer documents;
- requirements in respect of trust deeds, trustees, custodians and supervisors;
- the manner in which offers may be made;
- advertising and other communications with offerees in relation to offers; and
- the manner of acceptance of offers and other consequential matters (such as the handling of subscribers' funds, allotment, and obligations to provide information to subscribers at the time of acceptance or allotment, and subsequently).
The regime will not cover financial advice that extends beyond offer documents. Because the requirements under Australian and New Zealand law in respect of the provision of financial advice are not sufficiently similar at present, mutual recognition in this regard would not be readily achieved.
It is envisaged that the scope of the regime will be specified in an inter-governmental agreement , and that domestic legislation will implement it in each country.
5.2 Requirements to Be Met by Issuers under the Mutual Recognition Regime
For an offer of securities to be made under the proposed regime, the offer must comply with certain entry criteria and ongoing requirements.
Entry Requirements
The regime will apply if, and only if, an offer complies with certain entry criteria, which will be prescribed in domestic law.
First, the offer must be subject to the home jurisdiction's regulatory regime, that is, it must be a "regulated offer" in the home jurisdiction, which requires use of a regulated offer document (for example a prospectus, offer information statement, or PDS). In addition, the offeror must be entitled to offer the securities to the public under the law of the home jurisdiction, and any offer documents required to be filed with the home jurisdiction regulator must have been filed (and any waiting period before an offer can be made or accepted must have expired).
The offeror must file a notice with the host jurisdiction regulator stating that it proposes to make an offer under the regime. The notice must:
- specify certain particulars, including the name of the offeror and the securities to be offered, and any other matters that the regime may require to be specified;
- specify the period in which it is proposed to offer the securities in both the host and home jurisdictions;
- the proposed offer period in the home jurisdiction must include any period during which the securities are to be offered in the host jurisdiction;
- specify an address for the service of proceedings in the host jurisdiction;
- confirm that the offeror submits to the jurisdiction of the host jurisdiction courts; and
- be signed by a person with authority to act on behalf of the issuer.
The offeror must also provide the host jurisdiction regulator with a number of other documents:
- the offer documents that have been filed with the home jurisdiction regulator, or under which the offer can be made in the home jurisdiction without filing;
- any relevant constitutional documents;
- for shares, the company's constitution; for other issuers, the relevant scheme constitution or trust deed;
- a copy of the warning statement that will accompany offers in the host jurisdiction;
- the warning statement will state that the offer is regulated under the home jurisdiction's securities laws and that the standard host jurisdiction securities law requirements that apply to domestic offers do not generally apply to the offer;
- other specified warnings may also be required, for example, in relation to tax differences and currency risk;
- a copy of any exemption granted by the home jurisdiction regulator that is specific to the offer or the offeror; and
- the particulars of any general exemption granted by the home jurisdiction regulator that is relevant to the offer.
An offer that does not meet the entry requirements will fall outside the regime. Such an offer will be treated as an ordinary domestic offer in the host jurisdiction, and therefore will be unlawful if domestic regulatory requirements are not met, with consequences prescribed by domestic law.
Ongoing Requirements
Under the proposed regime, the offer must comply with certain ongoing requirements. These will be specified in the legislation of the host jurisdiction. It is anticipated that the ongoing requirements would include the following:
- the offer must remain a regulated offer in the home jurisdiction;
- the offer must comply with the home jurisdiction's substantive rules in relation to the making of such offers, as they apply from time to time;
- the offer must be open to acceptance by persons in the home jurisdiction at all times at which it is open for acceptance by persons in the host jurisdiction;
- no person should be concerned in the management of the offeror who is prohibited from being concerned in the management of such a body in the host jurisdiction;
- the principal offer document must be accompanied by a specified warning (see above);
- the offeror must file information concerning certain changes to the offer with the host jurisdiction regulator;
- any amendments to the regulated offer documents must be filed as soon as practicable and in any case within five business days9 of filing/use in the home jurisdiction;
- any amendment to, or revocation of, an exemption relevant to the offer granted by the home jurisdiction regulator that is specific to the offer or the offeror must be filed as soon as practicable and in any case within five business days of its issue;
- any amendment to the warning statement must also be filed with the host jurisdiction regulator prior to its use;
- the offeror must provide an offeree, on request, with copies of the relevant constitutional documents;
- in accordance with the entry requirements, these documents are required to be filed with the host jurisdiction regulator at the start of the offer;
- any amendments to the relevant constitutional documents must also be filed with the host jurisdiction regulator as soon as practicable and in any case within five business days of filing/use in the home jurisdiction; and
- the offeror must notify the host jurisdiction regulator (as soon as practicable and in any case within five business days) of any enforcement action or exercise of statutory power by the home jurisdiction regulator in relation to the offer, for example a stop order or a notice to produce documents.
Failure to comply with the ongoing requirements would result in a breach of the host jurisdiction's laws. The consequences of non-compliance would be specified in the law of the host jurisdiction, including criminal sanctions, civil liability and/or stop orders issued by the host country regulator.
The sanctions for a breach in the host country of the ongoing requirements of the mutual recognition regime will be determined by the host country and set out in the relevant host country laws governing the mutual recognition regime. The sanctions that apply in the host country may differ from the sanctions provided for under the laws of the home country, although the applicable substantive requirements in terms of offer documents will be the same. Likely sanctions for a breach of the ongoing requirements in New Zealand are civil liability for resulting loss, civil penalties of up to $1,000,000, or a fine of up to $300,000. Likely sanctions for a breach of ongoing requirements in Australia are civil liability for resulting loss, and civil or criminal penalties, the details of which are yet to be determined.
A breach of the ongoing requirements would not take the offer outside the regime, and would therefore not render the entire offer unlawful in the host jurisdiction.
Breaches of the home jurisdiction's securities laws in connection with an offer made to an investor in the host country under the mutual recognition regime would also expose the offeror to civil action, criminal sanctions and other enforcement action in the home jurisdiction in the same manner as if the breach had occurred in the home jurisdiction.
It is envisaged that the host jurisdiction regulator would have primary responsibility for taking action against issuers for failure to comply with the ongoing requirements other than the home jurisdiction compliance requirement, and that the home jurisdiction regulator would have lead responsibility for taking action in respect of breaches of the substantive requirements of the home jurisdiction securities laws. However, a breach of the home jurisdiction's substantive requirements in the course of making an offer to investors in the host country would also constitute a breach of the host jurisdiction's ongoing requirements, and thus could be the subject of enforcement action by the host jurisdiction regulator in appropriate cases. In this regard, the two regulators will need to establish regimes (possibly set out in a memorandum of understanding) for communication and co-ordination of action in connection with recognised offers. This would ensure that an issuer who breached a home jurisdiction law would be prosecuted only once.10 There may be circumstances, however, where ASIC may wish to commence proceedings notwithstanding that proceedings have been commenced in New Zealand.11
5.3 The Modification of Applicable Offering Requirements
The mutual recognition model requires the host jurisdiction to legislate to provide that if an offer is made under the mutual recognition regime, the (entry and ongoing) requirements that apply to offers made under that regime will apply in place of the standard domestic fundraising requirements. In New Zealand, for example, an offer made by an Australian issuer under the mutual recognition regime would need to comply with the requirements specified in Part 5 of the Securities Act 1978 (NZ) and in regulations made under Part 5, although they would not need to comply with the requirements of Part 2 of the Securities Act 1978 (NZ) and of the Securities Regulations 1983 (NZ) from which the offer would be exempted by regulations made under Part 5.
The home jurisdiction would need to legislate to provide that its fundraising laws apply to offers made by offerors in that country to investors in the host jurisdiction under the mutual recognition regime.
Exemption from Host Jurisdiction Offering Requirements
Each jurisdiction will need to legislate to provide that the usual requirements for domestic offers of securities do not apply in relation to offers made by issuers from the other jurisdiction under the regime. That is, offers will be exempted from these requirements if the regime's entry requirements are met. This approach would be provided for in the Agreement, and domestic legislation in each country would specify the requirements of its fundraising laws that do not apply to offers under the regime.
It is envisaged that New Zealand will provide for exemptions from certain provisions of Part II of the Securities Act 1978 (NZ), and that Australia will provide for exemptions from certain provisions of the Corporations Act 2001 (Cth). Details of the specific provisions in respect of which there will be exemptions for offers made under the regime are set out in Appendix 2.
In place of the standard domestic requirements, from which offers under the regime will be exempted, the requirements of the mutual recognition regime will apply. That is, the law of the host country will continue to specify certain requirements which must be met by an offer made under the regime, but those requirements will be the entry requirements and ongoing requirements of the mutual recognition regime, rather than the requirements that apply to standard domestic offerings.
Application of Home Jurisdiction Securities Laws
Both jurisdictions will need to legislate to provide that specified substantive requirements of their securities laws apply in connection with offers made to investors in the other jurisdiction under the mutual recognition regime. In other words, where an offer made in one jurisdiction is extended to the other jurisdiction under the mutual recognition regime, the securities laws of the home jurisdiction will apply to the offer whether the investor is in the home jurisdiction or the host jurisdiction. It is envisaged that this approach would be provided for in the Agreement, and that domestic legislation in each country will specify which particular laws will apply to offers made to investors in the other country under the mutual recognition regime.
It is envisaged that New Zealand will apply all of Part II of the Securities Act 1978 (NZ) (except for section 35) and the Securities Regulations 1983 (NZ) to offers made by New Zealand offerors to investors in Australia under the mutual recognition regime, and that Australia will apply all of the relevant securities fundraising and managed investment scheme provisions of the Corporations Act 2001 (Cth), including those provisions relating to disclosure to investors under Part 7.9 (see above), to offers made by Australian offerors to investors in New Zealand under the mutual recognition regime. The requirements that apply under Australian law in respect of hawking and alternative dispute resolution ("ADR") will apply to offers by New Zealand issuers under the mutual recognition regime, either by direct application of the existing statutory provisions, or by mirroring these provisions in the mutual recognition regime provisions (see Appendix 2).
Application of General Laws
Laws other than securities laws of the home and host jurisdiction will apply to the extent that general principles of statutory interpretation and private international law result in their application.
A claim in contract against an offeror by an investor in the host jurisdiction could be filed in the host jurisdiction, and served at the address for service specified in the notice supplied by the offeror as part of the entry requirements. Whether the law of the host jurisdiction was the proper law of the contract, and to which issues it would be applied, would depend on normal private international law rules. In most cases it is likely that the terms of the offer will provide that the proper law of the contract is the law of the home jurisdiction. The effect of this provision will be determined by reference to normal private international law rules.
A claim in tort (for example for negligent misrepresentation) arising out of conduct in the host jurisdiction could be filed in the host jurisdiction, and could be served in the host jurisdiction at the address for service specified in the initial notice. It is likely that normal private international law rules would lead to the application of the substantive tort law of the host jurisdiction in most, if not all, cases concerning information provided to persons in the host jurisdiction.
So far as liability for misleading and deceptive conduct in connection with an offer is concerned, each host jurisdiction would be permitted (but not required) to apply its domestic legislation. In this regard, it is envisaged that New Zealand would continue to apply the Fair Trading Act 1986 (NZ) and the Consumer Guarantees Act 1993 (NZ) to offers made to New Zealand investors under the mutual recognition regime. Likewise, Australia would continue to apply the corresponding provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (in Part 2, Division 2) and the relevant provisions of the Corporations Act 2001 (Cth) (Chapter 6D and Part 7.9) to offers made to Australian investors under the mutual recognition regime. In addition, other host jurisdiction market misconduct regimes, such as insider trading and continuous disclosure regimes, would continue to apply in the normal manner, regardless of whether the offer was made under the domestic offer regime, or the mutual recognition regime.
The proposed regime would not affect the common law or any applicable State/Territory laws.
5.4 The Role of the Regulators
The Role of the Home Jurisdiction Regulator
Under the proposed regime, the home jurisdiction regulator will have primary responsibility for supervising a cross border offer.
The Agreement will require that each jurisdiction provide for the application of its standard enforcement agency powers in respect of offers made by offerors in that jurisdiction to investors in the other jurisdiction under the mutual recognition regime. Domestic legislation in each jurisdiction will give effect to this. Thus, the home jurisdiction regulator will have all its usual powers (in the home jurisdiction) in connection with offers made in the host jurisdiction under the regime. These powers include the power to suspend or stop the offer being made, and the power to prohibit advertisements in relation to the offer. These powers will be exercisable in respect of offers to investors in either country.12
The home jurisdiction regulator will be able to exercise its powers of its own motion, at the request of the host regulator, or at the request of a person in the host jurisdiction. The Agreement will require (as a general principle) that both countries ensure that home jurisdiction regulators accord complaints from persons in the host jurisdiction no less priority than complaints from persons in the home jurisdiction.
The Role of the Host Jurisdiction Regulator
The Agreement will provide that the host jurisdiction can legislate to provide for its regulator to have certain powers in respect of offers made under the mutual recognition regime if entry requirements are not satisfied, or ongoing requirements are not complied with. Legislation in each country will, to the extent necessary, expressly provide for the application of these powers. It is envisaged that the host jurisdiction regulator will have its usual powers under domestic legislation to investigate suspected breaches of the law, including breaches of entry requirements or ongoing requirements (including the home jurisdiction compliance requirement). The host regulator will have the power to suspend or stop an offer in the host jurisdiction, and/or prohibit advertisements in the host jurisdiction, if entry requirements are not satisfied or ongoing requirements are not complied with. The host regulator will also have its usual powers to take action in respect of misleading conduct (for example, through issuing a stop notice).
The Agreement will encourage regulators to enter into understandings with regard to communication and the co-ordination of enforcement activity.
Regulators' Investigative Powers
No special provisions are needed to enable the regulator in one jurisdiction to investigate matters relating to the conduct of issuers in the other jurisdiction in connection with the operation of the mutual recognition regime.
Consider, for example, a New Zealand offeror making an offer in New Zealand, which is extended to Australia under the mutual recognition regime. New Zealand securities law requirements apply to the offer, whether directed to New Zealand or Australian investors. Any suspected breach therefore, whether it concerns a New Zealand investor or an Australian investor, is a breach of New Zealand securities law- the standard investigation and information gathering provisions apply. Those powers can be exercised by the NZSC on its own initiative, or at the request of ASIC. A breach of any of the entry requirements or ongoing requirements in connection with an offer made to an investor in Australia constitutes a breach of Australian law, which ASIC can investigate on its own initiative. If ASIC has an independent interest in the matter, ASIC can also investigate at the request of the NZSC. Any breach of New Zealand securities law requirements in connection with an offer made to an Australian investor under the mutual recognition regime will also be a breach of the ongoing requirements of the Australian mutual recognition legislation, so ASIC's usual domestic powers to investigate breaches of Australian securities law will apply.
Exemption Powers of the Home Jurisdiction Regulator
It is envisaged that the home regulator will retain the usual exemption powers in respect of offers which will be made in both jurisdictions under the regime.13 A copy of any exemption granted by the home regulator that is specific to the issuer, or to the particular issue of securities, will need to be filed in the host jurisdiction in accordance with the regime's entry requirements. The "home country compliance requirement" under the law of the host jurisdiction will then require compliance with the home country's securities laws as modified by that exemption.
However if the home regulator were to grant an exemption to an issuer that removed the need to use a regulated offer document in the home jurisdiction, the offer would no longer be a regulated offer for the purposes of the proposed mutual recognition regime, so the regime would not apply.
5.5 Jurisdiction and Enforcement Regarding Civil and Criminal Proceedings
A breach by an issuer of the requirements of the regime could be the subject of both civil and criminal proceedings, in the home jurisdiction or the host jurisdiction.
Civil Proceedings
With regard to civil matters, an aggrieved investor in the host jurisdiction could bring proceedings in the home jurisdiction or in the host jurisdiction by serving the proceedings at the address for service specified in the notice filed by the offeror14 (As noted earlier, the entry requirements of the proposed model would require a person wishing to make an offer under the mutual recognition regime to file a notice with the host jurisdiction regulator specifying an address for the service of proceedings in the host jurisdiction).
Similarly, civil penalty proceedings in respect of a breach of the regime's requirements in the host jurisdiction could be brought in that jurisdiction by serving the proceedings at the address for service specified in the notice filed by the offeror, or could be brought in the home jurisdiction (provided, in each case, that the law of the relevant jurisdiction provides for civil penalties for the breach in question - sanctions for breach are, as noted above, a matter for each jurisdiction to determine and prescribe in its domestic legislation).15
Criminal Proceedings
A breach of the requirements of the regime may be the subject of criminal proceeding in the home jurisdiction or the host jurisdiction.
A breach of the home jurisdiction's securities law requirements may be the subject of criminal proceedings in the home jurisdiction, whether the breach occurs in respect of an offer made to an investor in the home jurisdiction or in the host jurisdiction (the home jurisdiction's laws will apply to the offer in either case, as discussed above).
A breach in the host jurisdiction of the ongoing requirements of the regime (including a breach of the home jurisdiction compliance requirement) could be the subject of criminal proceedings in the host jurisdiction. A decision on whether or not to bring criminal proceedings in the host jurisdiction would be made by the relevant enforcement agency in that jurisdiction.16
Trans-Tasman Enforcement of Fines and Penalties?
A fine or penalty imposed in one country cannot normally be enforced in any other country. In the context of the proposed mutual recognition regime, however, it may be desirable to ensure that fines and penalties imposed in the host jurisdiction for breach of the ongoing requirements are enforceable in the home jurisdiction, where the issuer is based and is likely to have the bulk of its assets. The regime could facilitate trans-Tasman enforcement of fines and penalties by providing for a simple mechanism for enforcing in the home jurisdiction fines or penalties relating to breaches of the mutual recognition regime requirements imposed by the courts of the host jurisdiction. In New Zealand, Part 5 of the Securities Act 1978 would enable regulations to be made to provide for Australian penalties (civil or criminal) to be enforced by registering them in the High Court of New Zealand. This possibility raises a number of issues that are still under consideration by the New Zealand Government. The Australian Government is not currently reviewing its general policy on the enforcement of foreign punitive judgments.
5.6 The Way Forward
An Inter-Governmental Agreement
An inter-governmental agreement (referred to in this paper as the Agreement) would provide the political underpinning for the proposed mutual recognition regime. It is envisaged that this would take the form of a treaty.
It is envisaged that the treaty will be a high-level agreement, concerned with the principles of the mutual recognition regime. Details of the regime will be included in domestic legislation (for example, the specific provisions to be applied by the home jurisdiction to offers made to investors in the host jurisdiction under the mutual recognition regime, and the requirements of the host jurisdiction's securities laws that would not apply to offers made under the mutual recognition regime).
Legislation
Legislation and/or regulations will be needed in both Australia and New Zealand to implement the proposed mutual recognition regime.
The New Zealand Government has already inserted a new Part 5 in the Securities Act 1978 to provide for mutual recognition regimes regarding offers of securities. The proposed mutual recognition regime would be implemented by regulations made under Part 5 of the 1978 Act. When the model regarding the trans-Tasman mutual recognition of offers of securities and managed investment scheme interests has been finalised, the New Zealand Government will consider whether it is necessary or desirable for this legislation to be amended in the light of the particular features of the final model.
Australia has no such provisions in its legislation. Consequently, when the model has been finalised, the Australian Government will need to amend the Corporations Act 2001 (Cth), possibly in a manner comparable to Part 5 of the Securities Act 1978 (NZ).
Australia and New Zealand will also need to work together to draft the necessary provisions.
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