Changes to the securities regulations
Use in prospectuses of financial statements prepared under the Financial Reporting Act
Issue
9. The securities regulations currently specify the contents of financial statements that must be included in registered prospectuses for equity, debt, and participatory securities. The required contents of financial statements under the securities regulations are different from those that apply in relation to financial statements prepared by issuers under the Financial Reporting Act 1993, which must be prepared in accordance with generally accepted accounting practice (GAAP3).
Objectives
10. The objectives of this change are to reduce compliance costs and improve disclosure.
Proposed change
11. We propose to change the securities regulations to require that the financial statements used in the prospectuses for equity, debt or participatory securities are prepared in accordance with GAAP, in the same way as financial statements prepared under the Financial Reporting Act. This will reduce compliance costs by removing the requirement for issuers to prepare two different sets of financial statements for two different purposes. It also has the benefit of ensuring that the contents of financial statements in prospectuses are consistent with best practice as set out in financial reporting standards. This change will also require some consequential changes to the required contents of audit reports in prospectuses.
12. In addition, if the financial statements in prospectuses for equity, debt and participatory securities are to prepared in accordance with GAAP, we are seeking submitters views on whether there are any matters that are not included in GAAP that should also be included in these financial statements.
Q1 Do you agree that the financial statements in the prospectuses of equity, debt, and participatory securities should be prepared in accordance with GAAP? If these financial statements are prepared in accordance with GAAP, are there any additional matters that are not included in GAAP that you think should also be included in these financial statements?
Expanding the definition of borrowing group
Issue
13. When making an offer of debt securities, an issuer's obligation to repay the amount owing under the terms of the security is usually guaranteed by related entities, such as subsidiaries of the issuer. The securities regulations require disclosure about the debt issuer and the borrowing group (i.e. the issuer and any guaranteeing subsidiaries). Disclosure required in relation to the borrowing group includes the financial statements of the borrowing group, and a brief description of the activities of the borrowing group and the principle fixed assets of the borrowing group that are provided as security for the securities being offered. However, the guaranteeing entities of a debt issuer may include parent or sister companies which are not currently included in the definition of borrowing group.
Objective
14. The objective of this change is to improve disclosure.
Proposed change
15. We propose to change the securities regulations to include guaranteeing parent and sister companies within the definition of borrowing group. This would ensure that disclosure relating to the borrowing group actually provides information about all of the entities that are guaranteeing fulfilment of the issuer's obligations under the terms of the debt securities.
Q2 Do you agree that the definition of borrowing group should include guaranteeing parent and sister companies as well as guaranteeing subsidiaries?
Application of relevant financial reporting standards to summary financial statements
Issue
16. The securities regulations currently prescribe the contents of summary financial statements in the registered prospectuses of equity, debt and participatory securities, unit trusts, life insurance policies, and superannuation schemes. However, when any of these entities choose to prepare summary financial statements for any other purpose they are required to comply with the applicable financial reporting standard (FRS-43) under section 36A of the Financial Reporting Act 1993.
Objective
17. The objective of this change is to improve disclosure and reduce compliance costs.
Proposed change
18. We propose to change the securities regulations to prescribe that the summary financial statements in the registered prospectus of these entities must comply with the applicable financial reporting standard. This reduces the costs to those entities of preparing summary financial statements for other purposes, as it means that these entities are not required to prepare two different sets of summary financial statements. It also has the effect of ensuring that the contents of summary financial statements in these prospectuses are consistent with best practice as set out in the applicable financial reporting standard.
Q3 Do you agree that the summary financial statements in prospectuses should be prepared in accordance with the applicable financial reporting standard?
Prospective financial information in prospectuses
Issue
19. The securities regulations currently prescribe that a registered prospectus must, in certain circumstances, contain a prospective statement of cash flows rather than a full set of prospective financial statements. In particular, this is required where the prospectus is for an initial offer of equity securities, or for an offer of participatory securities.
20. It is unlikely that by itself a prospective statement of cash flows provides much useful prospective financial information to investors compared to a full set of prospective financial statements. In addition, when an entity chooses to prepare prospective financial information for any other purpose they are required to comply with the applicable financial reporting standard (FRS-42) under section 36A of the Financial Reporting Act 1993, which is not the case for prospective statements of cash flows in prospectuses.
Objective
21. The objective of this change is to improve disclosure.
Proposed change
22. We propose to change the securities regulations to prescribe that a full set of prospective financial statements be included in prospectuses in circumstances where a prospective statement of cash flows is currently required, and that these prospective financial statements be prepared in accordance with the applicable financial reporting standard.
23. Two key benefits would result from these changes. Firstly, these changes would provide more useful disclosure to investors by providing them with prospective financial information that would allow them to make a more informed judgement about the future financial performance of the entity. Secondly, these changes would ensure that the required content of prospective financial statements maintains best practice as set out in the applicable financial reporting standards.
Q4 Do you agree that issuers should be required to include a full set of prospective financial statements in their prospectus in circumstances where they are currently required to only include a prospective statement of cash flows?
Q5 If issuers are required to include a full set of prospective financial statements in their prospectuses in the circumstances described in question 4, do you agree that these prospective financial statements should be prepared in accordance with the applicable financial reporting standard?
Disclosure of terms of participation deed
Issue
24. The securities regulations currently require that either the deed of participation or the principal terms of the deed be included in prospectuses for participatory securities. These deeds are usually long and complex, making the information contained in the deed inaccessible to potential investors.
Objective
25. The objective of this change is to improve disclosure.
Proposed change
26. We propose to change the securities regulations to require that the principal terms of the deed of participation for participatory securities be included in prospectuses and the deed itself not need to be attached. This will be more accessible and useful than simply attaching the deed itself.
Q6 Do you agree that issuers of participatory securities should be required to include the principal terms of their deed of participation in prospectuses, rather than having the option of simply attaching the deed itself?
Disclosure of interests
Issue
27. The securities regulations currently require different disclosure of directors/managers' and promoters' interests in the prospectus of an issuer of equity or participatory securities than for unit trusts, life insurance policies, and superannuation schemes. There is no obvious benefit arising from the inconsistent treatment of disclosure of directors/managers' and promoters' interests for different kinds of issuers.
Objective
28. The objective of this change is to improve disclosure.
Proposed change
29. We propose to change the securities regulations to align the requirements for disclosure of directors' and promoters' interests in schedules 1 and 3 (equity and participatory securities) with the broader requirements relating to disclosure of interests in schedules 3A, 3B, and 3C (unit trusts, life insurance policies, and superannuation schemes). In addition to making the requirements more consistent across different kinds of issuers, this will also result in slightly broader disclosure requirements applying to the directors/managers and promoters of issuers of equity and participatory securities.
30. In summary, this change would repeal the rules in existing clauses 15 and 16 of schedule 1, and clauses 13 and 14 of schedule 3, and instead require identical disclosure by directors/managers and promoters of issuers of equity and participatory securities to that applying to the directors/managers and promoters of other entities under clause 11 of schedule 3A, clause 8 of schedule 3B, and clause 8 of schedule 3C.
Q7 Do you agree that the requirements for the disclosure of directors/managers' and promoters' interests for issuers of equity and participatory securities should be broadened to aligned with the equivalent requirements for unit trusts, life insurance policies, and superannuation schemes?
Use of information from interim and unaudited financial statements (specific CMDT recommendation)
Issue
31. The securities regulations currently provide that no advertisement may state the amount of the net assets, or the amount of the assets and liabilities, of the issuing group, borrowing group, guarantor, or mortgagor under a contributory mortgage, unless the amounts shown appear in the most recent audited financial statements of that entity. However, the audited full financial statements might not be the most recent financial statements available about an entity, so this requirement may create an impediment to providing the most up-to-date financial information to investors.
Objective
32. The objective of this change is to improve disclosure and reduce compliance costs.
Proposed change
33. We propose to change the securities regulations to allow information about the net assets and assets and liabilities of these entities in interim financial statements to be cited in an advertisement, if the interim financial statements are more recent than the last full financial statements. The result would be that more recent information could be provided to investors than would otherwise be the case.
34. In addition, we propose to change the securities regulations to allow an advertisement to cite information about the net assets and assets and liabilities of these entities from unaudited full or interim financial statements, provided that the advertisement makes it clear that the full or interim financial statements have not been audited. The result would be that more recent information could be provided to investors than would otherwise be the case.
Q8 Do you agree that information from interim financial statements about the net assets or the amount of assets and liabilities of an issuer should be able to be cited in an advertisement?
Q9 Do you agree that information from unaudited full or interim financial statements about the net assets or the amount of assets and liabilities of an issuer should be able to be cited in an advertisement, so long as the advertisement makes it clear that the full or interim financial statements have not been audited?
Determining the consideration to be paid for securities (specific CMDT recommendation)
Issue
35. The securities regulations currently require that a registered prospectus to contain a description of the price or other consideration to be offered for equity, debt, or participatory securities, or unit trusts. Other than for unit trusts, the regulations do not currently provide for the price or other consideration offered for securities to be determined by reference to a formula (e.g. as a percentage of the value an existing security at a point in time).
Objective
36. The objective of this change is to increase flexibility.
Proposed change
37. We propose to change the securities regulations to allow the price or other consideration being paid for equity, debt, or participatory securities, or unit trusts to be determined by a formula, so long as the formula used is set out in full and clearly explained. This will increase flexibility in designing offers of securities.
Q10 Do you agree that the consideration to be paid for a security should be able to be determined by reference to a formula, so long as the formula is set out in full and clearly explained?
Inclusion in prospectuses of material comments on prospective financial information (specific CMDT recommendation)
Issue
38. The securities regulations currently prohibit an advertisement from containing prospective financial information that is not also in the prospectus for the securities. This creates a problem where an issuer may wish to include with the prospectus an expert's report that comments on the prospective financial information contained in the prospectus (the expert may for example, do some sensitivity analysis that may be useful for investors). At present the issuer cannot do this because the experts report may itself be an advertisement under the securities regulations, and by commenting on the prospective financial information in the prospectus it will inevitably be containing prospective financial information that is different from that in the prospectus.
Objective
39. The objective of this change is to increase flexibility.
Proposed change
40. We propose that prospective financial information may be included in an advertisement (even though it is not included in the prospectus), as long as it only takes the form of commentary or analysis on prospective financial information in the prospectus. In these circumstances, the advertisement itself would also be required to contain a statement of the principle assumptions and method of calculation of this prospective financial information.4
41. We also seek submitters' views on whether the amendment described in paragraph 40 should be extended to cover all prospective financial information and not just prospective financial information that takes the form of commentary or analysis of prospective financial information in the prospectus.
Q11 Do you agree that an advertisement should be able to contain prospective financial information in the form of commentary or analysis of prospective financial information contained in the registered prospectus, so long as it sets out the principal assumptions and method of calculation of that information. If so, do you also consider that this amendment should apply to all prospective financial information, and not just prospective financial information in the form of commentary or analysis on prospective financial information in the registered prospectus?
Aligning the requirements for interim financial statements with the applicable financial reporting standard (specific CMDT recommendation)
Issue
42. Where an issuer wishes to include interim financial statements in a prospectus, there are some differences between the required contents of those interim financial statements under the securities regulations, and what is required under the applicable financial reporting standard (NZ IAS 34) This has the effect of requiring issuers to prepare two different sets of interim financial statements for different purposes.
Objective
43. The objective of this change is to reduce compliance costs and improve disclosure
Proposed change
44. We propose that the required content of interim financial statements used in prospectuses be prepared in accordance with the applicable financial reporting standards. This will reduce compliance costs by removing the requirement for issuers to prepare two different sets of interim financial statements for two different purposes. It also has the benefit of ensuring that the contents of interim financial statements in prospectuses are consistent with best practice as set out in the applicable financial reporting standard.
Q12 Do you agree that interim financial statements in prospectuses should be prepared in accordance with the applicable financial reporting standard?
Making it an offence for a person to distribute an advertisement via the internet if the advertisement is not accompanied by a certificate
Issue
45. The current Securities Regulation 17(6) makes it an offence for publishers, broadcasters, and film exhibitors to distribute an advertisement if a signed certificate has not been completed on behalf of the issuer in relation to that advertisement.5 However, regulation 17(6) does not currently cover a person who distributes the advertisement via the Internet. This appears to be a loophole in this offence provision.
Objective
46. The objective of this change is to modernise the regulations.
Proposed amendment
47. We propose that the securities regulations be changed so that it is an offence for a third party to distribute an advertisement via the internet without a certificate (however, this amendment does not propose that an internet service provider will be liable). Further, as part of the technical changes proposed in the discussion document, the Securities Regulations will also be changed so that it is only an offence if person knew or ought reasonably to have known of the absence of a certificate.
Q13 Do you agree that the current regulation 17(6) should be expanded to make it an offence for a third party to post an advertisement on a website without a signed certificate?
Rewrite and technical changes to modernise the regulations
Issue
48. The Securities Regulations 1983 are more than 25 years old and have been substantially amended on a number of occasions. As a result, the Securities Regulations contain a range of outdated terminology, unclear definitions, and superfluous, spent and unnecessarily rigid provisions In addition, many of these provisions will be amended or replaced as a result of the proposals in this paper.
Objective
49. The objective of this change is to modernise the regulations.
Proposed changes
50. It is intended that the Securities Regulations 1983 will be rewritten using modern drafting language (e.g. "must" rather than "shall"), without the rewrite process changing the substantive effect of the regulations.
51. In connection with the limited rewrite, a number of technical changes are proposed to modernise the regulations, increase their flexibility and technological neutrality, and clarify and simplify some of their definitions and substantive provisions. The proposed technical changes are set out in appendix 1. These changes were originally proposed in the context of amendments to the current regulations rather than a rewrite, and so are expressed as amendments to the Securities Regulations 1983.
Q14 Do you have any comment on the intention to undertake a limited rewrite of the regulations?
Q15 Do you have any comments on the technical changes to the securities regulations set out in appendix 1?
Conditions on use of simplified disclosure prospectuses
Issue
52. In February 2009, the government introduced the Securities Disclosure and Financial Advisers Amendment Bill into Parliament. The Bill provides for the regulation of a "Simplified Disclosure Prospectus" that may be used by issuers who are subject to certain disclosure obligations. Regulations will provide for the use of a Simplified Disclosure Prospectus by a listed issuer who is subject to a continuous disclosure obligation.
53. Cabinet agreed most of the contents of the regulations in February this year.6 Regulations will be made to provide for a Simplified Disclosure Prospectus for listed issuers, which will enable stock exchange listed issuers to offer designated debt and equity securities without the need to duplicate information that they have already publicly disclosed under their continuous disclosure obligations under the Securities Markets Act 1988 and listing agreements. Currently, the policy is that offer may be for designated debt (e.g. bonds) and equity (e.g. shares) securities, the security being offered must rank equally or preferentially to the issuer's existing listed securities although the security being offered does not itself need to be listed. The simplified disclosure prospectus must also contain a signed statement from directors to the effect that the issuer has complied with the requirements of continuous disclosure and that they can confirm all information material to the offer has been disclosed.
54. The securities regulations will set out who may issue securities using a Simplified Disclosure Prospectus, which securities may be issued using a Simplified Disclosure Prospectus, and what must be disclosed in a Simplified Disclosure Prospectus.
55. The simplified disclosure regime will be able to be used for issues of equity securities and debt securities that rank equally or preferentially with any of the issuer's listed equity securities, and will be able to be used for issues of debt securities that rank equally or preferentially with any of the issuer's listed debt securities.
56. We welcome views on whether, in the first instance, we should further restrict the application of the simplified disclosure regime to non-complex products, such as shares, preference shares, securities that convert into ordinary shares of the same issuer, and debt securities repayable by the same issuer debt. The main advantage of allowing the SDP regime to apply to complex products is that it will provide issuers with more options when seeking to raise finance in the current economic climate. The main downside to this proposal is the difficulty in determining how complex securities will fall within the ranking tests proposed.
Q16 Do you think that the application of the Simplified Disclosure Prospectus should be restricted to certain non-complex products? If so, to which non-complex products should the Simplified Disclosure Prospectus be restricted?
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