Letter from the Minister of Commerce to The Marketplace Company Ltd - 15 December 2004
[ Last Updated 14 November 2005 ]
15 December 2004
Also available as: Letter from the Minister of Commerce to The Marketplace Company Ltd [142 KB PDF]
The Marketplace Company Ltd
Attn: Christopher Russell
PO Box 5422
WELLINGTON
Dear Mr Russell
Notice of Intention to Declare Unlisted Subject to the Securities Markets Act
I am writing to inform you, as operator of the market, that I propose to declare that section 36B of the Securities Markets Act ("the Act") applies to the person operating Unlisted.
I am satisfied that the result of section 36B not applying to the person operating Unlisted securities market is likely to be detrimental to:
- the integrity and effectiveness of securities markets in New Zealand; and
- the confidence of investors in securities markets in New Zealand;
My reasons for this opinion are as follows:
- Size and nature of Unlisted
With 21 companies and a combined market capitalisation of around $880 million (not including those four companies which to date have not yet traded), Unlisted has a significant presence in New Zealand's capital markets. It is bigger than the New Zealand Alternative Exchange ("NZAX") in respect of both market capitalisation and number of companies trading. Further, despite being marketed as a facility for small and medium sized enterprises (and following its commencement even on that basis, the then Minister of Commerce informed you that she reserved her position on making a declaration), it has become clear to me that this is not the case. Some of the companies on Unlisted have wide shareholdings (e.g. there are 3100 unit-holders in New Zealand Rural Property Trust) and large market capitalisations by New Zealand standards (e.g. Skyline has a market capitalisation of $229 million and would therefore rank in the top 30 companies on the NZSX).
I therefore perceive a risk around Unlisted because of the number of shareholders potentially exposed should anything go wrong here in relation to matters which being subject to section 36B would address (e.g. an occurrence of insider trading or the failure of a company where continuous disclosure has not been given to a market). The number of people potentially affected is such that even if all shareholders appreciated the current lack of regulatory controls - worse if some didn't - the event, its reporting and the lack of shareholder or regulatory recourse, would likely cause damage to the reputation of and therefore the integrity and effectiveness of and the confidence of investors in New Zealand's securities markets. - Comparative international regulation
In reviewing regulation of securities markets in other jurisdictions (and I have particularly noted the United States, the United Kingdom, Australia and Singapore), it is clear that in like jurisdictions Unlisted would be subject to some form of regulatory oversight.
As I consider an important measure of the integrity of New Zealand's capital markets is the ability to attract international investment and its reputation overseas, I am satisfied that leaving Unlisted as it now is, and as it is now developing, outside s36B, is likely to have a detrimental effect on international perceptions of our markets and therefore their reputation and integrity, and investor confidence in them. - Regulatory difference and arbitrage
In my dealings with you, you have asserted that Unlisted is not a competitor for the regulated NZAX. You have stated that Unlisted's market is aimed at a particular niche - small and medium-sized enterprises which would be unlikely to list on either of the registered exchanges. However, it is clear from their size that most if not all of the companies operating on Unlisted are potential candidates for the NZAX or, for that matter, the NZSX.
A key point of difference between Unlisted and a registered exchange would seem to be not having to comply with or be subject to the statutory provisions for continuous disclosure obligations, the insider trading regime, director's and officer's relevant interest disclosure, substantial security holder disclosure, rule approval or regulatory oversight. Unlisted appears to offer most of the advantages of a registered exchange for a similar fee. To the extent that Unlisted's position (including its cost structure) - as a result of its unregulated status - creates a disincentive for companies of the type and scale now on it to participate in regulated markets, I am satisfied that this is likely to be detrimental to the integrity and effectiveness of securities markets in New Zealand and the confidence of investors in those markets. - Potential for confusion
I consider that there are aspects of Unlisted's operation that are sufficiently similar to a registered exchange that may cause confusion in the minds of investors and therefore be detrimental to the integrity of New Zealand's securities markets. Such features include: the auction style "bid-quote" method of selling; the use of positive listing agreements; and the use of broker intermediaries.
I am aware that there are features of Unlisted that differ from a securities exchange in that there is no clearing and settlement facility and Unlisted also uses prominent disclaimers on its website to advise users of its unregulated status.
While this might appear to be some safeguard against investor confusion about Unlisted's regulatory status, I consider that the disclaimers themselves appear at odds with other features of the market. For example, listing agreements that allow for published censure of an issuer's conduct and broker agreements requiring observance of international standards do not sit comfortably with disclaimers that Unlisted does not monitor or enforce compliance by listed issuers with the law, and that Unlisted has no responsibility in respect of brokers.
I am concerned that some investors may well have an incomplete understanding of the implications of Unlisted's unregulated status. The recent failure of Access Brokerage demonstrated that the average retail investor does not necessarily appreciate the exact details of the particular operation they are dealing with.
I also do not believe that the existence of such disclaimers removes the concerns set out in the other reasons for my decision.
I am therefore satisfied that despite the disclaimers Unlisted issues as to its unregulated status, Unlisted has sufficient characteristics of an exchange to give rise to confusion as to Unlisted's status that is likely to be detrimental to the integrity and effectiveness of, and the confidence of investors in New Zealand's securities markets.
Accordingly, for the reasons above, I hereby give notice of my proposed declaration that section 36B of the Securities Markets Act applies to the person operating Unlisted. You are invited to make a written submission to me concerning my proposed declaration by Friday 18 March 2005. In accordance with section 36D of the Act, I am writing in a similar fashion to the Securities Commission and other persons I think are representative of the interests likely to be substantially affected by the proposed declaration. I will consider all submissions made to me in due course.
If I still then wish to make the declaration, I will give 14 days notice to you and the others referred to above and in the Gazette, together with the reasons for my opinion, as required under section 36D.
Yours sincerely
Hon Margaret Wilson
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