The Commission has banned the offer documents for the James Smith Car Park Property Scheme offered by Regional Realty Limited.
The Wellington car park was being offered to investors for $21 million by Regional Realty Limited (Regional Realty), under a proportionate property ownership scheme. Interests in these schemes are participatory securities under the Securities Act 1978.
People who offer property schemes where each investor acquires an interest in the same property through a certificate of title may choose to rely on the Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002.
This exemption enables them to offer the securities without having a statutory supervisor, and without a prospectus and investment statement. Instead prospective investors are to be given an offeror's statement and a valuation report. These documents must contain all of the matters specified in the schedules to the exemption notice, and any other information that would be material to a prospective investor's decision to invest in the scheme.
These conditions of exemption are designed to ensure that investors are given relevant and sufficient information on which to decide whether or not to invest.
Issuers who choose to use an exemption notice must comply with the conditions of exemption. This is particularly important where the notice exempts the issuer from the need to have a registered prospectus. The reason for this is that where a condition of exemption is breached, the exemption is no longer available. If there is no registered prospectus, then under the law the securities cannot be allotted, and investors must be repaid their money. Therefore any failure to comply with conditions of exemption has serious consequences for the offer of securities.
Offerors who wish to use the Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice should note:
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- the offeror's statement (which must be
given to every investor before
subscription) must contain all the
information set out in schedule 1 of
the notice.
- a valuer's report must be sent to all
investors with the offeror's statement.
This must contain all the information
detailed in schedule 2 of the notice.
This report must be prepared by an
independent valuer, but the offeror is
responsible for ensuring that it
contains all the required information.
It is not sufficient to tell investors that
a valuer's report is available on request,
or to attach any summary document to
the offeror's statement.
- the respective roles of the people
involved in the offer must be clearly set
out. The issuer of the securities (the
person who has the benefit of the
exemption) is called the "offeror" under
the exemption notice. This person
must act "by or through" a licensed real
estate agent or a trustee corporation. If
a real estate agent acts both as principal
and agent in the offer (which we do
not think is desirable) then this must
be clearly disclosed to investors.
- where a real estate agent is used, the
offeror's statement must tell investors
of their right to complain about the
agent to the Real Estate Institute of
New Zealand.
- the offeror's statement must include
material details about the financial
standing of any tenants of the property.
This gives investors some idea about
the tenants and their ability to
maintain rental payments. If the
tenant is part of a group of companies
then any information about the group
should include a statement about
whether or not the tenant has recourse
to any assets of the wider group.
- similarly, the offeror's statement must
set out material details of any
guarantees. Material details may
include information about the
guarantors, and the extent of any due
diligence carried out on the guarantors.
- if there is forecast financial information
in the offeror's statement, the
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statement must contain forecast financial statements in respect of the scheme for the first accounting period commencing on or after the date of the offeror's statement. These forecast financial statements must accord with generally accepted accounting practice (in particular, FRS-29) and have been reviewed by a member of the Institute of Chartered Accountants of New Zealand.
Importantly, the offeror's statement must also include any other information that would be material to a prospective investor's decision to invest in the scheme.
There is a similar requirement for the valuer's report. These are required so that investors can make fully informed investment decisions. The offeror must undertake reasonable due diligence to discover all material information. It is not sufficient simply to say that certain information is not known to the offeror.
What is material will depend on the circumstances of each case. In the James Smith case, the Commission was of the
opinion that the required standard was not met because the offeror's statement and the attached valuation did not
include:
- information about the recent sale of the building for $16 million, and the valuer's reasons for believing that the
$21 million valuation was justified;
- information about the assumptions underlying the valuation; and
- a further valuation report that the offeror had obtained, and that was available on request - in the circumstances this report should have been given to all investors with the offeror's statement.
This article is not a complete description of the requirements of the exemption notice. Offerors should take advice from lawyers experienced in securities law when preparing disclosure documents under this exemption. Offer documents are intended to inform investors. Above all, they must not contain any information that would be likely to deceive, mislead, or confuse
prospective investors.
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