AQUILINE HOLDINGS LIMITED

Report on registered prospectus and certain advertisements

1.

The Securities Commission has reviewed the registered prospectus and certain advertising for an offer of converting preference shares and redeemable preference shares ("Offer") of Aquiline Holdings Limited ("Aquiline"). The review followed the launch of Aquiline's offer to the public on 14 April 2004. A prospectus was registered in relation to this offer.

2.

The review related to three issues:

(i)

prospective financial information in launch presentation: whether the inclusion of prospective financial information in the launch presentation for the offer was in breach of securities law because no such prospective financial information was included in the registered prospectus for the offer.

(ii)

advertisement in daily newspapers: whether a newspaper advertisement for the offer was likely to mislead or confuse investors about their participation in any growth of Aquiline during the period prior to conversion of the converting preference shares.

(iii)

registered prospectus - description of share price: whether the registered prospectus for Aquiline's offer of converting preference shares and redeemable preference shares omitted to include a material particular, namely sufficient detail about the mechanism used by the Board when setting the share price for the ordinary shares into which the converting preference shares will convert.

3.

The Commission considered both written and oral submissions from Aquiline on the three issues.

4.

The Commission has decided to briefly report its findings to emphasise for issuers the standards of disclosure required when money is raised from the public. A registered prospectus must contain all material information about the offer of securities to which it relates. Advertisements must not be likely to mislead, deceive, or confuse investors.

Prospective financial information in the launch presentation

5.

Following media reports and complaints from the media the Commission reviewed information provided by Aquiline in the presentation made at the launch of the Offer on 14 April 2004.

6.

The launch presentation included information about Aquiline's expected shareholder return on page 12. It stated that -

"By 1 July 2006 we are targeting:

• Ownership of up to 50 Standalone SMEs
• Annualised sales $500m p.a.
• Annualised EBIT $50m
• Enterprise Value ('EV') $200m
• EV comprised of $80 m Equity & $120m low cost capital

On this basis Aquiline expects to deliver a Total Shareholder Return ("TSR") of 40% p.a. over the next two financial years - 2004-05 and 2005-06".

7.

The Commission firstly considered whether the information on page 12 of the launch presentation was "prospective financial information" in terms of the Securities Act 1978 and the Securities Regulations 1983.

8.

The Securities Regulations 1983 defines the term "prospective financial information" as having the meaning given to it under generally accepted accounting practice. The term "generally accepted accounting practice" is defined in the Securities Regulations 1983 as having the same meaning as in section 3 of the Financial Reporting Act 1993. The Financial Reporting Act 1993 states that generally accepted accounting practice is to be ascertained by reference to applicable financial reporting standards. Financial Reporting Standard 29 ("FRS-29") defines "prospective financial information" as "information about future financial performance, future financial position, future cash flows, and future movements in equity based on assumptions about future events and courses of action. Prospective financial information includes prospective financial statements, the notes to the prospective financial statements and any narrative relating directly to the prospective financial statements".

9.

The Commission formed the view that the information in the presentation about Aquiline's targeted position and the stated expectation to deliver a total shareholder return of 40% p.a. over the next two financial years falls within the definition of "prospective financial information" in FRS-29.

10.

Regulation 15 of the Securities Regulations states that if there is a registered prospectus for securities to which an advertisement relates, the advertisement must not contain prospective financial information unless the advertisement refers to the registered prospectus and the prospective financial information is also contained in the registered prospectus.

11.

The registered prospectus for the Offer did not contain the information stated in the presentation relating to Aquiline's targeted position and the expectation to deliver a total shareholder return of over 40% p.a. over the next two financial years. The prospectus did not appear to contain any prospective financial information.

12.

Consequently, the Commission formed the view that the inclusion of prospective financial information in the launch presentation for the offer was in breach of the Securities Act and the Securities Regulations and in particular regulation 15, as no such prospective financial information was included in the registered prospectus for the Offer.

13.

The Commission decided not to take any action on this matter as Aquiline withdrew the prospective financial information from the launch presentation when the matter was raised by the Commission.

14.

Aquiline's view is that the information on page 12 of the launch presentation was presented as targets which had been adopted by the Board and not as forecasts or projections. Aquiline states that it had withdrawn the information from the launch presentation to minimise adverse publicity and damage to its public offer rather than because it agreed that the information was prospective information.

Advertisement in daily newspapers

15.

After a complaint about a newspaper advertisement in the daily newspapers promoting the offer, the Commission reviewed the information in the advertisement to ascertain whether or not the advertisement was misleading in terms of regulation 8 of the Securities Regulations 1983. A copy of the advertisement is attached, marked "A". The advertisement promoting the offer of converting preference shares and redeemable preference shares contained a graph which showed the share price growth of the ordinary shares, and the heading "An opportunity to be part of the Aquiline growth story for the first time".

16.

Regulation 8 of the Securities Regulations states that no advertisement shall contain any information sound, image, or other matter that is likely to deceive, mislead, or confuse with regard to any particular that is material to the offer of securities contained or referred to in the advertisement.

17.

Aquiline contended that the title of the advertisement and the graph were not misleading because the offer of the converting preference shares was in fact the first opportunity for investors to participate in Aquiline's growth and there was nothing in the advertisement to suggest that holders of converting preference shares would participate in the growth of the company prior to conversion. Aquiline submitted that there is no requirement for it to state the conversion ratio in an advertisement, and that a reasonable investor would understand that conversion would occur on the basis of a pre-set formula.

18.

The Commission was of the view that the newspaper advertisement as a whole was likely to mislead or confuse investors as the title of the advertisement, the graph in relation to the price of ordinary shares and the lack of information about conversion ratios when considered together gave an impression that shareholders would participate in Aquiline's growth during the term of their investment in the converting securities, whereas in fact, any participation in the growth (if any) would only commence after 2 years, upon the conversion into ordinary shares. The advertisement omitted to mention that conversion of the converting preference shares into ordinary shares is not on a fixed ratio basis, or determined by reference to the present share price, but will be determined by reference to a formula based on the price of ordinary shares, set by the board, as applying at the date of conversion.

19.

The Commission formed the view that the newspaper advertisement for the securities offered by Aquiline breached regulation 8 of the Securities Regulations 1983 and was likely to mislead or confuse investors about their participation in any growth of Aquiline during the period prior to conversion of the converting preference shares.

20.

Consequently, at a meeting on 12 May 2004 the Commission decided to prohibit the distribution of the newspaper advertisement under section 38B of the Securities Act.

Registered Prospectus - description of share price

21.

Aquiline's share price is set by the board at six monthly intervals i.e., the share price is not market driven. Aquiline's shares are not listed by New Zealand Exchange Limited.

22.

In relation to the share price the registered prospectus (on page 18) stated -

"The Board sets the share price of the Ordinary Shares at six monthly intervals, based on the net profit after tax projected by the Board for the ensuing six month period. The Board sets the six monthly share price taking the above factors into account, plus its judgement of the supply and demand for AHL equity capital. The share price set by the Board is the price at which new Ordinary Shares at that time are offered for subscription by AHL, or previously allotted shares are offered for sale by Shareholders using the Capital Register. Shareholders are not required to use the Capital Register, and Shareholders who sell their Ordinary Shares by other means are not bound by this set Share Price. However, as mentioned above, for the period 1 July 2003 to 8 March 2004, 88% of all Ordinary Share sales (excluding sales to related parties) took place through the Capital Register, at the set Share Price."

23.

The Commission considered that the registered prospectus did not contain an adequate description of the process by which the board arrives at the share price and that the factors taken into account by Aquiline in setting the share price and the methods of setting the share price were material to the offer of securities requiring disclosure in the registered prospectus.

24.

The Commission also considered that the statement in the registered prospectus about setting the share price omitted material information about methods and factors used by the board in setting the share price. The description of the methods for setting the share price should contain all available information about the setting of the share price and about the factors taken into account by directors, including any price/earnings multiple range within which the board sets the price.

25.

Consequently, at the meeting on 12 May 2004, the Commission formed the view that the registered prospectus of Aquiline for an offer of converting preference shares and redeemable preference shares omitted a material particular about the securities, namely sufficient detail about the mechanism used by the board when setting the share price for the ordinary shares into which the converting preference shares will convert.

26.

Aquiline was informed of the Commission's view and given an opportunity to comment. The Commission also provided guidance on the information Aquiline could include in the prospectus to rectify the matter. Aquiline instead chose to close the offer and on 14 May 2004 amended its registered prospectus to bring forward the closing date of its Offer from 31 December 2004 to 14 May 2004.

27.

Aquiline's view was that the prospectus did contain a full description of the procedure used by the board to set the share price and that there was nothing more which Aquiline could usefully have added to that description. Aquiline contended that the prospectus was clear and that the share price was subjective in that it was set by the board, using its judgment, and taking into account the matters described in the prospectus.

28.

Aquiline made submissions on the matters at a hearing held on 1 September 2004. After hearing Aquiline's submissions at that meeting the Commission confirmed its earlier opinion regarding the registered prospectus and the advertisement.

29.

Although the Commission considered Aquiline's registered prospectus to have omitted a material particular, it has decided not to commence the process of formal cancellation of the registration of the prospectus under section 44 of the Securities Act because the offer has been withdrawn. It has decided it should comment on the matters by way of a report published under section 28A of the Securities Act 1978.

30.

The Commission is of the view that where companies raising money from the public choose to use subjective pricing mechanisms for their shares then this needs to be very clearly highlighted for investors, along with all material details of any processes and procedures that will be undertaken to price the shares. Aquiline's prospectus was inadequate in the way it explained this for investors.