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Review of the Securities Regulations 1983

The Schedules to the Securities Regulations

Common amendments

Clause 1(4) of the First, Second and Third Schedules

Clause 1(4), which is repeated in the first three schedules, requires a prospectus to state the price or other consideration to be paid for the securities being offered. In a number of recent issues, exemptions from this provision have been sought so as to allow a mechanism for arriving at a price to be set out, rather than the price itself. It has been suggested that the Regulations should provide for "open priced offers" so that issuers would not need to seek an exemption. This suggestion, and open pricing generally, raises issues that the Commission wishes to review.
- In the meantime, we invite your comments on whether this clause should be amended.
Clause 3 of the First and Second Schedules
These clauses require disclosure of details of incorporation and registration of the issuer. It does not require disclosure of the statute under which the issuer was registered. We think that the statute under which the issuer is currently registered, whether in New Zealand or overseas, is at least as relevant as the statute under which it was incorporated.
- We propose that clause 3(1) should also require disclosure of the statute or other authority by or under which the issuer is registered at the time of the offer.
Clauses 3(2) and 3(3) are identical in the First and Second Schedules. They are transitional provisions that are no longer necessary.
- It is proposed that they be revoked.
Clause 5 of the First and Second Schedules and clause 2 of the Third Schedule
Clause 5, which is identical in the First and Second Schedules, and clause 2, which is an equivalent provision in the Third Schedule, require disclosure of information about the directors, manager (where appropriate) and advisors of the issuer. These requirements differ from the equivalent requirements in Schedules 3A to 3C, which are more flexible and better reflect today's market conditions. In particular, the more recent Schedules specify information required about criminal convictions, prohibition as a director and any history of being placed in statutory management or receivership. These are not included in the first three Schedules.
- It is proposed that these clauses be amended to conform better with clause 2 of Schedule 3A, clause 4 of Schedule 3B and clause 3 of Schedule 3C.
Clause 5A of the First and Second Schedules
Clause 5A, which is identical in the First and Second Schedules, requires disclosure of certain modifications, exceptions or limitations on the powers of the board of any issuer that is a company. Currently clause 5A requires an issuer to specify limitations imposed by the Companies Act 1993 as well as those imposed by the company's constitution. This seems unnecessary, as Companies Act restrictions will be common to all companies.
- It is proposed that this clause be amended to require only those limitations imposed by the company's constitution (or in the case of an issuer not incorporated under the Companies Act 1993, any limitations imposed under either the incorporating legislation or the constitution of that body).
Clause 7(2) of the First Schedule, clause 6(2) of the Second Schedule and clause 4(3) of the Third Schedule
Clauses 7(2), 6(2) and 4(3) require a brief description of the activities of the members of the issuing or borrowing group during the previous five years. It has been suggested that the term "principal fixed assets" in this clause is restrictive in that there are intangible or other assets outside the ordinary meaning of "fixed assets" which may be material and require disclosure. It is suggested that the term "principal assets" be used in this context.
It has also been suggested that these clauses should also require disclosure of whether the assets are subject to obligations in favour of other persons that affect its control over its residual rights (e.g. whether the issuer has given third party licence rights, charged the asset or entered into an assignment).
Alternatively, it has been suggested that these clauses be repealed on the basis that clauses 7(1) of the First Schedule, 6(1) of the Second Schedule, and 4(1) and (2) of the Third Schedule should provide sufficient disclosure.
- We welcome your comments on these suggestions.
Clause 8 of the First Schedule, clause 7 of the Second Schedule, clause 6 of the Third Schedule and Schedule 3A, clause 5 of the Schedule 3B and Schedule 3C
These clauses require disclosure of a summary financial statement for the issuing or borrowing group. There is currently no relevant Financial Reporting Standard on summary financial information although work is underway to develop such a standard.
- It is suggested that this provision be revisited when a relevant standard has been issued.
Clauses 9 and 10 of the First Schedule and Clause 7 of the Third Schedule
It is suggested that clause 10(1)(c) of the First Schedule, and the equivalent provision in the Third Schedule, clause 7(5), give rise to unnecessary compliance costs to compile the information in relation to a statement of cash flows for cash flows forecast to occur within 12 months from the specified date.
- We are currently reviewing clauses 9 and 10. In the meantime, we suggest that clause 10(1)(c) be amended to require a prospective statement of cash flows for a period ending on the next balance date. Where that period is less than one year, we propose to also require a prospective statement of cash flows for the year that follows.
Requiring the periods to coincide with the balance dates will ensure that they will be more comparable with future historical financial statements.
Clause 11(1)(b) of the First Schedule, clause 8(1)(b) of the Second Schedule and clause 10(1)(b) of the Third Schedule
These clauses prescribe disclosure in respect of an acquisition of a subsidiary or business. It has been suggested that the reference in these clauses to "total tangible assets" should be replaced with "total assets excluding goodwill".
It has also been suggested that the use of total tangible assets is outdated and that total tangible assets often do not reflect the total asset value of the company. This is particularly the case when a company with mainly intangible assets buys a very small tangible asset based subsidiary and must comply with this section. With the rise of e-commerce this is becoming more common.
However, we consider that the term "total assets excluding goodwill" does not reflect the intent of the Regulations which is to exclude all intangible assets, not just goodwill.
- We believe there may be grounds to change this policy. We welcome your comments.
- More generally, we are interested in your views on the circumstances in which disclosure of an acquisition or business should be required, the appropriate nature of such disclosure and the effectiveness more generally of clause 11 of the First Schedule and the equivalent clauses in subsequent Schedules.
Clauses 11(2)(c) and 11(3)(f) of the First Schedule, clauses 8(2)(c) and 8(3)(f) of the Second Schedule, clauses 10(2)(b) and 10(3)(e) of the Third Schedule, clauses 9(2)(b) and 9(3)(e) of the Schedule 3A, clauses 7(2)(b) and 7(3)(e) of Schedules 3B and 3C
These clauses require disclosure of five year summary financial information for businesses or subsidiaries acquired. It has been suggested that this requirement can be difficult for issuers where no historical financial information is available.
We acknowledge that this is a difficult area. However, the Commission has granted a number of exemptions in the past where the required financial information has not been available and issuers have provided alternative best available information. It has been suggested that "best available information" should become the prescribed standard.
- However, in order to ensure that an issuer does in fact disclose the "best available information", we propose that the Regulation should not be changed during Stage One and that the Commission continue to provide exemptions where appropriate.
Clause 11(3)(g) of the First Schedule and clause 8(3)(g) of the Second Schedule
Clauses 11(3)(g) and 8(3)(g) require that, where a statement of financial position is not required, the net tangible asset backing per unit of the securities being offered is required. It has been suggested that the use of net tangible asset backing in these clauses is not an accurate indicator of financial stability.
While we think that Regulations should not differentiate between the value of tangible and intangible assets to an issuer, the requirement to disclose net tangible asset backing per share is widely accepted in the market. We do not think any change is required. An alternative is to require the total assets per unit of securities to be disclosed as well.
- We would appreciate comments on this point.
Clauses 15(4) and 16(2) of the First Schedule and clauses 13(2) and 14(2) of the Third Schedule
These clauses require disclosure of the nature of material transactions by the directors or promoters of the issuer. The format of disclosure of directors' interests or equivalent in the Schedules differs and we are interested in achieving compatibility. However, we regard this disclosure as important and believe it does need to be explicitly dealt with in the Regulations.
- We would welcome comments on ways to achieve this compatibility.
In addition to the clauses identified above, this issue needs to be looked at in relation to other classes of securities. There is a conceptual division between those securities which are the ultimate risk takers in the business, contrasted with investors who have a defined return which they should receive except in the event of default or insolvency. It has been suggested that the first group should be entitled to a level of disclosure as to the interests of directors/managers to enable them to evaluate whether they are subject to unusual levels of "agency risk".
Clauses 23, 34 and 36 of the First Schedule, Clauses 16, 27 and 29 of the Second Schedule and clauses 21, 31 and 33 of the Third Schedule
- General
These clauses require disclosure of the financial information specified in the respective Schedules. This disclosure is not always consistent with GAAP.
- It is proposed that these clauses be amended to require financial statements in accordance with GAAP.
- Interim financial statements
Currently, interim financial statements that are included in a registered prospectus for equity, debt and participatory securities are required to comply with the requirements of the Securities Regulations, except that they need not be audited (section 37A(1A)(d)(ii)). However, interim financial statements that are included in a registered prospectus for unit trusts, superannuation schemes and life insurance policies are required to be prepared as if they required registration under the Financial Reporting Act 1993, except that they need not be audited (clause 16(3) of Schedule 3A, clause 12(3)(b) of Schedule 3B and clause 12(2)(b) of Schedule 3C). Interim financial statements contained in short form prospectuses are required to comply with the requirements of the Financial Reporting Act, except that they need not be audited.
As FRS-24 "Interim financial statements" "does not apply to interim financial statements included in or accompanying a registered prospectus as these will need to comply with the Securities Act and Regulations" (para 2.5), these requirements effectively require interim financial statements to be in full form rather than in condensed form.
The Commission has previously considered whether interim financial statements required by the Regulations should comply with the Financial Reporting Act, that is, with GAAP. If FRS-24 "Interim financial statements" forms part of GAAP, interim financial statements drawn up for offer document purposes will comply with FRS-24. FRS-24 provides for a minimum level of disclosure and the information required is less extensive than the information that is contained in an annual financial report.
The Commission's view has been that the disclosures required by FRS-24 are adequate for prospectus purposes provided that the disclosures required by the proposed FRS-24 are supplemented by the requirement to:
- disclose any material change in any item between the most recent audited financial statements of the issuer and the interim financial statements; and
- disclose all material related party transactions in the period between the date of the most recent audited financial statements and the date of the interim financial statements.
The disclosure proposed above would still be in respect of the "issuing group" the "borrowing group" and the "scheme" as defined in the Regulations.
To effect the changes, the following provisions relating to interim financial statements would need to be amended to require the interim financial statements to comply with the Financial Reporting Act:
- clause 23 of the First Schedule, clause 16 of the Second Schedule and clause 21 of the Third Schedule in respect of a statement of financial position;
- clause 34 of the First Schedule, clause 27 of the Second Schedule and clause 31 of the Third Schedule in respect of a statement of financial performance;
- clause 36(b) of the First Schedule, clause 29(b) of the Second Schedule and clause 33(b) of the Third Schedule in respect of a statement of cash flows; and
- Regulation 4(2)(e).
It is possible that section 37A(1A)(d)(ii) of the Securities Act 1978 may also need to be amended.
- The Commission would work with the Institute of Chartered Accountants of New Zealand in developing proposals to amend FRS-24 so that it applies to interim financial statements that are drawn up for prospectus purposes and includes the two additional proposals.
Clauses 24-33, 35, 37-38 of the First Schedule, clauses 17-26, 28, 30-32 of the Second Schedule and clauses 22-30, 32, 34 of the Third Schedule
These clauses set out the financial information required by the preceding clause in each of the Schedules. These clauses will become unnecessary when disclosure in accordance with GAAP is required.
- It is therefore proposed that these clauses be revoked.
Clause 39 of the First Schedule, clause 33 of the Second Schedule
These clauses require disclosure of the times and places where various documents relevant to the issue of securities may be inspected. These clauses contain obsolete references to memoranda and articles of association.
- It is proposed that these references be revoked as they are now obsolete.
Clause 42(1) of the First Schedule, clause 36(1) of the Second Schedule and clause 38(1) of the Third Schedule
These clauses require an auditor's report and specify what must be stated in that report. It has been suggested that these reports will not necessarily provide useful information where audited financial statements are prepared in accordance with GAAP. It has been suggested that these clauses be amended to align more closely with the audit report in Schedule 3A.
Even if the proposal is to adopt GAAP for prospectus purposes, it may not be possible for the existing requirements to be eliminated, at least from the Second and Third Schedules, as there is no equivalent definition of "borrowing group" and "scheme" in GAAP.
- It is proposed that no change be made for the time being. Do you agree?
As a further point, under current requirements the auditor's report must contain a statement that any prospective financial information "must be properly compiled on the footing of the assumptions made or adopted by the issuer".
- We are interested to receive comments on whether auditors should also be required to comment on the reasonableness of those assumptions.
Clause 6(7) of Schedule3A, clause 5(7) of Schedules 3B and 3C
These clauses specify where summary financial information is not required. The reference to "subclause 1(b)" in each of these clauses is a drafting error.
- It is proposed that these references be replaced by a reference to subclause 1.

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