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DISCLOSURE BY FINANCE COMPANIES

Cap on shares allotted

35.

The Commission does not intend that exemptions for employee share schemes be used as avenues for companies to raise significant capital with only limited disclosure. Where we have received requests for exemptions to allow companies to undertake substantial capital raising from employees the Commission has been concerned that the interests of the company, in securing significant capital, might not be aligned with the long term welfare of its employees.

36.

For this reason the Commission proposes to cap the number of shares that can be allotted to eligible persons under any class exemption for unlisted issuers. As these schemes are likely to operate over long periods it may be appropriate to have both an annual and an overall cap.

37.

The Commission proposes that the exemption should be available only

(a)

where the number of shares allotted to eligible persons who are members of the public in any one year does not amount to more than 5% of the share capital of the company at the beginning of the year; and

(b)

where the total number of shares held by eligible persons who are members of the public does not at any time amount to more than 15% of the share capital of the company.

We have chosen the 5% annual limit because this is the percentage of the share capital of a company that is a substantial holding in terms of securities law. The 15% overall cap is sufficiently low, we think, that the exemption is unlikely to be seen as a preferred way for a company to raise significant capital funding.

38.

Directors of many smaller companies have significant shareholdings. The Commission proposes that the limits described above would apply only to shares allotted to and held by eligible persons who must receive a prospectus before any shares are allotted. It is not intended that directors' (or some employees') shareholdings be counted in the total if these people are not "members of the public", or are "wealthy or experienced" investors in terms of section 5(2CA) of the Securities Act.

Questions

h.

Should any class exemption include a cap on the quantity of shares that can be allotted to eligible persons under the exemption?

i.

If so, are the proposed caps set at the right levels?

Request for comments

39.

The Commission welcomes comments on the questions set out in this paper, and any other comments on the proposed exemption.

40.

After considering comments received the Commission will decide whether or not to grant a new class exemption, and the terms and conditions of the exemption. An exemption notice will then be drafted. We will send a draft notice for comment to anyone who would like to be consulted on the drafting of the exemption. Please indicate in your comments on this paper if you would like to be consulted on the drafting of any exemption notice.

41.

We seek comments before the end of Tuesday 31 August 2004.

42.

Please send comments in electronic format to liam.mason@seccom.govt.nz. Comments can also be sent by post to: Securities Commission
PO Box 1179
Wellington
Attn: Liam Mason

or by facsimile to (04) 472 8076.