• About
• Publications
• Exemptions
• Notices
• What's new?
• International
• Speeches
• Information for investors
• Contact us
• Site map
• Home

Offers of Unlisted Interests in Commercial Properties - A Review

3. APPLICATION OF SECURITIES LAW

3.1	Offers of equity securities and bonds made by promoters of a commercial property investment company are required to comply with the provisions of the Securities Act 1978 ("the Act") and the Securities Regulations 1983 ("the Regulations").
3.2	In general terms, this means there must be an investment statement and a registered prospectus for the offer as well as a trust deed and trustee appointed in relation to the bonds.
	The investment statement
3.3	The investment statement is the primary offer document - every investor must have received an investment statement before subscribing for a security (section 37A(1)(a) of the Act). The issuer must also prepare and register a prospectus in relation to any offer of securities to the public (section 37(1)). The prospectus must be provided free of charge to any prospective investor who requests it (section 54B(3)).
3.4	The contents of the investment statement are prescribed in sections 38C to 38E of the Act, and in Part 1A and Schedule 3D of the Regulations. Investment statements are also deemed to be "advertisements" for the purposes of the Act and Regulations which means they are subject to most of the constraints and requirements of the Regulations as to their content.
3.5	Section 38D states: "The purpose of an investment statement is to- Provide certain key information that is likely to assist a prudent but non-expert person to decide whether or not to subscribe for securities; and Bring to the attention of such a person the fact that other important information about the securities is available to that person in other documents."
3.6	Regulation 7A includes: "(1) In addition to the other requirements set out in the Act, every investment statement must contain, in a succinct manner, all of the information, statements, and other matters specified in Schedule 3D that are applicable to the securities to which the investment statement relates."
3.7	The requirements of Schedule 3D that are of particular relevance to our review of offer documents relating to commercial property investments include: "What are the charges? 7. Types of charges- (1) A statement as to which of the following types of charges are or may be payable to the issuer or a promoter, or an associated person of the issuer or promoter, or (if there is a scheme) the scheme, by a subscriber (whether directly or indirectly, including by deduction): (a) Entry charges: (b) Trustee, administration, or management charges: (c) Expenses or overhead charges: (d) Charges or expenses relating to goods or services that the subscriber is required to obtain: (e) Early termination charges: (f) Switching or sale charges (including the difference between any buying and selling prices for the securities): (g) Alteration charges: (h) Other charges. (2) A statement as to which of the types of charges specified in subclause (1) are or may be payable by the issuer or, if there is a scheme, from the scheme to a promoter or administration manager or investment manager or an associated person of the issuer or the promoter or the administration manager or the investment manager, being charges that will or may affect the amount of the returns to subscribers. (3) A brief description of any practices of the issuer or any associated person in relation to charges that will or may affect the amount of the returns to subscribers. (4) A brief description of the rights of the issuer or any other person to alter any of the charges applicable to the securities. 8. Amount of charges- (1) If a charge, or the minimum or maximum amount of a charge, referred to in clause 7(1) can, at the date of the investment statement, be expressed as a dollar amount (or as a percentage of another dollar amount), a statement of the dollar amount (or of the percentage and a description of the other dollar amount). (2) If a charge, or the minimum or maximum amount of a charge, referred to in clause 7(1) cannot, at the date of the investment statement, be expressed as a dollar amount (or as a percentage of another dollar amount), a statement describing how the charge will be calculated and what procedure is available to the subscriber to ascertain the amount at the time of, and following, the subscription." "What returns will I get? 9. Returns- (1) The following information about the returns to subscribers from the securities: (a) A brief description of the nature of the returns: (b) A brief description of the key factors that determine the returns: (c) A statement whether or not an amount of returns, quantifiable as at the date of the investment statement and enforceable by subscribers, has been promised and, if so, the amount or a description of how that amount can be calculated: (d) A statement as to which of the following (if any) will or is likely to affect the returns (in addition to any of the charges referred to in clause 7): (i) Taxes or duties: (ii) Reserves or retentions. (2) The dates on which, or frequency with which, the returns from the securities will be due and paid or, if there are no such dates or frequency or the dates or frequency are unknown, a statement to that effect. (3) If payment of all or any of the returns from the securities will or may be withheld until a particular date or for a particular period, a statement to that effect and a brief description of the circumstances that may produce this result. (4) The name of the person legally liable to pay the returns." "What are my risks? 11. Risks- (1) A brief description of the principal risks of- (a) The money paid by a subscriber not being recovered in full by the subscriber: (b) A subscriber not receiving the returns referred to in clause 9: (c) A subscriber being required to pay more money in respect of a security than that disclosed in clause 5 or clause 12. (2) If it is reasonably foreseeable that, on termination of any security at any time, a subscriber will have received, in total, less than the amount paid to the issuer or an associated person for the security, a statement to this effect and a brief description of the circumstances that may produce this result. 12. Consequences of insolvency- (1) A statement whether or not subscribers will or may be liable to pay money to any person as a result of the insolvency of the issuer (or, if there is a scheme, the scheme) and, if so, a brief description of the liability. (2) A brief description of any claims on the assets of the issuer (or, if there is a scheme, the scheme) that will or may rank ahead of claims of subscribers in the event of the issuer or scheme being put into liquidation or wound up. (3) A brief description of any claims on the assets of the issuer (or, if there is a scheme, the scheme) that will or may rank equally with the claims of subscribers in the event of the issuer or scheme being put into liquidation or wound up."
3.8	The emphasis of the investment statement is on clarity and brevity. Although the statutory prescription does not include financial information, the intention of the investment statement is to identify the key factors relating to (among other matters) the returns, risks and charges associated with the investment.
3.9	For Securities Act purposes, the investment statement is also an "advertisement". As such (Regulation 15) the investment statement cannot include prospective financial information unless that information is also included in the prospectus for the securities.
3.10	Since all commercial property investments rely on prospective financial information to support stated "returns" the prospective financial information included in the investment statement must also be stated in the prospectus. The prospectus
3.11	The securities offered in commercial property investments usually comprise equity and debt securities. As such, the prospectus is usually required to comply with the First and Second Schedules of the Regulations.
3.12	Some of the provisions of these Schedules of particular relevance are: First Schedule: "1. Main terms of offer- (1) The name of the issuer, and address of its registered office (or, if it does not have a registered office, its address) in New Zealand. (2) A brief description of the securities being offered. (3) The maximum number or amount, and nominal value (if any), of the securities being offered. (4) The price or other consideration to be paid or provided for the securities being offered." "9 Prospects and forecasts- (1) A statement as to the trading prospects of the issuing group, together with any material information that may be relevant thereto. (2) The statement required by subclause (1) of this clause shall include a description of all special trade factors and risks that- (a) Are not mentioned elsewhere in the registered prospectus; and (b) Are not likely to be known or anticipated by the general public; and (c) Could materially affect the prospects of the issuing group. (3) Where the purpose of the offer of securities is expressed to be to provide finance for a particular capital project,- (a) A brief description of the project; and (b) An indication of the expected financial benefits of the project." "10. Provisions relating to initial flotations- (1) In the case of the first offer to the public of equity securities of the issuer,- (a) A brief description of the plans that the directors of the issuer, and the directors of any other member of the issuing group, have in respect of the issuing group during the year commencing on the specified date, including the sources of finance that will be required for the plans; and (b) A statement as to whether or not the proceeds of the offer of securities may, notwithstanding the stated directors' plans, be applied towards any undertaking that the issuer may lawfully engage in (including, in the case of an issuer that is a company, any one or more of the objects specified in the company's memorandum of association or constitution, as the case may be,); and (c) A prospective statement of cash flows of the issuing group which the directors of the issuer expect to occur in the year commencing on the specified date. (2) The prospective statement of cash flows required by subclause (1)(c) of this clause- (a) Shall show the likely receipt and proposed use of the proceeds of the offer of securities; and (b) Shall state the principal assumptions on which it is based. (3) Nothing in subclause (2) of this clause limits the information to be included in the prospective statement of cash flows required by subclause (1)(c) of this clause. (4) For the purposes of section 37(2) of the Act, the minimum amount that, in the opinion of the directors, must be raised by the issue of the securities in order to provide the sums (or, if any part thereof is to be defrayed in any other manner, the balance of the sums) required to be provided in respect of each of the following matters: (a) The purchase price of any property purchased or to be purchased which is to be defrayed in whole or in part out of the proceeds of the offer: (b) Any preliminary expenses payable by the issuer, and any commission so payable to any person in consideration of his agreeing to subscribe for, or of his procuring or agreeing to procure subscriptions for, any of the securities: (c) Working capital: (d) The repayment of any money borrowed by the issuer in respect of any of the foregoing matters." "16. Promoters' interests- (1) The full name of every promoter of the securities being offered. (2) Where any material transaction has been entered into at any time in the 5 years preceding the specified date, or is to be entered into on or after the specified date,- (a) Between the issuer or any of its subsidiaries and any promoter of the issuer, or of any subsidiary of the issuer; or (b) Between the issuer or any of its subsidiaries and (where a promoter of the issuer is a body)- (i) Any body corporate related to that promoter; or (ii) Any director or proposed director of that promoter or of any body corporate related to that promoter; or (c) Between the issuer or any of its subsidiaries and any immediate relative of- (i) Any promoter of the issuer or of any subsidiary of the issuer; or (ii) Where a promoter of the issuer is a body whether corporate or unincorporate, any director or proposed director of that promoter or of any body corporate related to that promoter; or (d) Between the issuer or any of its subsidiaries and any company more than half of whose share capital was or will be held directly or indirectly, at the date of the transaction, by- (i) Any promoter of the issuer or of any subsidiary of the issuer; or (ii) Where a promoter of the issuer is a body whether corporate or unincorporate, any director or proposed director of that promoter or of any body corporate related to that promoter- the following information: (e) A description of the property acquired, or to be acquired, under the transaction; and (f) The cost of the property acquired, or to be acquired, under the transaction to the person by whom it has been or is to be acquired; and (g) A brief description of the other terms of the acquisition of the property; and (h) The cost of the property to the person disposing of the property under the transaction; and (i) The date on which the person disposing of the property under the transaction acquired the property." "21. Other terms of offer and securities- All terms of the offer, and all terms of the securities being offered, not elsewhere set out in the registered prospectus, other than those- (a) Implied by law; or (b) Set out in a document that- (i) Is registered with a public official; and (ii) Is available for public inspection; and (ii) Is referred to in the registered prospectus." "40. Other material matters- Particulars of any material matters relating to the offer of securities (other than matters elsewhere set out in the registered prospectus or in the financial statements referred to in the registered prospectus pursuant to clause 22(2), and contracts entered into in the ordinary course of business of a member of the issuing group)."
3.13	The First Schedule includes a detailed prescription of the contents of the financial statements that are to be contained in, or that accompany, a prospectus for equity securities.
3.14	The Second Schedule includes similar requirements to the First Schedule but does not require disclosure of "prospects and forecasts" relating to the issuer or of any prospective financial information in a prospectus for debt securities.
3.15	In general terms, the expectation of the prospectus is that it will be a comprehensive and detailed document including financial information which only the more expert or knowledgeable investor may be able to fully appreciate. Advertisements
3.16	The Act and Regulations contain a number of provisions relating to advertisements for securities. While there are a number of constraints and prohibitions relating to advertisements the overriding principle is contained in Regulation 8 which states: "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."
3.17	Commercial property investments are frequently complex. The "returns" provided to investors have a number of elements and any promised, forecast or projected returns are heavily dependent on the assumptions made. There is thus considerable potential for advertisements relating to such investments to be misleading or confusing unless considerable care is taken with the information included in those advertisements. Returns
3.18	Regulation 2 of the Securities Regulations 1983 states: ""returns" in relation to a security, includes payments of any kind, whether in the nature of capital, income, benefits, or otherwise."
3.19	Although the definition describes what is included in returns, it does not prescribe how a "rate of return" should be calculated. Nor is it an exclusive definition.
3.20	There are particular difficulties in describing "returns" on stapled securities. These are made up of two different types of securities, debt and equity, with "returns" for each being in a different form (interest/principal repayment and dividends/capital growth) and expected to be paid out in different periods. In addition, distributions may include not only payments of "income-type" returns (interest, dividends) but also regular repayments of principal as well.