The Financial Markets Authority (FMA) yesterday issued a consultation paper on how to prepare prospectuses and investment statements.
This is a good initiative and worthy of the FMA’s mandate to educate the market regarding its expectations as a regulator – something that the Securities Commission was not always very good at.
Our initial assessment is that much of the guidance proposed is sensible and reflects current best practice. However, in places, we think that the FMA’s approach is too heavy handed – seeking to prescribe requirements which are not material or currently required by New Zealand law.
Submissions are due by Friday, 9 March 2012.
The FMA plans to discontinue pre-registration prospectus vetting by the end of March, and is aiming to have the final guidance note published in the week beginning 26 March.
It intends that the new rules will apply to disclosure documents issued after 1 May 2012. Existing documents will need to be brought into compliance by 1 January 2013.
We think that this timeline may slip as more time may be required to consider submissions. Similar consultation by the Australian Securities and Investment Commission (ASIC) last year took seven months to finalise.
The two “fundamental components” that the FMA will expect in all offer documents are:
- truthful and complete information about the offer and the issuer, including the directors and senior management, and
- “clear, concise and effective” wording and presentation (with specific advice on how these values are to be achieved).
Clarity, for example, will require plain language. Conciseness will require that company branding, celebrity photographs and other images are used sparingly and in the body of the document rather than in the first few pages.
Chapman Tripp comment
In some areas, FMA’s guidance draws closely on the exercise conducted by ASIC. ASIC scaled back its guidance after its original proposals were criticised as overly prescriptive, and we think the debate may follow a similar trajectory here.
In particular, we consider that some of the proposed information requirements have been designed primarily for equity capital raising and are not material, or are less appropriate, for debt capital market or fund management offerings.
The finalised guidance will also need to take account of the current dual offering document structure – the investment statement designed for the prudent non-expert person to decide whether or not to invest, that must be provided to all subscribers. The more detailed prospectus is only required to be provided on request. Unfortunately the current draft guidance does not always make clear whether it is intended for the investment statement, the prospectus, or both.
The FMA has also sought to adopt early the “clear, concise and effective” requirement of the Australian Corporations Act 2001. While “clear, concise and effective” disclosure is a worthy aspirational standard, it is not currently a requirement of New Zealand law, and is not always able to be reconciled with some of the detail prescribed by the Securities Regulations 2009.
“Clear, concise and effective” disclosure is proposed for product disclosure statements (PDS) under the Financial Markets Conduct Bill, but not for online register entries. Breach of the requirement, by itself, would not entitle the FMA to take civil proceedings (the disclosure would also need to be misleading or deceptive), but would allow it to temporarily stop distribution of a PDS.
We do not expect the Financial Markets Conduct Bill to become operative until mid 2013, with transitional periods of at least one year during which issuers may elect to continue to follow existing disclosure law.
Overall, the draft guidance is a useful initiative, and financial market industry participants should take the opportunity to submit.