Last month, the Supreme Court granted investors in the failed Blue Chip schemes leave to appeal a decision of the Court of Appeal on the question (among others) of whether marketing by Blue Chip companies and their sales agents of investment products amounted to "offers of securities to the public", thereby triggering the requirements of the Securities Act 1978.
The Blue Chip purchasers have so far unsuccessfully alleged misrepresentation and misleading or deceptive conduct in an attempt to cancel their agreements for sale and purchase for apartment units.
This appeal will allow the purchasers to argue that the marketing of the investment products by Blue Chip and its sales agents breached the Securities Act and that, therefore, the developers should be prevented from enforcing the agreements for sale and purchase against them.
It will be interesting to see what arguments are presented on appeal in support of the proposition that the marketing was an offer of a security to the public and whether or not the appeal is successful.
The Government has recently undertaken a comprehensive review of securities law and that has resulted in the release of the draft Financial Markets Conduct Bill that aims to be a "one-stop shop" for securities law, according to the Commerce Minister Simon Power.
Although it will not be of assistance to the Blue Chip investors, the Bill is aimed at restoring confidence in New Zealand financial markets by providing better protections and clearer rules for companies looking to raise capital.
Aspects of the Bill include. -
• Replacing the requirement for issuers to prepare a prospectus and investment statement with a requirement to prepare a single "product disclosure statement" tailored to retail investors.
• A modified liability framework for breaches of securities law, with reckless and intentional breaches resulting in criminal liability and penalties of up to 10 years' imprisonment and fines of up to $1 million for individuals and $5 million for companies.
• Civil penalties of up to $1 million for individuals and $5 million for companies if they make misleading statements in a product disclosure statement and advertisements.
The Securities Act generally provides that securities may only be issued to "members of the public" if the issuer company has provided an investment statement and a registered prospectus.
This is intended to protect the public, by ensuring that they have all the necessary information in order to properly evaluate the proposed investment.
However, the limited exclusions to that disclosure regime (and the costs of compliance) have often proved difficult for small companies trying to raise capital quickly in order to get to market.
The draft Bill would make the disclosure rules clearer and also provide more flexibility around the exclusions to formal disclosure which will be a welcome relief for many operators trying to seek out capital investment.
Under the Securities Act, the disclosure exemptions are essentially limited to relatives or close business associates of the issuer (or a director of the issuer), habitual investors, investors who are paying a subscription price of not less than $500,000 and certain "eligible persons" who are wealthy or experienced.
The Financial Markets Conduct Bill proposes a new regime of disclosure exclusions including exclusions for "wholesale investors", employee share purchase schemes and "small offers" that are limited to a maximum of 20 investors raising not more than $2,000,000 in any 12-month period.
The "small offer" exclusion should be particularly useful for small to medium-sized businesses and, hopefully, this will be one tool that can be used to make capital investment easier for those prepared to take on the associated risk.
• David Smillie is a partner in the law firm Gallaway Cook Allan.
