All you ever wanted to know about offering shares through public floats but were too afraid to ask! Tony Sycamore and Grant Cheesman of the Dunedin and Queenstown Lawlink firm of Anderson Lloyd Caudwell, set out some of the important matters the Securities Act 1978 requires for public share floats.

If you are contemplating raising capital from the public or promoting a share issue it is strongly recommended that you talk to your solicitor first, as breaches of the Securities Act 1978 ("the Act"), can carry very heavy civil sanctions ranging from avoidance of the share issue through to criminal sanctions and fines.

Part I - When Will The Securities Act Apply?

The Securities Act will apply whenever a company offers shares to the public in a share float. The purpose of the Act is to allow a company to raise capital and to ensure it discloses relevant information to prospective investors. The Act defines the word "offer" very widely in order to give investors as much protection as possible. This reflects the object of the Act, which is to ensure that potential investors are fully informed before they make a decision to invest.

What Is A Security?
The Act defines a number of transactions as examples of a security. The following gives a brief overview of some of these.

Equity securities are essentially shares in a company or any right to share in a company's share capital.

Debt securities are any interests in or rights to be paid money owing by any person. Examples include debentures, debenture stocks, bonds, notes, certificates of deposit, and convertible notes.

A unit in a unit trust is intended to provide facilities for its members to share in the gains arising from the trust's property or investments.

Superannuation schemes are created primarily to provide retirement benefits.

Term life insurance policies, whereby an amount is payable if misfortune visits the policy holder, are specifically excluded by the Act.

Participatory security is a catch-all term used in the Act to catch any security which does not fall within the above categories. Some examples are marina berths, forestry partnerships, and retirement villages.

A hybrid security is one which falls within the definition of more than one of the categories given in the Act. In this situation the regimes of both securities must be complied with.

Who Is The Public?
The public is best defined by addressing who it is not. Generally it does not include relatives or close business associates of the issuer, investors, or people who habitually invest money for the purposes of their business. It will nearly always include any person who responds to an advertisement placed by the promoter, seeking further information about an investment referred to in the advertisement.

The focus should be on the range of people to whom the offer is made, not those who accept the offer. However, the benefits of making an offer to non-members of the public are not available if one person the offer is made to is a member of the public.

What Is A Subscription?
The term subscribe refers to making a commitment to acquire a security, whether by purchase or through some other contribution.

Part II - What Does The Act Require Of The Offeror?

The Prospectus
The word prospectus comes from the Latin word for a view or prospect. Essentially the prospectus is an advertisement, though a much regulated one. A prospectus must be registered with the Companies Office before any offer can be made to the public. The issuer, each director (or their agent) of the issuer, and each promoter must sign the prospectus.

Certain documents must be provided when registering a prospectus. These are:

- the original authority granted to anyone signing on behalf of a director;

- a statement from any expert named in the prospectus that he or she has consented to his or her statements being included;

- copies of all significant contracts referred to in the prospectus; and

- the original auditor's report and consent from the auditor as to its inclusion in the prospectus.

Memorandum Of Amendments
Any content of the prospectus which is dated, misleading, or which has altered can be changed by means of a "memorandum of amendments". This also must be registered (two copies are required). It must be accompanied by a copy of the registered prospectus and signed by everyone who signed the latter, except for the promoters.

Much of the content of the prospectus is regulated by the Act, though it will vary according to the specific security being dealt with. Generally though, a prospectus must include:

- financial information;
- details of any relevant acquisition of a business or subsidiary;
- details of relevant interests of directors, promoters or other related parties;
- particulars of any relevant contracts entered into within the past two years; and
- any other relevant details.

Short Form Prospectus
The Act permits a shorter prospectus where a company is offering shares or debt securities to existing holders of shares or debt securities of that issuer.

A short form prospectus is only possible where the most recent financial statements were sent to all people holding the same class of shares as those to whom the offer is being made. The Act specifies certain information which must be included in those accounts.

The prospectus must also include a statement from the directors to the effect that nothing has happened to damage the company's financial stability, trading, or profitability since registration of the last financial information.

The Investment Statement
An investment statement is essentially an authorised advertisement. However it serves the purpose of providing key information that is likely to assist a prudent but non-expert person to decide whether or not to take up the investment. It must also bring to the attention of that person that further information about the investment is available in other documents.
Additional Requirements
Depending on the type of security being dealt with, the offeror will have to meet certain other requirements as well. The following provides a brief overview of these.

Each issuer of debt securities must appoint a trustee approved by the Securities Commission, and register a signed trust deed with the Companies Office. Terms of the deed will often need to be included in the prospectus.

Each issuer of participatory securities must appoint a statutory supervisor approved by the Securities Commission and register a deed of participation with the Companies Office. The deed must also either be attached to the prospectus or its terms included in the prospectus.

Each unit trust must have a unit trustee and a manager separate from the trustee (the manager must be a New Zealand incorporated company). The prospectus must include a summary of the principal terms of the trust deed.

The principal terms of any life insurance policy must be attached to the prospectus.

Each superannuation scheme must include trust deeds and rules as prescribed by the Superannuation Schemes Act 1989. There must be a superannuation trustee (in practice the issuer of the securities) and a separate manager. The prospectus must include a summary of the principal terms of the trust deed which in turn must be "signed off" by the issuer or their solicitors as to its accuracy. The sign off must be in the prescribed form agreed to by the Ministry of Commerce and the New Zealand Law Society.

Ongoing Obligations Of The Issuer
The issuer has a number of ongoing obligations. In summary these require the issuer:

- to maintain a register of securities issued and audit this at least once each year;
- to permit each security holder to inspect and take copies of the register;
- to maintain proper accounting records and audit them annually. These must be available for inspection by anyone permitted to inspect them under the Act;
- to issue certificates for equity securities, debt securities, units or participatory schedules; and
- send copies of certain documents to security holders upon request.

Copyright The Lawlink Group Ltd 2001

Every effort has been made to ensure that this information is accurate. However, it is general introductory information only. It does not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.

Tony Sycamore is a partner, and Grant Cheesman a law clerk, of the Dunedin and Queenstown Lawlink firm of Anderson Lloyd Caudwell.

Web site: Anderson Lloyd Caudwell

Web site:
Email: tony.sycamore@andersonlloydcaudwell.com
grant.cheeseman@andersonlloydcaudwell.com

June 2001