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Securities Commission Bulletin no.2 - Pre-prospectus Publicity [1984] NZSecCom 2 (1 May 1984)

Last Updated: 19 April 2014

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OFFICE OF PO BOX 1179

SECURITIES COMMISSION TELEPHON 729-830

_{LEVEL 6 GREENOCK HOUSE 102-112 LAMBTON QUAY –39 THE TERRACE WELLINGTON 1 NZ}

_{1 May, 1984}

SECURITIES COMMISSION BULLETIN NO.2

_{PRE-PROSPECTUS PUBLICITY}

1. When information concerning an issuer, its affairs, or a forthcoming offer of its securities is published before the registration of the prospectus, difficult questions can arise under the Securities Act 1978. The problems arise especially in connection with initial company flotations. In the past, glowing reports have been published to “condition” the market towards the acceptance of a proposed issue on a basis that has not been borne out by the prospectus when it is ultimately registered. Indeed, we

have sometimes had complaints from sharebrokers themselves that they would not

have agreed to participate in the underwriting of certain issues being brought out by their fellows if they had known facts subsequently disclosed in the prospectus. We think sharebrokers can and should be left to look after their own inter-relationships in this matter. That seems to us to be the policy of section 3(2)(a) and (b) of the Act, which exempts from the legislation offers that are made to classes of people we can call professionals. Accordingly, the regulation of communications among sharebrokers has been left to the New Zealand Stock Exchange. The Commission is concerned when the “conditioning” process is aimed at the public. The purpose of this bulletin is to call the attention of issuers, underwriters, sharebrokers, professional advisers and the media to the law about publications before the registration of a prospectus, that arouse interest in securities that are about to be offered for public subscription.

2. Part II of the Securities Act 1978 draws a sharp distinction between publications made before, and those made after, the registration of a prospectus. The purpose is to

ensure that the registered prospectus is, and at all times remains, the authoritative source of information about the offer and the securities offered.

3. The word “offer” has a special meaning defined in section 2 of the Act. It includes an invitation, and any proposal or invitation to make an offer. That refers to the word as

a noun; but it is further enacted that, as a verb, the word has a corresponding meaning.

So, when we read, in section 33, that “no security shall be offered to the public ... ” except upon certain conditions, we must be careful to understand that the prohibition extends to offers, invitations and proposals. The Act is not avoided by taking care to see that a communication does not contain an offer in the strict sense of the law of contract. The extended definition ensures that the Act applies to all kinds of communications which can fairly be taken as encouraging the public to take up issues of new securities that are available, or are about to become available.

4. Part II of the Act applies to “offers” made by any person, whether or not he is involved in the issue, provided the “offer” is made “by or on behalf of” the issuer. This is a difficult phrase to interpret. On a narrow view, it may be taken to refer to agency, with the consequence that the provisions of Part II would be confined to “offers” made by or with the authority of the issuer. On a broader view, the phrase

“on behalf of” can mean “in the interests of” or “for the benefit of’. On either view, it seems that if the matter that is published was supplied by the issuer, especially, for example, to a financial journalist, a Court could readily infer that the publication was made “on behalf of” the issuer in both senses of the term. Accordingly, the Commission takes the view that where it is the issuer’s song that is being sung, where the information purveyed stems from the issuer or his public relations advisers, where it is the issuer’s interests that are being served, there are strong grounds for the view that an “offer” is being made “on behalf of” the issuer.

5. The particular provisions of Part II about publicity regarding proposed or pending offers of securities may be classified into four groups dealing with:-

(a) Meetings of the issuer, (para. 6)

(b) Announcements of a pending issue, (para. 7) (c) Prospectuses, (para. 8)

(d) Advertisements, (para. 9)

6. Depending upon its constitution, the officers of an issuer may need to obtain the approval of a meeting of members to the making of an offer of securities. Where the sanction of members is not required, good practice requires that the proposals for a new issue are treated with the utmost secrecy, so that no question of publicity arises until the proposal is settled and ready for announcement. Para.7 refers to such announcements. In many cases, however, the proposal must go to a meeting. Then it may become public through the notice calling the meeting, through the proceedings at the meeting, and through the resolutions carried by the meeting. Section 3(7)(a) deals with this by providing that – “A statement or report ... made to or for the purposes of a general meeting of the members of the issuer, or a report of the proceedings of such a meeting ... shall not constitute an offer of securities to the public.”

7. When it has been decided to make a public offer, it is usually desirable to announce the decisio n as soon as it is made, so that all members and others interested have equal opportunity to obtain the information. One strong reason for this is to prevent insider trading or the appearance of it. The Act has two groups of provisions regarding such announcements, viz:

(a) Section 3(7)(b), which deals with statements or reports made by or on behalf of the issuer to a stock exchange to comply with listing requirements, and reports (for example in the daily press) of such a statement or report;

(b) Section 3(6), which deals with statements made by or on behalf of the issuer that contain no information or matter other than the information or matter described in that subsection.

These provisions are set out in the attachment to this bulletin. Announcements made in conformity with them do not constitute offers of securities to the public for the purposes of the Securities legislation.

8. Before the registration of the prospectus, publicity regarding an offer or pending offer of securities must be confined to the statements, announcements and reports mentioned in paragraphs 6 and 7 of this bulletin. After the registration of the prospectus, the “offer” may be publicised by means of:-

(a) A “registered prospectus”;

(b) An “authorised advertisement”.

9. The registered prospectus is the appropriate means of making a public “offer” of securities in all cases, though some entities have been exempted from the requirement to issue a prospectus. Even in the exempt cases, however, the necessity to explain the offer usually requires the publication of a document like a prospectus.

The scheme of the Act envisages that an “offer” will be made by distributing documents that are identical with the document registered with the Registrar, including amendments, if any, but without endorsements, attachments and signatures.

The registered prospectus contains the terms of the offer that are intended to become incorporated in the securities and the contracts relating to them, as well as the relevant factual information about the issuer and its affairs that is prescribed in the Act and Regulations. It carries strict liability for misleading statements or for the omission of material facts relating to the offer.

Sometimes it is desired to publish the prospectus in a different format, such as an advertisement in a newspaper. This is often done overseas. Section 42(4)(b)

facilitates it by enabling the Registrar to register different formats of the same content.

10. The rules mentioned in paragraph 8 flow from the impossibility of making a responsible evaluation of an offer without the prospectus. Perhaps some examples will make this clear. Where the proceeds of an issue of securities are to be applied in acquiring assets, much depends on the nature, value and terms of acquisition. These

can be almost infinitely various. Where assets are being acquired from the promoters,

the terms are especially important. Sometimes the promoters want cash from the proceeds of issue – and this is an important element in assessing the risk of investing in the issue. Other promoters, by taking shares in the issue in exchange for their assets, give some demonstration of their confidence in the new venture. Another variant is the vendor’s option to take up shares for cash after a time, sometimes, as in a recent case, on payment by the vendor to the company of a premium in addition to the par value. To prepare for publication a responsible opinion about an issue of securities requires knowledge of the facts of these and many other matters, all of which are dealt with in the registered prospectus.

11. An “advertisement” for the purposes of the Act is not confined to publications for which payment is made. Any publication that is “authorised or instigated by or on behalf of the issuer or prepared with the co-operation of, or by arrangement with, the issuer” may be an advertisement.

The definition in section 2 extends to any communication, other than a registered prospectus, that refers to an offer of securities to the public or that is reasonably likely to induce persons to subscribe for securities that have been, or are to be , offered to

the public. (Our underlining.) An advertisement within the meaning of the Act extends to anything that encourages acceptance of the “offer”. A journalist’s article can be an advertisement for the purposes of the Act.

12. An “authorised advertisement” is defined in section 38. Essentially, an “authorised advertisement” refers to the registered prospectus (stating the date), is not inconsistent with the prospectus, is not misleading or confusing, and conforms with some

particular regulations (Regs. 8 to 23). Within these rules, an issuer is free to make use

of any means of drawing attention to the offer contained in the registered prospectus.

13. One particular subject of complaint to us relates to sharebrokers’letters inviting clients to apply for a firm reservation of securities in a pending issue. These should not be issued before the prospectus has been registered, and they should conform with the requirements for an “authorised advertisement”.

14. Another particular subject of complaint relates to newspaper articles about pending or rumoured proposals for offers. Before registration of the prospectus, these should be confined to the matters mentioned in sections 3(6) and 3(7) of the Act (referred to in paras. 6 and 7 above). After registration of the prospectus, the financial journalist

may deploy the full range of his talents and skills in reporting, discussing and

commenting on the matter contained in the prospectus. This is the established law designed to ensure that the offer in the prospectus is not misrepresented to the public.

15. Extracts from the Act relevant to this subject are attached.

ATTACHMENT

“Advertisement” (except in section 3(1) (c) of this Act) means any form of communication (not being a registered prospectus or a statement made in accordance with section 3(6) of this Act, or a statement or report made in accordance with section 3(7) of this Act) that is to be, or has been, distributed to any person by any means, and which is authorised or instigated by or on behalf of the issuer, or prepared with the co-

operation of, or by arrangement with, the issuer, and –

“(a) That contains or refers to an offer of securities to the public for subscription; or

(b) That is reasonably likely to induce persons to subscribe for securities of the issuer, being securities to which that communication relates and which have been, or are to be, offered to the public for subscription, - whether or not consideration is to be, or

has been paid for the distribution of that communication; and includes a statement relating to an interest in a contributory mortgage required to be distributed to any person by regulations made under this Act:”.

“Distribute” includes make available, publish, and circulate; and also includes disseminate by letter, newspaper, broadcasting, television, cinematograph film, or any other means whatsoever:

“Offer” includes an invitation, and any proposal or invitation to make an offer; and “to offer”

has a corresponding meaning.

Section 33(1)

“(1) No security shall be offered to the public for subscription, by or on behalf of an issuer, unless –

“(a) The offer is made in, or accompanied by, a registered prospectus that complies with this Act and all regulations made under this Act;

or

“(b) The offer is made in an authorised advertisement.” Section 3(2)

“(2) None of the following offers shall constitute an offer of securities to the public: (a) An offer of securities made to any or all of the following persons only:

(i) Relatives or close business associates of the issuer:

(ii) Persons whose principal business is the investment of money or who, in

the course of and for the purposes of their business, habitually invest money:

(iii) Any other person who in all the circumstances can properly be regarded

as having been selected otherwise than as a member of the public:

(b) An invitation to a person to enter into a bona fide underwriting or sub-writing agreement with respect to an offer of securities:

(c) A take-over offer within the meaning of Part I of Companies Amendment Act

1963.” Section 3(4)

“(4) Any reference in this Act to an offer of securities to the public shall be construed as including a reference to distributing an advertisement, a prospectus, a registered prospectus, or an application form for the subscription of securities.”

_{Section 3(6)}

“(6) A statement made by or on behalf of an issuer to the effect that the issuer intends to make an offer of securities to the public for subscription and which contains no information or matter other than –

“(a) The name of the issuer, and

“(b) A description of the securities intended to be offered, including a brief description of any rights or privileges to be attached thereto; and

“(c) A statement, of the rate or rates of interest (if any) that may be earned by holding the securities intended to be offered; and

“(d) A statement of the total number of securities intended to be offered; and

“(e) A statement of the intended use of the subscriptions; and

“(f) The terms of the intended offer; and

“(g) A description of the class of persons to whom it is intended the offer will be made; and

“(h) The date at which the issuer expects that the offer will be made –

shall not constitute an offer of securities to the public. Section 3(7)

“(7) A statement or report –

“(a) Made to or for the purposes of a general meeting of the members of the issuer, or a report of the proceedings of such a meeting; or

“(b) Relating to the affairs of the issuer made to any stock exchange for the purposes of compliance with the listing requirements relating to that stock exchange, by or on behalf of that issuer, or any report of such statement or report –

shall not constitute an offer of securities to the public.”

Section 38

“38. In this Act the term ‘authorised advertisement’means an advertisement that – “(a) Refers to a registered prospectus that relates to all the securities referred to in the

advertisement, and states the date of registration thereof; and

“(b) States that allotments of the securities shall be made only on receipt of a form of application forming part of, or issued with, a registered prospectus; and

“(c) Specifies the place or places at which a registered prospectus may be obtained, or contains a coupon or coupons to be completed by any person who wishes to be sent a registered prospectus, or both; and

“(d) Complies with this Act and with all regulations made under this Act relating to advertisements

“(e) Complies with this Act and with all regulations made under this Act relating to advertisements:

“Provided that paragraphs (a) to (c) of this section shall not apply in respect of an advertisement relating only to securities exempted from certain provisions of this Act by virtue of subsections (2) to (4) of section 5 of this Act”.