FMA guidance note on pre-prospectus publicity

Pre-prospectus publicity bulletin10 October 2012

FMA guidance note on pre-prospectus publicity

Introduction

Perhaps as a timely reminder of that the FMA is doing more than just work on the legislative progress of the Financial Markets Conduct Bill and litigation against the directors of failed finance companies, it has published a guidance note on pre-prospectus publicity. This is timely given the work that had commenced on a possible share float of a number of SOEs.

The guidance note is relevant to the current law (under the Securities Act) and the FMA goes to some lengths to state that it cannot be future proofed until the final shape of the new legislation (which will include the FMC Bill and the thicket of regulation required to make it work) is known.

It should go without saying that pre-offer publicity /advertisements have the ability to “warm up the market”. In keeping with its predecessor, the FMA is concerned is that the offer document/s should be the primary source of information about a public offer. One of the FMA’s objectives is to ensure that investors are not persuaded to ignore the offer document/s (and make investment decisions before they have had the opportunity to give them adequate consideration). However, the Securities Act does permit (limited) pre-prospectus publicity – by enabling preliminary indications of interest to be sought. In addition, the FMA recognises that there may be a commercial need or a regulatory obligation to provide advance information about a potential offering.

Limited statements permitted

Whilst the general policy of the Securities Act is to restrict the scope for pre-prospectus publicity, the existing regime does provide some very limited scope for pre-offer publicity. Specifically, section 5(2CA) of the Securities Act allows issuers to advertise an offer before a prospectus is registered. Section 5(2CA) does allow preliminary expressions of interest to be obtained. This is a relatively recent development and, for example, was not available when the Crown sold down its stakes in Auckland International Airport and Contact Energy.

Section 5(2CA) limits the information that can be provided and any discussion of the business of the issuer or its prospects is not permitted.

The Securities Act also treats certain statements or reports as not constituting an offer of securities. These are statements or reports made to or for the purposes of a shareholders’ meeting or to a stock exchange in compliance with an issuer’s continuous disclosure obligations.

Branding / Profile raising

One of the grey areas affecting pre-prospectus publicity has always been the extent to which an issuer can undertake ‘normal’ advertising and other branding or profile-raising activities in advance of an offer. In practice, this is often easier to deal with in the context of a business with a high public profile and a routine advertising programme than in the case of businesses that are not household names. For example, a large retailer will have an established pattern of advertising that it can (and should) maintain as an integral part of its core business activity. As always, these questions are always more difficult at the margins such as a business with, primarily a wholesale or even export audience but which undertakes public good activities that it publishes sporadically.

The FMA guidance note makes it clear that the pre-prospectus publicity regime restricts the use of branding / profile raising activities to the extent that they refer to the upcoming offer or are associated with (i.e. “tag”) other advertisements that refer to the offer. The FMA also clarifies that what it means by “association” by reference to physical or temporal association such as appearing in the same publication, being physically distributed together or where (for example) TV advertisements are published over a concentrated period of time . Other forms of “association” may be much more subtle – such as implicit cross-references.

Sensibly, the FMA refers to other hallmarks of (infringing) activity as including starting a publicity drive, radical changes to the content or intensity of branding activity in the lead-up to the announcement or launching of an offer.

Exemptions

The Securities Act enables the FMA to grant exemptions to permit pre-prospectus publicity and the guidance note spells out the FMA’s exemption policy. In the guidance note the FMA refer to two types of exemption:

• Limited information: It can be appropriate to allow an issuer to provide limited information about its business (including, for example, its logos), particularly for an IPO where the issuer is not well known to the market (the example of an exemption for Goodman Fielder is provided). Such an exemption is not intended to facilitate the publication of detailed information about the issuer’s business or its future prospects.

• Public interest: The FMA has granted exemptions on public interest grounds that warranted more detailed information being provided to shareholders (for Fonterra’s ‘Trading Amongst Famers’ programme) and the general public (in the case of the Mixed Ownership Model).

Research Reports

The guidance note includes a useful clarification that FMA does not consider that research reports are ‘advertisements’ for the purposes of the Securities Act where they are prepared by analysts and confidentially distributed, prior to the registration of a prospectus, to institutions and financial advisers employed by the lead managers and brokers engaged by the issuer on the offer.

Other legal obligations still apply

The guidance note also reminds the reader that other legal obligations (in addition to the FMA’s powers under the Securities Act) will still apply in the event that a communication is misleading, deceptive, or may confuse investors. Specifically, the provisions of the Fair Trading Act, the Securities Markets Act 1988, the Crimes Act 1961, and the Companies Act may be applicable to a broad range of persons from making misleading, or (in the case of the criminal provisions), false statements.

Also, section 34 of the Financial Advisers Act 2008 prohibits financial advisers from engaging in misleading or deceptive conduct when providing financial adviser services.

The shape of the future – FMC Bill

The Financial Markets Conduct Bill is currently going through the Parliamentary process and heralds “once-in-a generation” rewrite of New Zealand’s securities laws. As such, the FMC Bill seeks to reform the regulation of financial market conduct- governing the way in which financial products are offered, promoted, issued, and sold, and the ongoing responsibilities of issuers (as well as secondary market conduct – dealing and trading).

The FMC Bill loosens the shackles on various forms of securities advertising, including pre-prospectus publicity. More information will be able to be provided about the issuer than is currently permitted by a section 5(2CA) statement. Coupled with this are enhanced powers on the part of the FMA to make orders to prevent publication or require correcting statements to be issued.

The FMC Bill also contains important changes to the liability provisions for securities advertising, particularly those affecting directors on the basis that they cannot reasonably be expected to exercise the same degree of oversight for advertising as that required for offer documents.

In addition, whether by accident or design, the relaxations evidenced in the FMC Bill in its present form also recognise the practical reality that, in the internet age, the public will have access to a wide range of information about an offer in advance of an offer document becoming available. As a result, it makes sense that the issuer (and others who are responsible information they disseminate – including financial advisers) should not be straight-jacketed from comment while others, ranging from informed commentators to what I am informed are labelled internet ‘trolls’, have a free rein.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.