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Focus: Capital Markets – March 2008

Trans-Tasman mutual recognition of securities offerings

In brief: The beginning of the regime providing for the mutual recognition of securities offerings between Australia and New Zealand is a step closer with the commencement of the Corporations (NZ Closer Economic Relations) and other Legislation Amendment Act 2007 (Cth). Partner Robert Pick (view CV) and Articled Clerks Bryony McCormack and Sladjana Subotic take a look at how the regime will likely operate and the benefits it will have for Australian and New Zealand issuers. 

How does it affect you?

  • Once effective, this regime will permit initial public offerings of securities that are made under a New Zealand law compliant prospectus and investment statement to be extended to retail investors in Australia without the need for an Australian prospectus or product disclosure statement.
  • It is expected that a reciprocal regime will be introduced in New Zealand – to permit initial public offerings of securities that are made under an Australian law compliant prospectus or product disclosure statement to be extended to retail investors in New Zealand without the need for a New Zealand investment statement – shortly after the commencement of the Australian regime.
  • This regime should increase the number of initial public offerings that are extended to retail investors in Australia and New Zealand, and lead to a reduction in cost and regulatory burden when offering securities in both jurisdictions.

Overview

The provisions of the Corporations (NZ Closer Economic Relations) and other Legislation Amendment Act 2007 (Cth) (the Act) relating to mutual recognition of securities offers came into force on 21 December 2007. The Act amends the Corporations Act 2001 (Cth) by introducing a scheme that allows for the mutual recognition of the regulation and administration of securities offers between Australia and foreign jurisdictions.1  

The aim of the scheme is to enable an Australian issuer of securities to offer their securities in New Zealand on the basis of compliance with Australian fundraising requirements and with minimum additional requirements imposed by New Zealand regulations, and vice versa.

The scheme cannot commence, however, until regulations are made in Australia and New Zealand to apply the scheme in the respective jurisdictions. Draft regulations to allow this new scheme to commence were released by the Australian Treasury in January 2008 (the draft Regulations). The deadline for public comments on the draft Regulations closed on 13 February 2008 and it is anticipated that the draft Regulations will come into effect within the next few months.

It is expected that New Zealand will seek to put in place similar regulations around the same time that the final form of the draft Regulations is settled and they come into effect.

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The current regime

Under the current law, if a New Zealand issuer wishes to extend an offer of securities under an initial public offer (IPO) to retail investors in Australia, they must do so under a prospectus or product disclosure statement that complies with the Corporations Act.2

Similarly, if an Australian issuer wishes to extend an IPO to retail investors in New Zealand, they must do so under an investment statement that complies with the Securities Act 1978 (NZ).3   

The need to comply with the disclosure standards in both jurisdictions has had two primary impacts:

  • It has meant that issuers that wish to extend their IPO into both Australia and New Zealand incur significant extra costs in complying with the regulatory regime in both jurisdictions.
  • Due to the significant extra costs, many Australian issuers have been reluctant to extend their IPO to New Zealand retail investors (and vice versa).

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The new regime

The Act and the draft Regulations aim to reduce duplicated regulation and the associated costs. It is anticipated that by doing so it will facilitate more investment between Australia and New Zealand, enhance competition in capital markets, reduce costs for business and increase choice for investors.

The Act inserts a new Chapter 8 into the Corporations Act to provide for the mutual recognition in Australia of 'recognised offers' of 'securities' by persons from a 'recognised jurisdiction'. The draft Regulations extend the operation of the Act to New Zealand issuers. In this respect, there are a couple of key criteria that will need to be satisfied by New Zealand issuers to enable them to take advantage of the new regime.

Eligible products

The Act applies to 'securities' as defined in section 1200A(1). This includes shares, debentures and interests in managed investment schemes, and certain derivatives over these financial products.

Entry conditions

Only offers of securities that satisfy the entry conditions – referred to as 'recognised offers' – will be allowed to take advantage of the mutual recognition scheme. Under the Act and the draft Regulations, these entry conditions are as follows:

  • at the time the offer is first made, the issuer must be:
    • a person incorporated by, or under, the laws of New Zealand;
    • a natural person residing in New Zealand; or
    • a legal person established by, or under, the laws of New Zealand;
  • the offer must be an offer of a security to which Part 2 of the NZ Securities Act applies (ie an offer under a New Zealand law compliant prospectus and investment statement); and
  • the issuer must ensure that they have lodged with the Australian Securities & Investments Commission (ASIC) a notice of intention to make an offer under the regime and copies of prescribed documents (which includes the relevant offer document).

The offer document that is used by the New Zealand issuer will need to contain prescribed warning statements, including statements that highlight the following issues:

  • the content of the offer document is governed by New Zealand, rather than Australian law;
  • there are differences between Australian and New Zealand law;
  • the likely currency exchange risk of investing; and
  • the taxation treatment of New Zealand securities may not be the same as for Australian products.
Ongoing conditions

There are ongoing conditions with which a recognised offer must comply until it closes in Australia. Breach of these conditions is an offence under the Act.

The primary ongoing conditions include the requirements that:

  • the offer must be made in New Zealand as well as in Australia;
  • the offer must comply with New Zealand law; and
  • if the New Zealand offer document is updated, amended or replaced, then a copy of the updated, amended or replaced document must be lodged with ASIC.
Advertising restrictions

Under the Act, the provisions in the Corporations Act that restrict the ability of an issuer to advertise securities offerings made under a formal disclosure document (eg sections 734 and 1018A) apply equally to securities offerings made under a recognised offer that complies with the Act and the draft Regulations.

ASIC's regulatory powers

ASIC retains the power to issue stop orders in relation to a New Zealand offer document that is used in reliance on the new regime if ASIC is satisfied that the offer documents relating to the recognised offer, or any related advertisement of the securities the subject of the recognised offer, contain misleading or deceptive statements.

ASIC may also declare a person banned from relying on the regime introduced by the Act and the Draft Regulations.

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Australian offers extending into New Zealand

As noted above, it is expected that New Zealand will seek to put in place similar regulations around the same time that the draft Regulations come into effect. This will mean that Australian issuers will be entitled to extend their IPO into New Zealand using an Australian-compliant prospectus or product disclosure statement without the need for a New Zealand investment statement, provided the Australian issuer is able to satisfy criteria that are the equivalent to those outlined above.

However, in addition, the Act requires that an Australian issuer will also need to notify ASIC that it is extending the offer into New Zealand in reliance on the regime.

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The scheme in context

The Act and the draft Regulations are part of a general initiative for greater coordination of business law between Australia and New Zealand.

Assuming the draft Regulations are approved in their current form, the regime created by the Act and the draft Regulations will permit offerings of securities under an IPO that are made under a New Zealand law compliant prospectus and investment statement compliant to be extended to retail investors in Australia without the need for an Australian prospectus or product disclosure statement – and vice versa (upon equivalent New Zealand provisions coming into effect).

This is a positive development in trans-Tasman business relations and should increase the number of IPOs that are extended to retail investors in Australia and New Zealand, and lead to a reduction in cost and regulatory burden when offering securities in both jurisdictions.

Footnotes
  1. The scheme implements the agreement between the Australian and New Zealand Governments in relation to Mutual Recognition of Securities Offerings, entered into on 22 February 2006. Although the Act is a direct response to the objective of greater coordination of business law between Australia and New Zealand, the provisions in the Act are couched in general, jurisdictionally non-specific terms. Jurisdictions other than New Zealand can potentially take advantage of the mutual recognition of securities offers scheme in the future if relevant regulations are passed.
  2. Offers of securities under rights issues can be made by foreign issuers without a prospectus, provided certain conditions are met, in reliance in ASIC Class Order 00/183.
  3. Most Australian IPOs are extended into the New Zealand retail market in reliance on the Securities Act (Australian Issuers) Exemption Notice 2002 (the Exemption Notice). The Exemption Notice relieves Australian issuers that are offering securities to retail investors in Australia under an Australian prospectus from the requirement to prepare and register a New Zealand prospectus, but does not relieve an Australian issuer of the requirement to prepare and distribute an investment statement. Offers of securities by Australian issuers that are already listed on the ASX (eg rights issues and other entitlement offerings) may be made to New Zealand resident shareholders without a prospectus or an investment statement under the Securities Act (Overseas Companies) Exemption Notice 2002.

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