Following past finance company collapses in New Zealand, disclosure documents were criticised as lacking necessary detail, clarity and sufficient emphasis on relevant risks. It was argued that important information was missing or lost in superfluous detail and marketing material.
Last year, the Financial Markets Authority (FMA) issued effective disclosure guidelines, signalling the regulator's expectations of appropriate disclosure for would-be investors. The guidelines are aimed at ensuring offer documents are clear, concise and effective. They require plain language, succinct presentation of information and adequate and accurate disclosure.
The Mighty River Power offer document is one of the first initial public offer documents to comply with these guidelines.
When the Financial Markets Conduct Bill - a total overhaul of New Zealand's securities laws - is fully in force (expected in April 2016) the documents required for investors in all initial public offerings will change.
A significant focus of the Bill is the new disclosure regime. This will require issuers to prepare a single product disclosure statement, for all products. It will replace the prospectus and investment statement.
While all details under the Bill are yet to be confirmed, what is clear is effective disclosure to investors is a major priority. So how might those changes look?
A review of Mighty River Power's offer document (right) sheds interesting light on the potential changes.
THE SHAPE OF THINGS TO COME
After the Financial Markets Conduct Bill is enacted, offer documents are likely to look like this:
1. A product disclosure statement
Instead of Mighty River Power's 257-page combined investment statement and prospectus offer document, a single, shorter product disclosure statement would be provided.
2. Key Information Summary
At the front of the product disclosure statement, a one or two page key information summary would be included. This would summarise the key features of the investment, including the purpose of the offer, and risks associated with it. The information will be prescribed, enabling investors to compare similar offer documents.
3. A More Prescribed Template
The nature of the content, potentially font size and length of the product disclosure document will likely be highly prescribed.
4. Enhanced Risk Disclosure
Risk disclosure will be enhanced. This will ensure investors can accurately judge the risk they may be taking by investing. Risks will be categorised, described in terms specific to the issuer, with the circumstances giving rise to the risks detailed, to enable the investor to assess the likelihood and magnitude of the risk on the company's performance (to the extent reasonably possible). The risk section will potentially have prescribed text which describes certain standard market risks, for ease of comparability.
5. Clear, concise, effective disclosure
The current focus on clear, concise, effective disclosure will be further emphasised, with more thought given to the most effective way to convey information - including through the use of headings, colour, graphs or diagrams.
6. Additional Information on a web-based register
Further information will be available on the offer, in a web-based register of offers of financial products. This will include a lot of the information which is currently provided in the prospectus. The register will be publicly searchable, including a link to the company details, financial statements, material contracts details, a description of expenses and any auditor's report.
7. Director Approval
The current Mighty River Power prospectus is executed by all directors. Under the Bill, while some level of director or board approval for lodgement of the product disclosure statement will be required, the exact position is yet to be confirmed.
8. Liability and Enforcement
The Financial Markets Authority will have a range of civil remedies available. These will include penalties and compensation orders, and the ability to ban people from managing companies for up to 10 years. Criminal liability is reserved for serious (knowing or reckless) breaches.
• Tracey Cross and Rachel Taylor are partners in DLA Phillips Fox.
