Blacking out analysts' research at the time of an IPO is a sore point for a leading share broker, writes Graham Skellern

Investors would be better served if they had access to published research reports at the time of an initial public offer (IPO).

In nearly all of the IPOs coming onto the New Zealand sharemarket, analysts' research reports of the participating broking firms are blacked out for 30 to 40 days up to and after the time of listing.

The lead managers of the IPOs have set this rule in accordance with the global practice of their parent investment banks -- a protocol that grew out of the United States.

The blackout is a sore point for Neil Paviour-Smith, managing director of Forsyth Barr and a director of NZX.


"The role of an advisor is important and the blackout is not helpful or an ideal development in the market to assist investors confronted by a lot of information at the time of offer.

"Companies looking to complete IPOs do produce comprehensive information for investors but it's also important that they receive clear and concise messages," he says.

"They are not getting the expertise of the analysts, and I think there is a better way of managing the information in the marketplace. We want more listings in New Zealand and blackouts are a poor development.

"Research blackouts are something we've seen in offshore jurisdictions and they have evolved here as the banks have followed the policy of their overseas owners."

Paviour-Smith says any potential conflict of interest for the analyst can be managed and "I would hope that the blackout practice gradually disappears from our landscape".

He says analysts are not involved in organising the IPO, and their viewpoint can be of help to the vendors, advisers, fund managers and investors all at the same time.

"If you manage your processes and put in strong conflict procedures around Chinese walls, and the analyst's research is transparent, then I don't know why it needs to be blacked out."

It's almost a Catch-22.

Broking firms such as Forsyth Barr invariably get involved in the syndicate arranging the IPO and by doing this need to agree to the manager's protocol on research.

"We have debated the point strongly," says Paviour-Smith, "and if we don't get involved then our clients will have less access to the IPO. It is a difficult decision to make.

"(On some occasions) we have been able to get a softening to the hard edge of the rule where we have come up with a two page summary facts sheet -- and that's got us to a place where, on balance, it's okay to be involved with the IPO.

"But there have been times when we have turned down being involved in an IPO -- for a variety of reasons, not just the blackout."

The Financial Markets Authority (FMA) had earlier put out a note saying: "While New Zealand firms often follow global practices and impose black-out periods restricting research publication immediately before and after an IPO, there are no requirements under the FMA Act (or NZX rules or other New Zealand law) to restrict the publication of research of a company making an IPO.

"In fact, research may be published by participants at any stage during an IPO. Research reports may also be shared with retail investors, as well as institutional investors."

They are not getting the expertise of the analysts, and I think there is a better way of managing the information in the marketplace.

The Financial Markets Conduct Act 2013 (FMC Act) put in place a new framework for those offering securities in New Zealand, including new, more flexible rules for advertisements and other promotional activities.

The Authority said the broad FMC Act obligations on fair dealing and new advertising regime encouraged fair, efficient and transparent promotion of financial products.

This gives those in the industry an opportunity to re-examine how and when they share information such as research reports.

"We strongly encourage participants to make research reports available to retail investors and/or their advisers, although we recognise that this is a decision for each business to make.

"When multiple joint lead managers are involved in an offer, participants should not unnecessarily restrict other joint lead managers from making their research available to retail investors and/or their adviser," the authority said in its note.

The authority is aware that the current market practice for promoting an IPO has led to an imbalance in the information available to institutions and retail investors.

Though certain institutional clients of joint lead managers have access to valuable research, retail investors and their advisers often have limited access to quality contextual information to help with investment and trading decisions.

So how do retail investors get around the blackouts and become more confident about investing?

Paviour-Smith says: "They need to speak to an Authorised Financial Adviser; they should try and not listen to the 'noise' and follow the herd mentality; they need to form their own view and feel comfortable with the investment; they need to understand the risks and rewards such as investing in a company for a while rather than selling it for a gain on the first day; and if something is too good to be true then maybe it is and if there's any nagging doubt, then come to terms with that."

Paviour-Smith says the book builds for an IPO have been good for the sharemarket.

"You no longer see the price extortions of extraordinary bargains and massive premiums on day one The book build finds the (market) level for the IPO and if the share price sustains that level, then investors have a good experience and hopefully stay invested in that business."