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The Securities Commission is investigating Nathans Finance as the finance company teeters on the verge ofcollapse.
Trading in its parent, VTL, has been suspended on the NZX.
Commission general counsel Liam Mason said the inquiry would look at vending franchise business VTL - which declared itself insolvent yesterday
- and at Nathans Finance, its wholly owned subsidiary.
"The commission will be looking at whether the [Nathans] prospectus has been misleading," Mason said.
"It will also consider whether there are any continuous disclosure issues with the listed company."
Nathans raised money by issuing debenture stock, and then provided finance for VTL franchise owners.
Both companies now face receivership unless new capital can be raised.
Nathans said it stopped distributing its prospectus yesterday, meaning it cannot raise any more money.
And VTL said a deal to sell its US franchise business assets to Bacon Whitney for a subordinated note of US$67.5 million had been dropped after the suspension.
Shareholder approval would have been needed for a complex deal in which VTL could eventually have become majority owner of the buyer but could also have issued new stock to protect the buyer's owners - US fund Halpern Denny - from becoming a minority holder.
Nathans accounts for the 12 months to June last year showed secured debenture stock of $149.7 million and loans to VTL of $79.6 million.
Matthew Lancaster of Perpetual Trust - trustee to the deed with Nathans Finance - said Nathans was in serious trouble because of its exposure to VTL.
"With VTL ceasing to trade, unless there is something to recapitalise it it doesn't look so good."
VTL had been aiming to take control of Service America, one of the largest independent vending companies in the US.
But it surprised the market this month when it abandoned that bid and said it was aiming to sell its US assets to Bacon Whitney instead.
Lancaster said he understood the Registrar of Companies had commissioned a valuation of VTL that showed the company to be insolvent.
"From that, the registrar decided it needed to declare Nathans at risk," Lancaster said.
On Saturday, the registrar gave notice to Nathans not to deal with any funds or property without prior approval and to place in a trust account any money received for investment.
VTL then received notice on Sunday that the registrar considered Nathans to be a corporation "at risk".
VTL yesterday said it was insolvent, and trading in the company's shares was suspended.
Nathans faces receivership if it cannot find another solution.
"We expect to put out an update first thing [this morning], hopefully with some clarity about what the position's going to be," Lancaster said.
Neither VTL chairman Gary Stevens nor Nathans Finance chairman Roger Moses returned calls yesterday.
The Register of Companies declined to comment.
One industry observer said Nathans Finance had ended up funding VTL's operations.
"That's what's so wrong about it," he said.
"A finance company should follow some basic lending principles. For example, you shouldn't have 50 per cent of your money lent to one entity, particularly your parent company."
That money had been used to expand in the US and the strategy had not worked out, he said.
VTL said in a statement to the market yesterday that issues had arisen over the company's financial viability and the draft report prepared as part of the registrar's investigation.
"In the opinion of the directors, this announcement concerning Nathans, and the decision to withdraw Nathans' prospectus, will lead to a fundamental lack of confidence in Nathans which, in the current climate, will not be able to be recovered," VTL said.
The value of Nathans would be seriously impaired, resulting in VTL ceasing to be solvent.
Plans by John Halpern and George Denny III - founders of Boston investment firm Halpern, Denny & Co - to increase their personal stake in VTL from 9.95 per cent to 21.21 per cent each were dropped last week.
VTL shares last traded at 70c.
NATHANS FINANCE
* Had $149.7 million in borrowing from investors in June last year.
* Had loans to parent company VTL of $79.6 million.
* Yesterday suspended its prospectus.