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FINANCIAL MARKETS UPDATE: OFFERING FINANCIAL PRODUCTS TO NON-RETAIL INVESTORS.

On 1 December 2014 the Financial Markets Conduct Act 2013 ("the Act") will be the primary legislation that governs the law relating to New Zealand's securities market. Many offers of financial products made in New Zealand (e.g. offering shares in a company) are made outside the prescribed disclosure requirements of the law generally because the offer is excluded from the disclosure requirements of the Act.

Under the Act there are a number of exclusions to the prescribed disclosure requirements that need to be made to an investor. The most common exclusions used are offers made to wholesale investors, close business associates and relatives.

Offerors must remember that an offer under an exclusion of the Act is still subject to the civil and criminal liability provisions of the Act.

Although an offer made under an exclusion of the Act is not a "regulated offer" (i.e. not an offer to the public/retail investors) liability can still come from various wrong doings, such as:

  • The offer was made outside the scope of an exclusion;
  • A statement in the disclosure document (e.g. an investor information memorandum) was false or misleading;
  • There is an omission from the disclosure document required under the relevant exclusion clause; or
  • The offer has breached the fair dealing provisions of the Act (e.g. deceptive conduct, false representations and unsubstantiated representations). 

Civil Liability

Under the Act the civil liability provisions have been reworded wider than its previous equivalent of the Securities Act 1978. The civil liability provisions apply to persons who have contravened or are involved in the contravention of the Act. On the application of the FMA or any other person, the court will declare who these people are. Therefore, civil liability can extend further than the issuer and its directors to senior management of the issuer and beyond.

There are defence provisions under the Act for civil liability provisions, such as a contravention was due to reasonable reliance on information supplied by another person, or the contravention was due to the act or default of another person and the contravener took reasonable precautions and exercised due diligence to avoid the contravention. There is an additional defence to liability on the part of directors and other persons who may be 'involved in a contravention' if the person took all reasonable and proper steps to ensure the entity concerned complied with the provisions of the Act.

Criminal Liability

It is a criminal offence if a person knows of or is reckless as to whether the disclosure document contained a statement that is false or misleading or is likely to mislead or that omits certain required information under an exclusion. The penalties in the case of an individual may be imprisoned for a term not exceeding 5 years, a fine not exceeding $500,000, or both.

There is also a general offence, which states that every person commits an offence who makes or authorises the making of a statement in a disclosure document that is false or misleading. Liability in this case can be imprisonment for a term not exceeding 5 years, a fine not exceeding $200,000, or both.

Criminal liability applies more to directors where they have authorised or consented to a disclosure document to be distributed, in which they know, or are reckless as to whether a statement is false or misleading in the disclosure document. However, criminal liability can still apply to any person who has contravened the criminal liability provisions (i.e. anyone who provides a disclosure document to a person and knows or is reckless as to whether a statement is false or misleading in the disclosure document).  

Therefore, you can see that the criminal liability provisions require a guilty mind (i.e. knowledge or recklessness), whereas under the Securities Act 1978 there was strict liability on directors if a disclosure document had a false or misleading statement.

If you wish to offer a type of financial product to investors, such as shares in a company, please contact us for advice. 

Written by James Moran at 09:00

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