At a finance industry conference, Christopher Adams finds optimism that the paper war is being won
The devil, so the saying goes, is in the detail.
It’s a phrase that’s often used when describing investment transactions such as initial public offers. And for prospective investors making important decisions, the offer documents are usually the best place to go hunting for demons.
Trouble is, separating the most crucial information from the less critical content can be a challenge.
The prospectuses that accompany initial public offers (IPOs) have in the past been lengthy, sometimes impenetrable tomes, running to well over 200 pages.
Enter the Financial Markets Conduct Act, the once-in-a-generation overhaul of capital markets law that began to be phased in this year.
A key aspect of the legislation’s second phase, which kicks in on December 1, is the introduction of a simplified product disclosure statement (PDS) regime. For equity offers such as IPOs, the documents will be limited to 60 pages in length, with a key information summary no longer than four pages.
The PDS will be backed up with additional information accessible on an online register.
Adjusting to the new regime will be challenging for equity issuers and their investment banking and legal advisers.
However the changes are aimed at bolstering investor confidence, which could make it easier for New Zealand firms to raise the capital they need to grow.
In an interview on the sidelines of last week’s Infinz (Institute of Finance Professionals NZ) conference, Financial Markets Authority chief executive Rob Everett said the regulator’s push to make offer documents more readable would hopefully result in them being better-read by investors.
“If it’s too complicated people don’t read it,” he said. “Our hope is that, over time, people will be more inclined to open up the document and have a look.” Everett said feedback suggested many retail investors simply weren’t picking up offer documents and even some research analysts weren’t giving them much more than a cursory perusal.
“When you make it complicated, you effectively force a lot of people out of the market,” he said.
“It is a time thing, which is why part of the focus of the new regime is having a key information statement that would be more user friendly for someone who doesn’t have a lot of time but is willing to spend at least some time trying to do their research.”
Ross Pennington, a partner with law firm Chapman Tripp, told the audience of finance professionals at the Infinz event that “bad laws” had previously governed New Zealand’s capital markets. “I think we have world leading, excellent law now,” he said.
Pennington urged issuers not to pay too much attention to their advisers’ overly cautious guidance when preparing a PDS. “Don’t be conservative, don’t be legalistic and pedantic,” he said. “Understand what this new regime is trying to do, embrace it and you’ll probably be all right.”
Martin Stearne, managing director of investment banking at First NZ Capital, which was a joint lead manager of Genesis Energy’s April IPO, said the power company was an early adopter of the new disclosure requirements.
“That was the first issuer that fully engaged with the FMA to come out with a PDS-style statement,” Stearne said.
“It had its challenges, but the company and its advisers engaged with the FMA over a fairly long period of time and step-by-step the issuer got comfortable that it could be done.”
An Infinz panel session discussed the importance of narrowing down the specific potential threats companies face when outlining key risks in disclosure statements, rather than throwing together a long list of more general dangers.
“We think issuers could still do a bit more to describe how likely each of their distilled risks is to happen and the potential impact,” said Simone Robbers, the FMA’s director of primary markets and investor resources. “That’s something that we’re looking to keep working on with the market.”
Intueri Education Group chief executive Rob Facer, whose firm listed on both sides of the Tasman in May, said all organisations faced a raft of similar risks. “It’s around identifying those that are somewhat unique to your organisation at that point in time,” Facer said during the panel discussion.
Intueri, for example, highlighted potential risks stemming from changes in immigration policy, which could affect the number of international students coming to New Zealand. “So we needed to make sure we highlighted some of those issues,” Facer said.
Intueri had to amend its prospectus after a fatality at its commercial diving school in April.
“Under normal circumstances that might not have been a disclosable event, but in the interests of investor confidence and disclosure we went to market and explained what had happened and the potential implications,” Facer said. Worksafe NZ laid charges over the incident against two Intueri subsidiaries last week.
Meanwhile, the Financial Markets Conduct Act has also introduced a “same class offers” regime that allows listed companies to raise additional capital through debt or equity with minimal documentation – often just a straightforward, single-page disclosure.
Auckland Airport was one of the first issuers to use the same class exemption when it launched a $150 million fixed-rate bond offer in May.
Deutsche Craigs director David McCallum said the exemption had greatly reduced the preparation time required for such offers.
“[It provides the] ability to go to the retail market and be there, potentially, in two to two-and-a half weeks, rather than two-and-a-half months historically,” McCallum said.
Stearne said the same class exemption also came in handy during NZX-listed finance firm Dorchester Pacific’s recent takeover of Turners Auctions.
Part of the deal involved an offer of Dorchester shares to Turners’ shareholders and a placement to new investors.
“Rather than the need to issue an equity prospectus, they could rely on same class offers,” Stearne said.
“That made the takeover itself happen a bit faster and at a lower cost with fewer constraints.”
McCallum said the same class regime should encourage more companies to list in order to take advantage of the exemption.
The new legislation has also made new forms of capital raising possible, such as equity crowdfunding and peer-to-peer lending. Additionally, it has paved the way for the NZX’s new NXT market for high-growth firms with a market capitalisation in the $10 million to $100 million range.
The FMA approved the new, less onerous disclosure regime that the NXT will operate under at the end of September. At that time NZX indicated that it expected to have the new market – which will eventually replace the NZAX alternative market – up and running before the end of the year.
Companies including Invivo Wines and technology developers Straker Translations, Fronde and Booktrack have been put forward as potential NXT issuers.