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DISCLOSURE BY FINANCE COMPANIES

Proposed class exemption

11.

The Commission wishes to extend the ambit of its class exemption so that smaller companies who wish to use employee share schemes as part of their remuneration plan do not have to seek individual exemptions. The Commission understands that these schemes are relatively common, but often operate without a registered prospectus. In some cases, the shares will be offered to people who are not "members of the public", and so no prospectus will be needed. However, under the Securities Act the fact that a person is an employee does not, of itself, make that person not a "member of the public" in relation to any offer of securities by their employer. We think that most employee share schemes should have a prospectus and investment statement. The primary purpose of these documents is to give information about the benefits, costs, and risks of the investment to people who may buy shares.

12.

If shares are offered to employees in circumstances where a prospectus is required there are serious consequences for the employer (issuer) if the scheme does not have a prospectus. Under the Securities Act any allotment of shares in these circumstances is void and of no effect. The issuer, and any directors of the issuer, are liable to repay subscriptions. If this is not done within 2 months of the allotment then the subscriber is also entitled to 10% per annum interest on their subscription money. For example, if shares are allotted without a prospectus and then some years later an employee is unable to sell the shares, or to get as much as was paid for them, the employee could claim the allotment was void, and require the company or its directors to repay the full subscription price plus 10% per annum interest. It is important from the point of view of the issuer's liability to have a prospectus.

13.

Many employee share schemes operate on an ongoing basis. The Commission recognises that the compliance costs involved in preparing and registering a full prospectus every year could be prohibitive for a small enterprise.

14.

Exemptions for employee share schemes recognise the value of companies encouraging employee participation in the company through share ownership plans. The exemptions strive to strike a balance between lowering compliance costs for the company and providing employees with sufficient information to make an informed decision about joining the scheme.

15.

Taking this as a starting point, there are four policy considerations on which the Commission seeks comment prior to settling any further exemption. These are:

(a): extent and method of disclosure;
(b): eligible persons;
(c): exit mechanisms;
(d): whether to cap the number of shares that can be allotted under the exemption.

Extent and method of disclosure

16.

The Commission considers that registering a prospectus is an important discipline for any company that intends to issue shares to the public. However, once this is done, and the company is an issuer, there are arguments in favour of limiting the ongoing compliance costs of renewals. Employee share schemes tend to operate over a long period of time and there can be significant costs when prospectuses must be renewed every year.

17.

For this reason the Commission proposes a class exemption that allows unlisted companies to offer shares to employees through an established scheme using an evergreen prospectus and an investment statement. This is the same basic level of disclosure as is required of listed companies under the class exemption.

18.

The Commission considers that the conditions of any exemption should require unlisted companies to provide more information than listed companies are required to provide. This is because companies listed on NZX have six-monthly financial reporting obligations, and must also comply with the continuous disclosure provisions of the listing rules. This means that shareholders of listed companies can easily obtain information about their company, and get an accurate idea of the value of its shares from the current market price. Unlisted companies in general do not offer these advantages.

19.

Compliance costs can be limited if the additional disclosures can be made in the issuer's financial statements and by additional information in the annual report. This avoids the costs of a new disclosure document every year, but still gives investors the information they need.

20.

The Commission proposes that unlisted companies using this exemption should provide employees with:

(a)

the company's most recent audited financial statements;

(b)

if any allotment is to be made more than 9 months after the most recent balance date, a set of interim financial statements that comply with FRS-24;

(c)

additional information about the company, shareholdings, and current activities in their annual reports, similar to that already required in the Commission's individual exemptions. This comprises:

(i)

particulars of entries in the directors' interests register; and

(ii)

information about material contracts; and

(iii)

information about any pending legal proceedings or arbitrations that might have a material adverse effect; and

(iv)

a statement by 2 directors of the company as to whether, in their opinion after due inquiry, there have arisen since the last balance date any circumstances that materially adversely affect�

A: trading or profitability; or
B: asset value; or
C: ability to pay liabilities due within the next 12 months.

21.

The Commission does not propose any exemption from the requirement to have an investment statement. However, given the small amount of information required in the prospectus, and the fact that it, like the investment statement, will be an evergreen document, it could be sensible for issuers to combine the two documents. The goal would be to provide concise and clear information for employees about the benefits of joining the share scheme, the cost of doing so, and the risks associated with being a shareholder of the company.

22.

The Commission proposes to require that investment statements for these offers describe any arrangements the company has in place for shareholders to sell their shares, or to facilitate the sale of shares. For more on this, see the section headed "exit mechanisms", below.

23.

Because companies may wish to offer individual terms to various employees, the Commission also proposes that companies using the exemption could include personalised information for employees in a document accompanying the investment statement. The Commission would grant an exemption from the requirement that the investment statement set out all the terms of the offer to the extent required to allow this.

Questions
a.: Would the proposed exemptions and disclosure conditions relating to the prospectus and investment statement provide the right balance between compliance cost savings and adequate disclosure for employees?
b.: Are any other disclosure exemptions needed to make the exemption more workable?

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