Project update and consultation: Class exemption review Real Property Proportionate Ownership Schemes

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1 Project update and consultation: Class exemption review Real Property Proportionate Ownership Schemes 31 August 2012 Summary of proposal for real property proportionate ownership schemes The Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002 SR 2002/315 (the Notice) expires on 30 September The Financial Markets Authority (FMA, or we) have been reviewing the Notice as part of our class exemption review. Having reviewed practices relating to offers of real property proportionate ownership schemes in the market, and submissions received on the review of the Notice, FMA proposes not to grant further exemptions similar to those in the Notice. FMA considers the significant exemptions from the Securities Act and regulatory requirements contained in the Notice are not justified or required in terms of the purpose of the Securities Act. In particular FMA considers: the standard disclosure requirements of the prospectus and investment statement address the material matters prospective investors need to understand. FMA will provide further guidance to assist market participants in addressing the disclosure requirements of particular relevance to these schemes; the registration of a prospectus will provide a valuable public record of investments offered to the public; and a statutory supervisor will provide useful support to the management of these schemes. FMA proposes a new limited exemption to address two discrete issues applying in the case of proportionate ownership schemes relating to developments on real property: An exemption allowing extension of the prospectus for allotment of interests in schemes. This is because often development timeframes will be expected to exceed 18 months. An exemption that takes account of the fact that where there is a long period of time between subscription and allotment, market movements, and other events, may mean that the prospectus is no longer up to date at the time of allotment. FMA proposes a transitional provision enabling offers that have commenced before 30 September 2012 to be completed in reliance on the existing Notice. Additionally FMA invites any market participant currently proposing to offer a real property proportionate ownership scheme to the public that will not have commenced before this date to contact us to discuss whether specific exemptions may be justified in the particular case. Financial Markets Authority Level 2 Level 5, Ernst & Young Building 1 Grey Street Galway Street WELLINGTON Britomart, AUCKLAND Website: Ref: /#

2 2 Introduction 1. The Notice is due to expire on 30 September The Notice provides exemptions from the statutory supervisor, investment statement, prospectus, accounting, register and certificate requirements for offers to the public of interests in real property proportionate ownership schemes on the basis of provision of an alternative offer document and alternative requirements around the offer and allotment processes. 2. FMA is aware that real property proportionate ownership schemes are offered to the public both in reliance on the Notice and under the standard Securities Act and regulatory requirements. 3. Although the scope and size of the sector is not well defined, we estimate there are between syndicated property vehicles operating in New Zealand with total investments of around $2bn. The market is dominated by a small number of large operators. However, a comparatively large group of smaller operators occupies the lower end of the market, based largely in provincial areas where they are well situated to capture the investments of retired customers, as they are yield focussed. 4. High profile failures in the early 2000s appears to have led to a decline in the sector but issuance has surged in recent years possibly as a result of the decimation of the finance company sector - particularly for the sector of the investing public that seeks the apparent familiarity of a property related investment (but without necessarily appreciating the full implications of investing in these financial products). We expect that trend to continue for example, as the redevelopment of Christchurch gets underway and the demand for property development monies increases. 5. Property syndicates and schemes have been the subject of a significant number of complaints to FMA and its predecessor with complaints covering a variety of issues focusing on inadequate governance, deficient management and poor disclosure. Complaints also clearly demonstrate that the disclosures provided have failed to provide investors with a full appreciation of the nature of their investment, the additional liabilities that investment in the scheme may carry by way of maintenance contributions, or the issues and risks raised by common ownership and lack of autonomous decision making control. 6. Against that background, on 10 April 2012 FMA published its first consultation paper on the class exemption review. We signalled our intention that this Notice required significant review. We noted that the Notice would be reviewed on a first principles policy basis by considering to what extent any exemptions from full compliance with the Securities Act participatory securities offer document disclosure and conduct requirements are appropriate. We noted that we considered a holistic review was necessary to ensure the regime for real property proportionate ownership schemes most efficiently supports market activity, whilst facilitating fair and transparent investments for investors. 7. FMA has considered submissions received on the review of the Notice. Although most submission support retention of the Notice, for the reasons explained below FMA has concluded that this is not justified in terms of the purpose of the Securities Act. FMA proposes not to grant new exemptions similar to those in the Notice.

3 3 Ability to offer in reliance on the standard Securities Act regime 8. FMA s power to grant exemptions is one important tool we use to achieve our objective to promote and facilitate the development of fair, efficient and transparent financial markets. In exercising our exemption power, we look to facilitate the development of New Zealand s capital market, while balancing the need to ensure investors interest are met including that they are fully informed of the information they need to know to make investment decisions. 9. FMA is able to grant exemptions from the standard Securities Act and Regulatory requirements only where it is satisfied: a. the exemption would not cause significant detriment to subscribers for the securities that are members of the public in New Zealand; and b. the extent of the exemption is not broader than is reasonably necessary to address the matters that gave rise to the exemption. 10. In considering this purpose, and these statutory tests, we have concluded no substantial exemptions are justified or required: Statutory supervisor a. There is no particular distinction between the structures of these participatory schemes which relate to an investment in real property and those of any other participatory schemes investing in another underlying asset class, for example forestry and agricultural schemes, to justify relief from the protections afforded to investors of a statutory supervisor. Investment statement and prospectus b. On reviewing the disclosure requirements of the investment statement and prospectus we do not consider there are any significant omissions, nor matters that are not able to be complied with. Issues of particular relevance to an investment in property such as valuation information, material matters disclosed in a certificate of title, land information memorandum, or regional or district plan, rental agreement details, financial standing of tenants, and contracts relating to proposed building or development on the land would either be required by particular disclosure requirements of the investment statement or prospectus or would caught by the other material matters requirement. c. One significant difference between the Notice and our proposal would be that there would be no requirement to get a valuation from a registered valuer. However where a valuation has been obtained, we consider the full report would be material information that would need to be disclosed, as would the valuer s qualifications, and any relationship the valuer has with the issuer or other factors which would undermine the valuer s independence. Were a proportionate ownership scheme to be marketed without a professional valuation having been obtained we think investors would need to be warned about this in very clear terms. Additionally the basis for the price for which the property was to be purchased or any value attributed to the property would need to be explained, including for example if it was a matter of opinion of the manager and the relevant qualifications of the manager to form this opinion.

4 4 d. FMA has published a Guidance Note on Effective Disclosure which is of general application and will assist market participants to understand FMA s approach to reviewing prospectus and investment statements and provides our view on good practice for preparing offer documents. We propose to provide further assistance on issues of particular relevance to these schemes. We invite market participants to alert us of any issues they consider guidance could usefully address. Accounting records and audit of financial statements, securities register, and certificates evidencing securities e. As an issuer, the manager of a scheme is required to prepare financial statements under the Financial Reporting Act. An exemption from the Securities Act provisions relating to the accounting records and financial statements is therefore of no effect. f. Investors, and other members of the public, may search the real property certificate of title however this involves some effort and expense, and additionally it will not provide a list of investors in cases where a nominee holds the property on behalf of the investors. Therefore we see no justification for the exemption from the usual securities register the purpose of which is to provide an official record of investors. g. We do not see any need for a certificate exemption except in limited cases, for example where there are continuous issues. This is not the case in these schemes. Discrete exemptions required from prospectus requirements for development schemes 11. We consider a new limited exemption is likely to be required to address two discrete issues applying in the case of proportionate ownership schemes investing in property developments: a. An exemption allowing extension of the prospectus for allotment of interests in schemes. This is because often development timeframes will be expected to exceed 18 months. Any exemption would be on conditions such as: i. requiring subscriptions to be held on trust; ii. the need for the offer document to prominently disclose a backstop date after which the investors would have an election as to whether subscriptions would be returned or the allotment date extended. Transition b. An exemption that takes account of the fact that where there is a long period of time between subscription and allotment, market movements, and other events, may mean that the prospectus is no longer up to date at the time of allotment. 12. FMA propose a transitional provision enabling offers that have commenced before 30 September 2012 to be completed in reliance on the Notice. This would enable the continued offer of any existing scheme (namely a scheme with an Offeror s Statement dated on or prior to 30 September 2012) until 30 November We expect this to be in force before the existing notice expires on 30 September 2012.

5 5 13. Any offer commencing after 30 September 2012 would be required to be offered in full compliance with the Securities Act and Regulations. For this reason we are therefore also interested to hear from any market participants proposing new offers in the months immediately following 30 September Those market participants are invited to contact us if they consider the requirement to comply with the standard provisions of the Act and Regulations would result in significant detriment that would outweigh benefits investors would receive of immediately moving to the protection of full compliance. In such cases we will consider a case for specific exemption, including what conditions may be required to justify the exemption such as appointment of a statutory supervisor. 14. To assist with the efficient offer of development schemes we will progress the proposed new limited scope exemption to address practical difficulties in relation to the life and currency of the prospectus as quickly as possible. We seek comments on these discrete exemptions by 24 September 2012, and aim to have any new exemptions determined appropriate in place by 31 December Submissions sought 15. We welcome submissions from market participants, their advisers, and investors on any aspect of the proposals for the review of the regime relating to real property proportionate ownership schemes. 16. In particular we seek comments on: a. Any disclosure requirements of the standard investment statement or prospectus that you consider would be applicable but would be unable to be compiled with. In relation to any matter you raise please explain why compliance is not possible and why, and on what conditions, you consider an exemption is justified bearing in mind the tests FMA must satisfy in granting any exemption. (See paragraph 10(b).) b. The scope, terms and conditions of exemption you consider necessary, workable and justified (again bearing in mind the tests to be satisfied in granting any exemption) to: i. provide for extension of the prospectus for allotment of interests in schemes which relate to developments where development timeframes are expected to exceed 18 months. (Note our comments that our initial thoughts are that any exemption providing for an extended prospectus life would, as a minimum, need to be on conditions such as requiring subscriptions to be held on trust, and requiring the offer document to prominently disclose a backstop date after which the investors would have an election as to whether subscriptions would be returned or the allotment date extended); ii. to take account of the fact that in schemes relating to developments where there is a long period of time between subscription and allotment, market movements, and other events, may mean that the prospectus is no longer up to date at the time of allotment. c. Any issues you consider a guidance note on disclosure relating to these schemes would usefully address. 17. We seek submissions by 24 September Please provide us with two versions of your submission: a PDF and a word document.

6 6 18. Please send your submission by only (no posted or delivered versions please) to The subject line should identify that the contains a submission on the real property proportionate ownership schemes review, and who the submission is from, e.g. Submission on real property proportionate ownership schemes review by [submitter s name]. 19. We will not treat any part of your submission as confidential unless you specifically request we do so. Submissions will be subject to the Official Information Act We may make submissions available on our website, may compile a summary of the submissions or draw attention to individual submissions in internal or external reports. If you would like us to withhold any commercially sensitive, confidential or proprietary information included in your submission, please clearly state this in your submission and identify the relevant extracts of information. We will consider any request to have information withheld in accordance with our obligations under the Official Information Act. Further information 20. For information on the status of proposed new exemptions, including the proposed transitional exemption to enable schemes that have commenced before 30 September 2012 to continue under the existing Notice, you can review our website at: Laws We Enforce, Legislation, Exemption Notices. All new exemptions are published on this page. 21. You can also contact Natalie Muir, Manager Exemptions, for any further information about FMA s proposals for this matter: Telephone: , exemptions@fma.govt.nz