Franks Stephen: Business Law Reform Bill — In Committee 
Franks Stephen: Business Law Reform Bill — In Committee 
[Volume:616;Page:12417] 
STEPHEN FRANKS (ACT) 
: 
 The point that I hope will be clarified is why a Government department would be regarded as having knowledge of a matter when it has been brought to the attention of a senior employee in circumstances in which a reasonable person would take cognisance of it. I would think that a third party—an outsider—would expect a Government department to have knowledge of a matter if it had been given notice in writing and if a reasonable person would expect the notice to have been brought to the attention of such a senior employee. In other words clause 59 seems to allow a department to deny knowledge through its own failure when it should require that a department is deemed to have knowledge if it has been given notice irrespective of whether the notice has been drawn to the attention of the senior employee. I would like to know whether I have misunderstood the purport or whether a department would have a privilege that no other person would have. This clause essentially provides for a subjective test of knowledge instead of an objective test of when a third party that had tried to inform a department should be able to rely on the assumption that the department has knowledge. 
I suggest that “notice” should be something that has been notified in such a manner that a reasonable person would expect it to have been brought to the attention of a senior employee so that it does not just catch someone who sends an email to or rings and tells a junior officer. “Notice” could even be a notice in writing. But it seems to me that clause 59 needs at least to explain that we are not creating a situation whereby a department can deny knowledge by merely not drawing something to a senior employee’s attention. 
More significantly I will move amendments to clause 90 in Part 10. They will be amendments to the Securities Act designed to cut the costs of raising capital. One thing that has not been possible in securities markets is for someone with a bright idea or someone with a project that he or she needs equity for to go out and shop it around to test the market for a float. 
 It is possible to go to the brokers and the experts and ask them what they think but new subsection (2CA) in section 5 inserted by clause 90 addresses a continuing problem for people who want to raise equity capital. There has been a very feeble exception from what is called the “ban on pre-prospectus publicity” but it has not allowed people to go out there and do what happens in every other market; that is start to offer what they have see what the response is modify it and go backwards and forwards until they know they have a product that people want. 
The relaxation in the bill is utterly pathetic. It provides that pre-prospectus market testing can occur but only if no information can be given other than the name of the issuer a description of the securities the rates of interest the number the intended use the terms of the offer and the people to whom it will be made. In other words it does not allow the perfectly natural process of going out with a trial balloon putting it at its most attractive and seeing whether it flies—developing a product that suits the people one wants to offer it to. 
The Fair Trading Act applies in securities markets. if anything misleading and deceptive is put out there is liability. Why should a person not be able to go out there and test the market in any way he or she likes provided that person is not misleading and deceptive? Of course it does not override the normal securities law requirement that someone cannot sign up until he or she has the formal offering documents. 
The current law betrays a deep lack of confidence by securities regulators in their own efforts. It states that they do not believe their prospectuses and investment statement requirements are worth anything because they will not trust people to withhold commitment until they have them. Even when they are required to have them before subscription the securities regulators still believe that they should not let anyone go out and talk to the market unfettered before the documents can be distributed. In other words the cart has to be built and pushed out before we have the horse—before we know that there is a demand that will drive the offering. 
My amendments propose that the only restriction on pre-prospectus publicity should be that it does not circumvent the requirement that people not be signed up and locked in before they have the investment statement and the other documents and that the material that is circulated by way of pre-publicity not be misleading or deceptive so far as the promoter or issuer knows or ought to know. That is just a repeat of what is required under the Fair Trading Act but it is included to reassure the “nervous Nellies” in the securities regulation industry that it will not be open slather. 
The second amendment I have suggested is an opt-out from the offering restrictions so that people can choose not to force someone who is looking for equity capital through the costs of a prospectus and investment statement if they wish to take the risk. Again that does not circumvent the Fair Trading Act—misleading and deceptive conduct is still out. In my amendment I go further and make it clear that it would not exclude liability or allow an opt-out for people who would then be at risk of fraud. Fraud will say that an opt-out simply does not work and neither would deceptive or misleading conduct. It would mean that the whole exemption did not work. 
The proposal in this amendment is simply that people in investment markets have the freedoms that every person has if he or she wants to buy property. Why should property investment be open to anyone without prior warning disclosure statements or all the sign-offs and audits? There are many property investments that would be far more risky than the traditional securities investment in the securities and capital markets. People are allowed to gamble away their entire fortunes on the horses on Lotto or on anything else without disclosure statements. Participation in capital markets at least is usually not an all-or-nothing game. People who gamble can lose their entire investment. It is rare that one loses one’s entire investment when one puts money into even a foolish investment in an initial offering. Any investor can also go into the secondary market without a prospectus or investment statement. 
This amendment provides for people who deliberately opt out—who sign a statement that states: “In effect I am not going to complain if I end up buying something that I don’t want because I want to take the risk and I acknowledge that I am doing so without the benefit of the offering documents required by Part 2 of the Securities Act.” 
I realise that at this stage it is unlikely that the Minister in the chair Mr Cunliffe will feel willing to approve the amendment and get the Labour Party to vote for it but I would be very interested to know whether he has any significant reasons to oppose it in principle. It is what the Government should have been bringing forward. It is the kind of reform that would ease burdens. In my second reading speech I calculated that the offering document industry might cost $100 million a year. Much of it is a completely wasted cost to New Zealand business and capital raising. We could have an opt-out market that would test whether people really thought all that stuff was valuable. If people choose to opt out of the protections of the securities regime without repealing it we would then know we had a revealed preference which would tell us whether all the regulations are worth anything. I suspect that for reputable issuers they do not add any value; they only add cost.