FMA drafts Guidance Note on how to prepare and present prospectuses and investment statements

The Guidance Note, called "Effective Disclosure", is split into 6 sections, and under each section the FMA seeks stakeholder feedback.

While restating the need to comply with the existing legal requirements in the Securities Act 1978 and the Securities Regulations 2009, the FMA is suggesting that mere technical compliance ("tick box" compliance) will not satisfy the requirements for disclosure documents.  The FMA emphasises that disclosure documents must give truthful and complete information, conveying an accurate impression and providing balanced disclosure of risks and benefits.

In addition to the above "holistic" approach, the FMA is also proposing some detailed new requirements and prohibitions.  The new requirements include matters such as:

• Clear and plain language drafting
• Descriptions of business models
• Director and senior manager CVs.

Meanwhile the FMA will strongly frown upon brand puffery, excessive photos and imagery.

The FMA is also suggesting that increased scrutiny will be placed on the risks section, going so far as to state that disclosure of generic or standard "risks" may be misleading or deceptive because they may effectively obscure the more significant risks.

Other things specifically considered include related party lending, financial information and certain types of offers (KiwiSaver, finance companies proposing investments and "cash box" entity offerings).

The FMA lastly advises that its "pre-vetting facility" will end at the end of March 2012.

Some of the proposed requirements may result in significant changes from current practice for some issuers.  Affected persons should carefully review the Consultation Paper and consider making a submission to the FMA.  Submissions are due by Friday 9 March 2012.

The FMA proposes that issuers will need to adhere to this Guidance Note when drafting prospectuses and investment statements from the middle of 2012 onwards.  The timing of this Guidance Note is interesting considering that the new Securities Regulations were made relatively recently, and the imminent Financial Markets Conduct Bill proposes to remove the requirement for both a prospectus and investment statement and instead have just one "Product Disclosure Statement".  We assume however that the principles expressed in the Guidance Note will continue to apply to Product Disclosure Statements.

The Consultation Paper is available here.

If you would like to discuss this update or the Consultation Paper, please contact one of Buddle Findlay's financial regulation experts - Sacha Judd, Adam Jackson or Ian Stewart.