Offer documents banned - James Smith scheme

Offer documents banned - James Smith Car Park building property scheme

The Securities Commission has banned the offer documents for the James Smith Car Park Property Scheme offered by Regional Realty Limited.

The Wellington carpark building was being offered for sale to investors for $21 million by Regional Realty Limited (Regional Realty), under a proportionate property ownership scheme.

“The offer documents for the scheme did not comply with the law and were likely to mislead investors,” Commission Chairman Jane Diplock said. ”By law the securities in the scheme cannot be allotted, and investors must be given the opportunity to have their money refunded.”

The Commission decided, on 27 February 2004, to prohibit distribution of the offer documents for the scheme, after receiving a complaint the previous day. No public statement was made until Regional Realty had an opportunity to be heard by the Commission. All subscription money was held in a solicitor’s trust account.

Mr Mark Winter, director of Regional Realty, appeared with his solicitors before the Commission on 15 March 2004. After that meeting the Commission decided to continue the prohibition order.

“Investors were not given all the information they are entitled to,” Jane Diplock said. “In particular the valuation information provided in the offer document was inadequate”.

Regional Realty was relying on a Commission class exemption to offer interests in the scheme to investors. The class exemption allows an issuer to give investors an Offeror’s Statement and a valuation report instead of an investment statement and registered prospectus. These documents must contain all of the information specified in the exemption notice. The offeror, Regional Realty, is responsible for ensuring that investors receive this information, including the required valuation information.

The Commission found numerous flaws in the offer documents, including the following:

The role of Regional Realty in relation to the sale was unclear, and likely to mislead or confuse investors. Regional Realty told the Commission it is acting in dual roles, both as the seller of the building and the responsible real estate agent through whom the offer is made. The Commission found that this dual role was not explained in the Offeror’s Statement, which also failed to tell investors about their right to complain to the Real Estate Institute of New Zealand.

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The Offeror’s Statement was likely to mislead or confuse investors regarding the financial standing of the tenant, Shortland Street Carpark Limited. The Offeror’s Statement did not contain information about the financial standing of this company, as required, but instead gave information about the standing of the Manson Development group of companies (one of which has a half share in Shortland Street Carpark Limited through a joint venture) without stating that the tenant has no recourse to the assets of that group.

The valuation report in the Offeror’s Statement did not contain all the material information required to be given to investors under this exemption. Regional Realty had obtained a further report that was available on request. The Commission found that in the circumstances this report should have been given to all investors along with the Offeror’s Statement.

The Offeror’s Statement and the attached valuation failed to disclose material information, including information about the assumptions underlying the valuation, and about the recent sale of the building for $16 million, and the valuer’s reasons for believing that the $21 million valuation is justified.

Because the Offeror’s Statement does not comply with the exemption notice and there is no registered prospectus for the securities, no allotments of securities may be made. Regional Realty is required under the Securities Act to return subscription monies to investors.

Regional Realty has told the Commission that it intends to redraft the offer documents for the scheme and re-offer interests in the scheme in compliance with the law. Regional Realty will need to apply to the Commission to lift its prohibition order before recommencing the offer.

Background The Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002 applies to property schemes under which each investor acquires an interest in the same real property through the issue of a Certificate of Title.

Interests in such property schemes are participatory securities under the Securities Act 1978.

The exemption notice requires prospective investors to be provided with an Offeror’s Statement and a valuation report. These documents are required to contain all of the matters specified in the Schedules to the exemption notice. Compliance with these requirements must be strict.

The exemption is from providing a registered prospectus and an investment statement to investors. Normally these documents are required so that investors are given all the information they need to make an informed decision on whether or not to invest. When an offeror relies on the exemption they must comply with the conditions of exemption which are designed to ensure that investors are given relevant and sufficient information on which to make a decision.

The Commission imposes conditions of exemption requiring inclusion of all specified information in the offer documents as conditions of the exemption from the requirement to have a registered prospectus and investment statement and from the need to appoint a statutory supervisor and enter into a deed of participation.

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