Red tape keeps getting in the way, brokers say

Friday 8th December 2000

By Chris Hutching

Disgruntled brokers want the complex New Capital Markets rules revamped - but any tweaking is unlikely to be as dramatic as they are demanding.

Brokers complain the rules for the NCM, launched in May with the aim of helping small companies raise capital in a cost-effective way, are complex and constantly being redefined. The listings have been much more expensive than they expected and difficult to explain to clients.

One broker turned down a potential listing this week because he considered it was not worthwhile.

A forum of brokers has aired its gripes with Stock Exchange executives and is digesting the response - which mainly addresses insignificant issues while reinforcing restrictions such as the ability to use debt.

From a retail investor's view involvement in an NCM company requires blind faith because the rules state promoters cannot provide information about the "key transaction" that will comprise its business until a shareholders' meeting after listing.

Brokers have been getting around the rules by referring inquiries to the target "key transaction" company.

Originally the NCM idea came from a Canadian model for setting up cash box companies that would later identify a "key transaction."

But in New Zealand the promoters of NCM listings have identified the key transaction first and then sought client money.

Broker John Reuhman said he had spent considerable time and money trying to explain the system to clients who were not at all relaxed about signing up for something without an investment statement or information memorandum.

Investors would have learned about the key transaction of Submarines Australasia from the information published by the target company but the promoters had to pretend they were unable to provide details.

In at least one case a public relations practitioner told the National Business Review he was unable to talk about the key transaction but much of the generic information was available on a website.

The relatively small amount of capital being sought initially by NCM listings - $800,000 - and the small parcels offered to individual investors, means brokers have been working hard to massage their client base for small rewards so far.

Mr Reuhman said the 10 listings (only one has progressed to the key transaction) were a significant achievement but there was no point in a system where people had to bend the rules.

The disclosure rules in particular flew in the face of all the trends and legislative changes to securities legislation of the past 10 years.

The other area where Reuhman & Co sought changes was over the restriction about using debt financing, which it views as a major weakness and impediment to growth.

DF Mainland's Wayne Collins reiterated the sentiments. "The concept is to be admired but the process needs to be in keeping with good commercial sense."

Mr Collins said he doubted the NCM would survive without significant overhaul if the New Zealand Stock Exchange merged with Australia's because his counterparts over the Tasman would view many rules as silly impediments.

"We're great supporters of the NCM but too many rules are going to defeat its purpose."

The NCM so far includes wireless communicator Rocom, Mowbray Collectables, the stockbroking and investment banking services associated with Reuhman & Co brokers, the medical and beauty clinic Caci Group, tourism company Submarines Australasia, and Selector, which has already spent its initial capital and is going back to the market with a 3:1 capital raising.

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