Consensual adult investing

Shoeshine

Friday 4th June 2004

Do you think of yourself as wealthy? Ever wondered where the affluence goalposts are actually planted?

In an all-new exclusive expose, Shoeshine is able to reveal that it's now official being wealthy means having net assets of at least $2 million or a gross income of at least $200,000 in each of the past two years.

The definition is set out in the Securities Amendment Act 2004, which came into force on April 15.

It applies only to offers of securities. So if your definition of rich is owning two cars, a spa pool (with swirly jets, of course) and a jet ski, you can brag on.

The amendment act should be noted by anyone interested in the critical but tricky business of raising capital to feed growing companies, but how much of a difference it will make is open to debate.

The interesting stuff is the amendment of the old act's subsection 2C, introducing seven new sub-subsections.

The thrust of sub-subsection 2CC is that you are now an "experienced" person eligible to receive investment propositions unaccompanied by a prospectus or an investment statement if you're a "wealthy" person, as newly defined.

That is as long as you are willing and able to produce a certificate signed by an independent chartered accountant that you make the minimum asset and income requirements.

(What the minimum asset and income counts are and how they're defined can, incidentally, be changed at will by the government of the day through a simple order in council.)

From the point of view of companies trying to raise capital, this is all very well if you're trying to sling a leg over your mates. But that was already covered by the old act, which exempts you from having to produce a prospectus for relatives or close business associates.

It's probably also fine if you're widely known for your financial acumen, as Shoeshine and certain former National cabinet ministers are. Shoeshine struggles to think of a former Labour minister who has a successful business to promote.

But imagine "wealthy" people being cold-called by those less gifted with celebrity and asked if they have the required bit of paper. The likely response cannot be printed in a family newspaper.

Scenarios like this must have been in the minds of the nation's wealth managers when they lobbied successfully for another change to the act.

This is sub-subsection 2CE, which adds a second category of "experienced investors," who are entitled to engage in consensual investing without the protection of a prospectus.

2CE saves you from the ignominy of being considered an underage, public investor if you can get yourself certified as "experienced" by an "independent financial service provider (IFSP)."

It works like this. You're a person experienced in investing money, or in the industry or business to which the offered securities relate, if an IFSP says you are and gives you a written statement telling you why he thinks so and if you sign a written acknowledgement that you've haven't seen a prospectus or an investment statement.

That last bit is, presumably, because the sight of a condom might cause a consenting adult investor to reconsider her level of protection.

This raises another host of questions.

What, for instance, qualifies an IFSP as independent? A sore point right now and one the drafters of 2CF have ducked, as they define a "financial service provider" as someone whose principal business consists of giving investment advice, receiving investment money or receiving investment property.

So that includes your accountant, your sharebroker, your banker or the chap from Money Managers' Orewa office who advises you where to stick Granny's inheritance. In short, pretty much everyone.

This latest outburst of tinkering with the Securities Act is no doubt well-intentioned but it fails to address the biggest obstacle to raising capital the enormous amount of time and resources required to produce a clean, act-compliant prospectus you can mail to anyone.

Like analysts' reports, in which the disclosures these days sometimes take up three-quarters of the document, prospectuses are loaded with "information" nobody will ever read.

Experienced investors don't bother because the same stuff is in every document that crosses their desks. Joe Sixpack won't read it because he hasn't a clue why it's there or what it means.

As former deputy prime minister Wyatt Creech, who recently ground through the documentation for his Open Country Cheese capital raising, remarked, "if prospectuses weren't so damned hard to produce, fewer people would have to make non-public offers."

Shoeshine imagines the New Zealand Exchange, whose sterling efforts to open the capital markets to more fast-growing companies are garnering a lot of praise from the investment community, will not be hugely impressed by the act's latest revision.

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