If an approved prospectus turns out to be defective, or the issuer misbehaves, the Securities Commission can halt the offer with a stop order under section 141 of the Capital Market Act 2015. For a unit trust that sells units continuously, a stop order shuts the fund to new money.
Grounds for a stop order
Where in the opinion of the Commission “(a) a prospectus does not comply with or is not prepared in accordance with any provision of this Act; or (b) a prospectus contains a statement or information that is false or misleading; or (c) a prospectus contains a statement or information from which there is a material omission; or (d) an issuer has contravened any provision of the securities laws or the Companies Act 1997”, the Commission may by written order served on the issuer or such other person as it determines, direct that person “not to allot, issue, offer, make an invitation to subscribe for or purchase or sell, further securities to which the prospectus relates”.
The first three grounds concern the document; the fourth concerns the issuer’s conduct. For a unit trust the issuer is the trustee (section 2), so a trustee’s breach of its licence conditions, of the Companies Act 1997 or of the Securities Commission Act is enough. The test is the Commission’s opinion; it need not prove the defect to a court first. An order may also be directed at “such other person”, such as a fund manager or distributor actually selling the units.
The hearing and interim orders
Natural justice is built in. The Commission must not make a stop order “unless the Commission has given a reasonable opportunity to be heard to any affected person as to whether such an order should be made” (section 141(2)).
Where delay would be prejudicial to the public interest, the Commission may make an interim order without a hearing (section 141(3)). An interim order lasts until the end of 21 days after it is made or until the conclusion of the hearing, whichever is later, unless revoked sooner (section 141(4)). The Commission may revoke it by a further written order once satisfied that the circumstances that prompted it no longer exist (section 141(6)). In practice an interim order freezes the offer while the hearing is convened.
Effect of a stop order
While a final or interim order is in force, “this division shall apply as if the prospectus had not been registered” (section 141(5)). Any further issue, offer or circulation of application forms therefore breaches section 128, with its K10,000,000 or ten-year penalty, and contravening the order is a separate offence (section 141(9)) punishable under the general penalty in section 461.
Section 141(7) then unwinds what has already happened:
- Applications not yet filled. Where applications were made before the order but securities have not been issued, the applications are deemed withdrawn and cancelled. The issuer, or whoever received the money, must repay it “forthwith” without interest; if any sum is not repaid within 14 days of the stop order, the issuer is liable to repay it with interest at 10 per cent a year, or such other rate as the Commission specifies, from the end of that period.
- Securities already issued. Where securities were issued to applicants, the issue is deemed void. The issuer must repay all money forthwith without interest, with the same 10 per cent interest if not repaid within 14 days of service of the order, and must take the steps necessary to give effect to the order.
These duties are without prejudice to section 121, and the 14-day rule and 10 per cent interest mirror sections 121 and 139 on failed listings.
The Commission “shall not serve a stop order if any of the shares or debentures or units of shares or debentures to which the prospectus relates have been listed on a stock market of a stock exchange and trading in them has commenced” (section 141(8)). Cancelling a traded issue would unravel transactions between innocent buyers and sellers. The wording refers to “units of shares or debentures” rather than units in a unit trust, so whether the bar covers listed units is unclear, though the policy applies equally. For listed securities the Commission must use trading suspensions, section 443 action or prosecution.
Stop orders compared with revoking an approval
A stop order targets the prospectus. A different power, section 119(2), targets the approval of a proposal under section 116, for example approval to list units on PNGX. The Commission may revoke or revise such an approval, or impose further conditions, where there has been a false or misleading submission under section 120(1), a breach of a condition of the approval, or a change in circumstances that would have affected the decision had it been known. The printed text joins these grounds with “and” and cross-refers to a condition imposed under “Section 102”, which appears to be an error for section 118. Revocation must not affect rights of third parties already created by implementing the approval, and the person must be heard first (section 119(2)–(3)). A stop order, by contrast, does unwind completed issues, but only while the securities are unlisted.
If a stop order is made on a fund you have applied to, keep your application records and wait for the refund. If the money is not back within 14 days, interest at 10 per cent runs and a complaint to the Commission is appropriate; see how to complain. Those responsible for the defective prospectus may also be liable to you; see who is liable.
Sources
- Capital Market Act 2015 — ss 2 (“issuer”), 116, 118–121, 128, 139, 141, 443, 461
- Companies Act 1997
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.