When Is a Prospectus Required to Offer Units in Papua New Guinea?

A trustee that wants to raise money from the public for a unit trust cannot simply advertise a fund and start taking deposits. Part IV of the Capital Market Act 2015 requires a prospectus, registered by the Securities Commission, before units are offered. This article explains when that requirement bites.

The rule in section 128

Units in a unit trust scheme are “securities” under section 2, so the rule applies to them exactly as it applies to shares and bonds. The “issuer” of a unit is the trustee (section 2), so the trustee is the person who must obtain registration. Three further rules sit alongside the main one:

• Application forms. Unless the Commission authorises otherwise in writing, nobody may issue, circulate or distribute an application form for securities unless it is accompanied by a copy of the registered prospectus (section 128(2)). A form handed out on its own is unlawful.
• Unformed schemes. Nobody may circulate an application form for securities of a company that has not been formed or a unit trust that has not been formed (section 128(3)). Promoters cannot collect money for a fund that does not yet exist.
• Penalty. Contravening subsection (1), (2) or (3) is an offence punishable by a fine of up to K10,000,000 or ten years’ imprisonment, or both (section 128(7)).

What counts as a prospectus

Section 122 defines a prospectus for Part IV as “a notice, circular, advertisement or document inviting applications or offers to subscribe for or purchase securities, or offering any securities for subscription or purchase”, and includes supplementary, replacement, shelf, short form and abridged prospectuses and profile statements. Section 2 carries a narrower definition, a document offering securities to the public that is intended to be, or has been, submitted to the Commission. Read together, any document that invites the public to apply for units is a prospectus in law, and issuing it unregistered is an offence. A brochure, a newspaper notice or a social media post inviting applications all qualify.

What counts as an offer

The Act casts the net wide. A reference to an invitation includes an invitation to make an offer or application (section 123). For units specifically, section 124 provides that “offer for subscription or purchase” and “making an invitation to subscribe for or purchase” include “the making available of such units”. A trustee that simply makes units available at its counter is offering them. Because an open-ended unit trust issues units continuously, the trustee needs a current prospectus for as long as units are sold. Section 131(1)(c) requires every prospectus to state the period, set by the Commission, after which no securities will be allotted under it. See supplementary and replacement prospectuses.

Units compared with other unlisted securities

Section 116(4) requires a person who offers unlisted securities, including foreign securities, to seek the Commission’s authorisation and register a disclosure document containing the information the Commission specifies under section 69. That subsection expressly excludes “units in a unit trust scheme”. Units are routed instead through the prospectus provisions and the scheme registration rules in Part V. Listing units on PNGX is a separate matter requiring approval under section 116(1)(b); see listing approvals.

Offers for sale and deemed prospectuses

A promoter cannot avoid the rule by issuing units to a friendly company that then sells them to the public. Under section 138, where an issuer allots or agrees to allot securities “with a view to all or any of them being offered for purchase”, the document by which that offer is made is deemed to be a prospectus issued by the issuer, and all the prospectus laws apply as if buyers were subscribers. An offer made within the period the Commission specifies, before the issuer has received the full price, is presumed to be such a resale (section 138(4)). Ordinary trading on a stock exchange is outside the section (section 138(3)), as are excluded offers (section 138(9)). In Oil Search Ltd v Tongayu [2021] PGNC 22; N8785, the company obtained exemptions under section 138 for the on-sale of shares after its capital raising.

Publication before approval

The Commission may publish a “registrable prospectus”, one submitted but not yet approved, for public information (section 128(4)). Any such publication must not suggest that the Commission recommends the securities or vouches for the statements in the document (section 128(5)). Investors should wait for the approved version.

Offers that need no prospectus

Section 127 switches off the prospectus provisions for excluded offers, invitations and issues specified in Schedules 6 and 7. The main categories are offers to a buyer paying at least K250,000, offers to licensed dealers and fund managers, offers to other unit trust schemes, offers made exclusively outside Papua New Guinea, securities of private companies and employee share schemes. An information memorandum used for such an offer is still treated as a prospectus for liability purposes (section 125(3)). The full list is in which offers are excluded.