Not every offer of securities needs the full prospectus treatment. Where investors are large enough, professional enough or few enough to look after themselves, the Capital Market Act 2015 lets the issuer deal with them on an information memorandum instead. The categories are set out in Schedules 6 and 7.
How the exclusion works
Section 125 makes an offer or invitation an “excluded offer” or “excluded invitation” if it is specified in Schedule 6, or if the Commission prescribes it by order in the National Gazette. Section 126 does the same for an “excluded issue” under Schedule 7. The offer is the invitation to invest; the issue is the allotment; the two schedules largely mirror each other. Section 127 then switches off the prospectus provisions listed in the schedules.
Excluded offers, invitations and issues are those “to which Sections 128, 129, 130, 131, 132, 133, 134, 135, 136, 137 and 140 shall not apply”.
That list covers registration, approval, lodgement, contents, the duty of disclosure, supplementary prospectuses, advertising and consents. It does not include sections 142 to 150 (liability for false statements), section 141 (stop orders) or section 151 (unsolicited offers), which continue to apply.
The excluded categories
| Category | Schedule 6 (offers) | Schedule 7 (issues) |
|---|---|---|
| Buyer acquiring as principal for at least K250,000 (or foreign currency equivalent) per transaction | para 8 | para 8 |
| Holder of a capital market licence carrying on dealing in securities | para 4 | para 4 |
| Holder of a capital market licence carrying on fund management | para 7 | para 7 |
| A unit trust scheme or prescribed investment scheme; a closed end fund approved by the Commission | paras 3, 6 | paras 3, 6 |
| Licensed institution under the Banks and Financial Institutions Act 2000; registered insurance company; statutory body | paras 17–19 | paras 17–19 |
| Made exclusively to persons outside Papua New Guinea | para 5 | para 5 |
| Securities made or guaranteed by the National Government, a provincial or municipal government or the Bank of Papua New Guinea | para 11 | para 11 (State or Bank of PNG) |
| Securities of a private company | para 12 | para 12 |
| Employee share or share option schemes | para 15 | para 15 |
| Rights issues by unlisted corporations to existing members or debenture holders (not renounceable issues under s 133); offers to existing members of a company | paras 2, 20 | para 2 |
| Underwriting and sub-underwriting agreements | para 1 | para 1 |
| Sale of units by a personal representative, liquidator, receiver or trustee in bankruptcy realising assets | para 9 | para 9 |
| Trades on an approved stock exchange or in the money market; takeover offers; schemes of arrangement | paras 10, 13, 14, 16 | paras 10, 13, 14, 16 |
| Exercise of options, warrants and convertible notes under a registered prospectus; dividend reinvestment in shares or units; bonus issues | — | paras 20–23 |
| Rights issues by foreign corporations listed on a recognised overseas exchange | para 21 | paras 24–25 |
Three categories matter most for unit trusts: an offer of units to another unit trust, a licensed fund manager or a bank; a sale of units by an executor or liquidator realising an estate; and a scheme’s issue of units in satisfaction of a distribution, provided the original units were issued under a prospectus (Schedule 7, paragraph 22).
What “sophisticated investor” means in practice
The Act does not use the phrase, but paragraph 8 does the work of a sophisticated investor test: a person who acquires securities as principal for a consideration of not less than K250,000 in a single transaction, paid in cash or otherwise. The threshold is per transaction, so a promoter cannot aggregate ten investors of K25,000 each. Acting “as principal” excludes a nominee buying for a pool of smaller clients. A landowner company investing K300,000 of royalty money, a church investing K500,000 of surplus funds or a superannuation fund are in this class; a retiree investing K20,000 is not, and may only be approached with a registered prospectus.
Information memoranda still carry liability
Sections 125(3) and 126(3) provide that an information memorandum issued for an excluded offer or issue, purporting to describe the business and affairs of the issuer, “shall be deemed to be a prospectus insofar as it relates to the liability of the person or his agent for any statement or information that is false or misleading or from which there is a material omission”. The issuer must deposit a copy with the Commission within seven days after it is first issued (sections 125(4), 126(4)). A K250,000 investor who is misled by an information memorandum therefore has the same remedies as a retail investor misled by a prospectus; see who is liable.
Paragraph 12 excludes securities of a private company, reflecting the Companies Act 1997 restriction on private companies offering shares to the public. The Commission may by Gazette order remove that exclusion for particular private companies or classes of them (section 125(5)); under section 126(5) the equivalent order for issues is made by the Minister on the Commission’s recommendation.
What the exclusion does not do
An excluded offer of units still requires the scheme to be registered under Part V, the trustee to be licensed, and any listing to be approved under section 116; Schedule 5 contains a separate list of proposals that do not need section 116 approval. Section 151’s ban on unsolicited offers does not apply to excluded offers (section 151(2)(e)), and section 138’s deemed prospectus on resale does not apply either (section 138(9)). An unregistered operator who tells a small investor that the offer is “excluded” is usually wrong; see when a prospectus is required.
Sources
- Capital Market Act 2015 — ss 116(6), 122, 125–127, 138(9), 151(2)(e); Schedules 5, 6 and 7
- Companies Act 1997
- Banks and Financial Institutions Act 2000
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.