Tuesday, June 24, 2008

 Public offerings of securities have been regulated in South Africa for many years.  The reason for the regulation is that members of the public who are offered shares in a company are entitled to full disclosure to them of the nature of what is on offer before they make a financial commitment, and to provide them with effective remedies to redress any loss incurred as a result of failure on the part of the company to make complete or accurate disclosure.   
The Companies Bill, which was submitted to cabinet in February 2008 and is expected to become law in 2010, modernises and redefines offers to the public to bring South Africa in line with countries with more sophisticated securities regulations. 
The Bill introduces a definition of an initial public offering (IPO).  The current Companies Act deals with the issue of shares to the public but does not define an initial public offering.  The Bill defines an initial public offering as an offer to the public of securities if no securities of that company have previously been subject of an offer to the public.  The Bill provides that no one may make an initial public offering unless the offer is accompanied by a registered prospectus.   
The prospectus requirements of the current Companies Act (as amended by the Corporate Laws Amendment Act in 2007) are retained to a large extent, and the prospectus must contain all information that an investor may reasonably require to assess the financial position and prospects of the company, the securities being offered and the rights attached to them.  In addition, the prospectus must have the information set out in Schedule 3 to the Bill which information is similar to the information required under the current Companies Act. 
The Bill also specifically defines a primary offering and a secondary offering.  A primary offering is an offer to the public made by or on behalf of a company of securities to be issued by that company or its subsidiary.  A secondary offering is defined as an offer for sale to the public of any securities of a company or its subsidiary made by any person other than the company or its subsidiary.  The distinction between the primary and secondary markets recognises that where someone other than the company itself offers to sell shares, such person may not be able to provide information to the potential investor to the same extent that the company can. 
A primary offering of listed shares (other than an IPO) must comply with the requirements of the stock exchange, while a primary offering of unlisted shares requires a prospectus.  In a secondary offering there must be attached to the offer either the registered prospectus in respect of the primary offering of those shares (with the necessary revisions to address changes) or a written statement which contains information set out in the Bill (basically a mini prospectus). 
The definition of an offer to the public will remain a key definition, but the Bill introduces a number of new categories of offers that are deemed not to be offers to the public and, accordingly, the prospectus requirements would not apply in these instances.  Firstly, a secondary offer effected through a stock exchange is not an offer to the public.  Secondly, if the offer is made only to banks, authorised financial services providers, financial institutions, the Public Investments Corporation or persons whose ordinary business is to deal in securities whether as principals or agents, it will also not be an offer to the public.  This widens the ambit of the current exemption which basically applies only in respect of banks and insurance companies.  This reform is to be welcomed on the basis that more sophisticated investors (who are in a strong enough position to look after themselves) may be the subject of an offer without compliance with the prospectus requirements. 
The other types of offers that are not offers to the public under the current Companies Act are retained in the Bill, such as, an offer made only to directors or persons related to directors, provided that the offer is not renounceable in favour of any person who is not a director or related to a director and offers to employees under an employee share scheme provided that certain requirements are met.
The Bill also makes provision, as an alternative to any other manner of making or presenting an offer to the public, for it to be presented by way of an advertisement.  Any such advertisement must satisfy all of the requirements of the Bill with respect to a registered prospectus and will be subject to the provisions of the Bill relating to the making of the prospectus. 
In addition to making or presenting an offer to the public by publishing a prospectus, such an offer may be drawn to the attention of the public by way of an advertisement but such advertisement must include a statement clearly stating that it is not a prospectus and must indicate where and how a person may obtain a full copy of the registered prospectus relating to that offer. 
If securities are offered to the public for subscription or sale pursuant to a prospectus every person who becomes a director between the issuing of a prospectus and the holding of the first general shareholders’ meeting at which directors are elected, or any person who has consented to be named in the prospectus as a director, the promoter of the company or any person who authorised the issue of the prospectus or made the offer to the public will be liable to compensate any person who acquired securities on the faith of the prospectus for any loss or damage the person may have sustained as a result of any untrue statement in the prospectus or in any report or memorandum appearing in the face of, issued with or incorporated by reference in the prospectus.  In addition the Bill provides that an omission from a prospectus or written statement of any matter that in the context is calculated to mislead by omission constitute the making of an untrue statement in that prospectus or written statement irrespective of whether the Bill requires that matter to be included in the prospectus or written statement.   
In certain circumstances liability will not attach to a person where such person relies on the information from another person, and the person believes the information is correct, for example, a statement by an expert or an official person. 
The Bill also provides that nothing in the particular chapter limits any liability that a person may incur under the Bill or under the common law. 
The public offerings provisions of the Bill should be welcomed as it defines the various kinds of offers to the public better than under the current Companies Act and clearly states what is required.  In addition, it expands the types of offers that would not need a prospectus or a written statement and clearly stipulates the liability of persons involved in preparing the prospectus. 
Rudolph du Plessis is a director at Bowman Gilfillan Attorneys