Property problems: Rules designed to give investors right information

Q. The recent offerings of investments in carparking buildings have been attracting media interest. I understand that the Securities Commission has granted an exemption from its general requirement regarding public offers of securities when the security involves certain types of syndicated property investments. Does this make investing in such securities potentially risky?

A. Under the Securities Act 1978 the exemption notice allows investments in real property proportionate ownership schemes, such as carparking buildings, to be offered to the public on the basis of a less comprehensive set of disclosure materials than would otherwise be required for an offer of securities to the public.

How strictly the requirements must be complied with was tested on March 17 in the James Smith carpark development in Wellington.

In the James Smith carpark case the Securities Commission announced it had banned the offer documents for the carpark property scheme. Interests in the Wellington carpark were being offered for sale for $21 million under a proportionate property ownership scheme.

The commission investigated the basis on which the interests were offered and concluded the offer documents did not comply with the law and were likely to mislead investors.

As a result, interests under the scheme could not be allotted and investors must be given the opportunity to obtain a refund.

The offeror was relying on an existing class exemption granted by the commission to offer interests in the scheme to investors. The class exemption allows interests in such a proportionate ownership scheme to be offered to investors by means of an offeror statement and valuation report instead of an investment statement and registered prospectus.

However, these documents must contain all the information specified in the exemption notice.

The commission found a number of flaws in the offer documents, including:

* The dual role of the offeror (Regional Realty) as both the seller and responsible real estate agents through whom the offer was being made, was unclear and likely to mislead or confuse investors.

* The offeror statement did not contain information about the financial standing of the tenant of the carpark. Instead it gave information about the standing of the developers without stating that the tenant had no recourse to assets of the group.

* The valuation report did not contain all the material information required to be given to investors under the exemption.

* The offeror statement and valuation failed to disclose material information, including information about the assumptions underlying the valuation and the recent sale of the carpark building for $16 million and the valuer's reasons for believing that the valuation of $21 million was justified.

It was on this basis the offer documents for the carpark scheme were banned.

The James Smith case demonstrates the Security Commission's strict requirement for compliance with the disclosure requirements under the exemption notice, and should give investors comfort.

The conditions in the exemption are designed to ensure that investors have sufficient information with which to make a decision to invest. If the information required is either not provided or is misleading, the offeror risks having the material banned, requiring a refund of investors' money and incurring the attendant bad publicity.

Having received all of the information required by the exemption, potential investors are then able to make their own assessment as to the merits (and risk) of the investment. Without that information, an informed assessment cannot be made.

Q. A former employee is guilty of theft from my business of a substantial sum. I am sure she has used the money to purchase a block of flats. What can I do?

A. The money stolen from the business is yours, not hers. She is obliged to return your money to you. If she cannot do so because it has been used to purchase property, it is arguable that she holds that property as trustee on your behalf, at least to the extent your funds have been used to purchase it.

Assuming you can prove your money has been used to purchase the flats, you can claim an interest in them. To protect your interest, while you take steps to prove the flats were purchased with your money, you should lodge a caveat on the title.

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