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FMA satisfied with 'pre-offer' talks before prospectuses, sees no need for further regulation

 The Financial Markets Authority sees no need to regulate how issuers and their book runners communicate with institutional investors prior to a prospectus being registered after criticism offer documents were issued too late for the aborted Hirepool sale.

Milford Asset Management executive director Brian Gaynor said the gap between Hirepool's prospectus being registered and the bookbuild was just eight days, compared to 14 days for Genesis Energy's [NZX: GNE] IPO and 33 days for MightyRiverPower [NZX: MRP]. The narrowing gap "reduces the opportunity for serious analysis," Gaynor wrote in a NZ Herald column in June. New Zealand had traditionally followed a US model where a prospectus was filed and made public at the start of the sale process, with clear guidelines on what investment bankers and managers could say and what analysts could publish.

That changed with the government's selldown of state power companies, where management talked to institutions well before a prospectus was available and brokers selectively provided research reports to institutions. Now IPO companies meet potential investors weeks or even months before a prospectus is published, he said.

But Elaine Campbell, the FMA's director of compliance, said the regulator hasn't seen any abuse of rules in recent IPOs that would warrant further action.

"New Zealand, like Australia and other similar jurisdictions, allows issuers and their book runners flexibility in the timing of bookbuilds and price-setting discussions," Campbell said. "It's well understood that issuers who are not yet listed can hold discussions with institutional investors, and even share a draft offer document, before registration of the prospectus as long as this isn't misleading."

"We're aware of a range of views within the industry about the optimal way to conduct bookbuilds but we have not seen any convincing case for increasing the regulation of pre-offer communications," she said.

On the question of a shrinking gap between prospectus and bookbuild, she said the FMA is "emphasising to all issuers and their advisers that sufficient time must be built in to the process for investors to review the registered prospectus before making investment decisions."

Gaynor says New Zealand has lurched more toward the British system of IPOs, which has been criticised for favouring issuers and vendors at the expense of investors. Hirepool had been an extremely positive development for investors because institutions had been price makers not price takers. Retail investors have to accept IPO prices determined in institutional bookbuilds "and some of these prices have clearly been too high," he said.

The latest company to list on the NZX, portable measuring gadget maker ikeGPS [NZX: IKE], tumbled in its debut yesterday after selling in its IPO at $1.10 a share. The stock partially recovered today to trade at $1.03. IkeGPS completed its bookbuild, allocating the entire $25 million sought to institutions and brokers, four days before they lodged a prospectus with the Companies Office. There was no public pool.

Of the other companies to go public via a share sale this year, online business travel booking company Serko [NZX: SKO] last traded at 90 cents versus an IPO price of $1.10. Gentrack Group [NZX: GTK], which develops utilities and airports software, was last at $2.54 after being sold at $2.40 and Genesis Energy [NZX: GNE] was at $1.79 from an IPO price of $1.55.


Comments and questions

The FMA are missing the point. Retails investors are being asked to commit to issues on draft prospectuses, with less information and often shorter timeframes, or in some cases as price takers from a book build process where they cannot have influence. Institution are wanting more time to do through analysis on the documentation and companies, but the hideously slow FMA and NZX processes mean that traditional timetables are a mess and regulatory approvals are now lenghty processes.

One of the biggest risks to the integrity of financial markets is the lack of transparency in relation to bookbuilds - which are routinuely "managed" to look after institutions in sought after IPO's against and screw retail investors.

NZ needs to implement a Blackbox book build methodology - which elimates the impact Lead Managers and Brokers can have on pricing and makes the outcome the outcome for the vendors to decide if they wish to proceed or not. With technology solutions this would have more impact on the integrity of offers than any other current initiative that the FMA are supporting.

Tumbler have a look at On line book builds in Australia. There the small end of town can have some input on price formation through retail brokers.