Unlisted may be under threat
New financial regulations could force the closure of the Unlisted securities market, home to companies with a combined market value of $1 billion.
Unlisted was set up in 2003 as a low-cost trading platform in competition with the NZX. Stocks quoted on its board include Queenstown gondola operator Skyline, meat processor Silver Fern Farms and investment company Rangatira.
Unlisted chairman Bevan Wallace said the threat was in the Financial Markets Conduct Act, passed in September, which introduced a licensing regime for financial-product markets.
Unless exemptions could be negotiated, there were serious implications for Unlisted's future, he said.
"We'll consider all options, including turning the lights out in December  when the regime comes into effect."
Companies using Unlisted were particularly concerned about the Act's insider trading and continuous disclosure rules, said Wallace.
"A lot of our entities are very closely held, and a lot of the shareholding base would be controlled by insiders, and under the legislation there is no safe harbour for them to trade their shares."
Under the Act, company insiders such as directors or executives must not trade shares while they have material information not known to the market.
Wallace said the small companies on Unlisted were uncomfortable disclosing sensitive information that could be used by competitors. "In many instances what they would like to do is share the information with the counterpart, but not with the market."
Unlisted would rather use a "notice and pause" regime in which insiders disclosed their intention to trade, allowing other investors to be aware they were dealing with an insider.
"But in our latest discussions with MBIE [Ministry for Business Innovation and Employment] and the FMA [ Financial Markets Authority] the response is we'd have to provide full justification and effectively draft regulations to get that approved."
The cost of producing those documents would probably be prohibitive, said Wallace.
Unlisted's preferred solution was to apply for blanket exemptions from the Act on the understanding that any transgression would lead to closure or the requirement to apply for a licence.
Rangatira chief executive Ian Frame said the closure of Unlisted would be disappointing and a loss for the financial community.
"It works well," he said. "It ain't broke, so why fix it?"
Most Unlisted issuers used the facility as a service to their shareholders, rather than to raise capital, and trading volume was typically low. Using the NZX instead would be more costly in fees and compliance, said Frame.
"People sometimes interpret that as trying to avoid compliance, but that's not correct. In terms of disclosure, we act as if we were listed, but we do it more cost-effectively."
None of the companies on Unlisted had been involved in anything requiring an inquiry by the FMA, unlike several NZX-lised companies.
"I think that says a lot."
Draft regulations governing the trade on licensed financial markets were released by Commerce Minister Craig Foss last week.
Submissions are due by March 14. The new rules will come into force on December 1, 2014.
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