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MEMORANDUM TO Ministry of Economic Development DATE 25 August 2010 SUBJECT Review of Securities Law Joint submission by Foodstuffs South by hli25189

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									MEMORANDUM




TO                   Ministry of Economic Development

DATE                 25 August 2010

SUBJECT              Review of Securities Law - Joint submission by Foodstuffs South
                     Island Limited and Foodstuffs (Wellington) Co-operative Society
                     Limited, presented by their respective legal advisors Anderson
                     Lloyd and Chapman Tripp, in response to the Discussion Paper
                     issued by the Ministry of Economic Development dated June
                     2010

1         Introduction
1.1       Foodstuffs South Island Limited (“Foodstuffs South Island”) and Foodstuffs
          (Wellington) Co-operative Society Limited (“Foodstuffs Wellington”)
          (collectively "Foodstuffs") are generally supportive of the approach taken by
          the Ministry of Economic Development ("MED") in relation to defining
          regulated financial products, offers to exempt investors and disclosure
          requirements, as recorded in the Review of Securities Law Discussion Paper
          dated June 2010 ("Discussion Paper").

2         Key proposals in the Discussion Paper
2.1       MED has identified the need to regulate only those financial products that
          generate/have the potential to generate a financial return and/or hedge
          financial risk as a material feature (otherwise many of the regulatory
          requirements become irrelevant and/or burdensome). Products are proposed
          to be divided into four main categories and economic substance of financial
          products is to take precedence over legal form to ensure the consistent
          treatment of similar products and greater clarity. A new set of exemptions has
          also been proposed, together with a bright line method for assessing
          qualification, which would result in increased certainty for both issuers and
          investors. Disclosure is to become more simplified, and tailored to specific
          financial products and the needs of investors.

2.2       Conceptually, Foodstuffs supports all of these proposals and believes that the
          initiatives under discussion will be generally beneficial to issuers and investors
          alike, as well as the wider economy. Foodstuffs believes that the review of
          securities law by MED is very timely and will form an integral part of the
          overall reform package governing securities issuers and those providing
          financial services more generally in New Zealand.

2.3       Foodstuffs is of the view that the MED proposals are "on the right path" and
          wishes to make a brief submission expressing its general support of the
          approach taken.

2.4       Foodstuffs’ view on the proposals relating to collective investment schemes in
          the Discussion Paper will be presented to MED in a separate submission.

3         Foodstuffs
3.1       The structure and the nature of the Foodstuffs' businesses ("the co-operative
          model") has certain characteristics and involves methods of operation which
          make it quite distinct from other corporate entities. This is due to the
          fundamental nature of the co-operative model, which allows business




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          owner/operators (Foodstuffs’ members) to work together for their mutual
          benefit and also for the overall benefit of the co-operative. The special nature
          of the co-operative model was specifically referenced in several places in the
          Discussion Paper, demonstrating MED's awareness of and sensitivity to this
          unique structure and the need to separately consider it within the overall
          securities law reform.

3.2       For example, one feature of the co-operative model that is affected by existing
          securities law is the issue of debt and equity securities as a means of on-
          going funding by transacting shareholders or members. The Securities
          Commission has already recognised, by way of exemption (through the
          Securities Act (Co-operative Companies) Exemption Notice 2002 that applies
          to Foodstuffs South Island and the Securities Act (Industrial and Provident
          Societies) Exemption Notice 2002 that applies to Foodstuffs Wellington), that
          transacting shareholders or members of a co-operative do not purchase co-
          operative shares for the purpose of obtaining any return on investment for
          capital invested. Rather, the shares are a membership tie, which enables
          transacting shareholders or members to obtain the mutual benefits of trade
          made available by subscribing to the co-operative model (including bulk
          purchasing, access to suppliers and business support from Foodstuffs). This
          line of thought is reinforced in the Discussion Paper as part of the discussion
          around the definition of "Investment" (see Section 5 below) and is consistent
          with the overall substance over form approach MED has taken.

3.3       MED also specifically acknowledges the use of redeemable preference shares
          as an important part of the co-operative model. This will no doubt need to be
          taken into account by MED in refining the definition of equity securities (see
          Section 4 below) and also in the broader context of the categorisation of
          financial products.

4         Specific Categories of Regulated Financial Products
4.1       Foodstuffs supports MED's proposal to divide financial products into four main
          categories, namely:
          o      Debt;
          o      Equity;
          o      Collective Investment Schemes;
          o      Derivatives.

4.2       Such classification system would enable the economic substance of the
          product to be the focus rather than the legal form, which is the test as it
          currently stands, and should see similar products treated in a consistent
          manner.

4.3       MED has also indicated that aligning the definitions of equity and debt with
          relevant accounting standards would assist in the categorisation of securities.
          This should achieve consistency and certainty across the treatment of these
          products and Foodstuffs is supportive of this approach.

5         Definition of "Investment"
5.1       MED's proposal that the definitions of the product categorisations include "a
          requirement that a material feature of the offer is the possibility of earning a
          positive financial return from the investment" is strongly supported by
          Foodstuffs. In defining "an investment", Foodstuffs agrees that the focus
          should be on the predominant purpose of the investment (again, looking to
          substance over form), with the effect that an "investment" should be restricted
          to financial products that have the potential to earn a return or allow for risk




EJB-845216-11-106-V2:tjw                                                                     Page 2 of 4
          hedging. Foodstuffs agrees that an "investment" should not include a financial
          product where there may be some financial return but such return is
          immaterial to the investor's decision to subscribe.

6         Exemptions
6.1       Foodstuffs supports MED's proposal that the securities regime should not
          apply to investors in defined exempt categories unless issuers and investors
          agree to opt-in and comply with relevant requirements. Foodstuffs welcomes
          the proposal to broaden the categories of exemption and to use bright line
          testing to determine whether or not an investor qualifies under a specific
          exemption. Foodstuffs believes that this more simplified and objective
          approach to the exemptions will help to remove much of the uncertainty that
          exists in the current regime.

6.2       Foodstuffs supports the various categories of exemptions proposed by MED.
          However, Foodstuffs recognises that the challenge for MED will be in further
          refining/defining each category to ensure that qualification under each
          exemption is capable of objective assessment (eg. bright line testing) in line
          with the overarching principles underpinning the regulatory review outlined in
          the Discussion Paper.

6.3       In the Discussion Paper, MED also suggests class exemptions as an
          alternative option, which could apply to specific entities, including (inter alia)
          co-operative companies and provident societies. Foodstuffs is supportive of
          this approach.

7         Disclosure Requirements
7.1       Foodstuffs agrees with the proposed shift towards a single product disclosure
          statement which would be tailored to specific financial products with additional
          disclosures on the Register of Securities. Foodstuffs believes MED's
          proposals in this area would help to achieve an appropriate level of
          transparency without creating an unnecessary regulatory burden on issuers of
          financial products by making product disclosure statements briefer and more
          focussed. The proposed changes should also ensure that information made
          available to investors in the offer document is both meaningful and relevant,
          and targeted at the specific financial product on issue as well as the investor.

8         Conclusion
8.1       Foodstuffs is generally supportive of the approach taken by the MED in
          relation to proposed changes to securities law, particularly in the wider context
          of the overall legislative reform package. MED has recognised that the
          regime needs to focus on those transactions which history has shown require
          regulation. Unnecessary and/or burdensome regulatory requirements would
          certainly not benefit investors or issuers of financial products, or indeed the
          economy. It is important to strike a balance between protecting investors from
          unnecessary risks (but without removing risk completely) while allowing
          investors to make informed decisions in respect of their investment activity.
          Foodstuffs believes that the Discussion Paper represents a step in the right
          direction to achieving this balance.

8.2       Foodstuffs believes that the overarching principles and objectives should
          remain the focus of MED's approach to the securities law review and that
          achieving the desired outcomes outlined in the Discussion Paper would be of
          benefit to financial services providers generally.




EJB-845216-11-106-V2:tjw                                                                       Page 3 of 4
8.3       It is clear from the Discussion Paper that MED already recognises the
          features of the co-operative model in the context of the overall securities law
          review. Foodstuffs believes it is essential that this unique structure is
          considered as part of the overall review to ensure an appropriate level of
          regulation for entities operating as co-operative companies and industrial and
          provident societies.




EJB-845216-11-106-V2:tjw                                                                    Page 4 of 4

								
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