The Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) have recently announced changes to the rules governing partly-paid securities. This follows retail investors exposing themselves to huge liabilities after purchasing instalment receipts in BrisConnections.

BACKGROUND

In the BrisConnections case, investors were offered partly-paid stapled units for AU$1 each in connection with the initial public offering of BrisConnections in July 2008. Each partly-paid unit came with an additional obligation to pay two future instalments on those securities to the value of AU$2. The price of the party-paid unit has subsequently dropped to AU$0.001 and shareholders have been left with substantial liabilities to pay further installments on virtually valueless securities. Certain retail investors who acquired the partly-paid units are now claiming that the additional liability to pay installments was not adequately disclosed to them and that they acquired the units without understanding that there were liabilities attaching to them.

THE CHANGES

The changes to the rules governing partly-paid securities will take effect from 1 May 2009 and are intended to ensure that retail investors are more fully informed of the implications associated with trading in partly-paid securities.

The specific changes to the rules regarding partly-paid securities include:

  • the insertion of a new definition of 'partly-paid security' in the definitions section of the market rules; and
  • a requirement for market participants and retail clients to enter into a Partly-Paid Security Client Agreement (which indicates that the retail client is aware of the responsibilities associated with trading in partly-paid securities) prior to the retail client buying party-paid securities for the first time. Similar requirements already exist with respect to trading in options, futures and warrants.

Accordingly, brokers will now be required to inform retail clients of the 'rights and obligations' associated with trading partly-paid securities.

Despite the above, the new changes will not apply to partly-paid securities in no-liability companies, as these companies do not have a contractual right to recover calls on the unpaid issue price of their shares.

Ultimately, the changes to the rules governing partly-paid securities are designed to reinforce the existing provisions in the Corporations Act 2001 which require brokers to disclose the risks associated with trading in complex financial products (for example options, futures and warrants).

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