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Financial Markets Authority bans $20m Longhorn scheme offer documents

The Financial Markets Authority Te Mana Tātai Hokohoko has banned offer documents for a $20 million funding scheme which promised investors a 50 per cent return over three years.

The One Management GP cannot raise money for The One in Longhorn Partnership Fund which plans to build south Auckland units at Flat Bush.

The business wanted the $20m as partial funding for a $210m scheme to build units at 38 and 48 Longhorn Dr in a land purchase not due to settle until December.

Today’s move follows an earlier temporary freezing measure after the Herald asked the authority about the scheme in which James Law Reality was also involved.

The authority said today it was concerned that communications about the offer “are likely to mislead or confuse prospective investors”.

It cited the level of investment risk, a guarantee by Tung Wei Ling and Manna Wang, references to a mortgage and returns payable.

“The promotional materials represented that the level of risk to investors was minimal, despite the security and guarantee referred to in the promotional materials likely providing little or no protection to investors,” the authority said today.

Numerous references were made in the offer to a guarantee by Tung Wei Ling and Manna Wang “but it only provides temporary protection because it could terminate prior to repayment dates. The FMA considers the guarantee is likely to provide no protection to the Fund or investors in the Fund in the event of default by The One Longhorn”.

References to a mortgage over the land securing advances by the fund to The One Longhorn would not be in place at the time of initial drawdowns under the loan agreement, likely misleading or confusing investors about the level of risk, the authority said.

The offer also gave the impression that the guarantee from Ling and Wang was predicated on their ultimate ownership of The One Property Group Holdings, which was estimated to have net assets of $22.5m based on a BDO letter, it said.

But the guarantee is in Ling and Wang’s personal capacity and the authority considered the assets of The One Property Group Holdings were not at risk under the guarantee, undermining its benefit to investors and any purpose for including the letter from BDO.

The permanent order comes into effect on May 10.

Paul Gregory, authority acting director of capital markets, said today: “This offer’s disclosure has fallen well short on the basics of what helps investors to make investment decisions: level of risk and returns payable. The exclusion in the Financial Markets Conduct Act for wholesale investors is intended to reduce the level of regulation, but does not make misleading or confusing statements acceptable.”

The interim stop order will lapse for James Law Realty. The authority considered the potential for ongoing harm had been addressed by making the stop order against The One Management GP only.

In March, the authority put an interim stop order on the scheme, open to wholesale investors, including eligible investors.

A stop order is a regulatory tool the authority can use to ban or prevent advertising or disclosure that is false or misleading or is likely to confuse consumers or investors, on matters that influence their investment decision.

The authority can issue an interim order, which typically lasts for 15 working days, while it considers if a full stop order is warranted.

It said in March it was concerned about statements by The One Management GP regarding the fund’s returns payable to investors and the level of risk in the investment.

The interim stop order prohibited The One Management GP from:

• Making any offers, issues, sales, or other acquisitions or disposals of units in the fund;

• Accepting applications for units in the fund;

• Distributing any restricted communication that relates to the offer of units in the fund (i.e. removing any relevant internet advertising/websites, social media posts, sponsored advertising content, and billboards);

• Accepting further contributions, investments, or deposits in respect of units in the fund.

Additionally, James Law Realty was temporarily banned from distributing any restricted communication that relates to the offer of units in the fund when the temporary stop order went on during March.

Asked back then how much of the $20m originally sought for the townhouse project had been raised, Law said he could not disclose that. But he would seek advice about whether he could.

“Yeah, it’s a surprise. I didn’t think I’d get the stop order from the FMA,” Law told the Herald two months ago.

Law firm Buddle Findlay commented on the stop order in April.

“The information memorandum prepared for the offer included statements regarding the expected return – a mammoth 50 per cent over three years – various risks and risk mitigations and the assistance of specialist advisers to provide expert advise [sic],” the law firm noted.

The authority had acted in the public interest because significant financial harm to investors could result from investing in units of the fund if they relied on restricted communications that may be false or misleading, or likely to mislead or confuse in respect of the returns payable to investors and the level of risks in the investment, the law firm said.

Offers of financial products are regulated but there are exclusions from the comprehensive investor-protection regime of that legislation which covers licensing, governance and disclosure, that are available for wholesale investors and other categories of excluded offerees eg, close business associates and relatives, Buddle Findlay said.

The exclusions have requirements including, among other things, warning statements and some certifications), while the fair dealing provisions of the law apply regardless of any exclusions and operate to restrict conduct that is misleading or deceptive or likely to mislead or deceive in relation to any dealing in financial products, it said.

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