ASIC issues interim stop order on offers from Finnia Income Limited
The Australian Securities and Investments Commission (ASIC) has placed an interim stop order on offers from Finnia Income Ltd in response to deficiencies in the issuer’s target market determination (TMD).
The orders stop Finnia from issuing interests in, giving a prospectus for or providing financial advice to retail clients under the existing TMDs.
ASIC placed the interim stop order to protect retail investors from potentially investing in offers that may not be suitable for their financial objectives, situation or needs. To date, 13 interim stop orders have been issued in relation to non-compliant TMDs, and seven interim stop orders remain in place. Six have been lifted following actions taken by the entities to address ASIC’s concerns.
Finnia is an unlisted public company seeking to raise $20 million under a prospectus through the issue of redeemable preference shares in the company for the purpose of lending to real estate development projects. Potential investors must contribute a minimum of $25,000 for a term of 72 months. The targeted interest rate is 8.15% paid quarterly.
At the time of lodgement of the prospectus, Finnia had not prepared a TMD for the offer. Finnia produced a TMD after ASIC communicated with the company.
In summary, the target market defined by Finnia in its TMD included investors:
- wanting to invest a minimum of $25,000 in redeemable preference shares exposed to the property sector;
- seeking an investment earning a higher return on investments than that offered by banks;
- with a balanced to aggressive risk profile;
- with the ability to read and comprehend the prospectus.
Amongst other things, ASIC was concerned that Finnia’s TMD did not adequately describe the objectives, financial situation and needs of consumers likely to be in the target market in an objective manner. Instead, it primarily focussed on the features of the offer and consumers’ understanding of the offer.
The regulator also found that the TMD for the prospectus did not meet appropriateness requirements under the design and distribution obligations (DDO) because the distribution conditions were unlikely to result in the product being distributed to consumers in a suitable target market.
Finnia’s distribution conditions were limited to identifying investors who had already registered with the issuer and were willing to meet the minimum investment of $25,000. There were no additional processes to identify investors as being within the target market.
ASIC expects Finnia to consider the concerns raised about the TMD and take steps to ensure compliance. ASIC will consider making a final order if its concerns are not fully addressed in a timely manner. Finnia will have an opportunity to make submissions before a decision is made about any final stop orders.
ASIC previously placed a separate interim stop order on the same prospectus due to disclosure concerns.
ASIC reminds financial product issuers that under the design and distribution obligations (DDO), they must define target markets for their products appropriately, having regard to the risks and features of their products and the consumers they are intended for. Issuers also need to consider how their product will reach the target market and have appropriate distribution conditions in place to ensure the product is directed towards its target market.
DDO requires firms to design financial products that meet the needs of consumers, and to distribute those products in a more targeted manner. A TMD is an important requirement under DDO. It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (target market) and matters relevant to the product’s distribution and review.
ASIC has targeted surveillances underway to check whether product issuers and distributors are complying with DDO. Where firms are not doing the right thing, ASIC can take quick action under DDO to disrupt poor conduct and prevent potential consumer harm.