ASIC has placed a stop order on a prospectus from a lender seeking funds through an issue of preference shares, concerned at deficiencies in its target market determination.
Finnia Income Ltd, an unlisted public company, was seeking A$20 million to lend to real estate development projects. It was offering an interest rate of 8.15 per cent on redeemable preference shares with a six-year term.
ASIC said the target market determination did not adequately describe the objectives, financial situation and needs of consumers likely to be in the target market.
Under the Design and Distribution Obligation rules, which were implemented in October last year, financial services companies are required to identify the target market for any product that requires a disclosure document and must design the product for that market. They have to select appropriate distribution channels and periodically review those arrangements to ensure they continue to be appropriate.
The scheme is aimed at reducing the harm of mis-selling by requiring issuers to design products for which an appropriate target market can be identified.
Issuers are required to consider the likelihood of a product being appropriate for the retail clients in the target market: that is, whether it is likely to be consistent with the likely objectives, financial situation and needs of retail clients.
Relevant factors in this consideration include a product’s complexity, risk profile and fees, as well as investors’ likely understanding of product features, their capacity to meet their obligations or bear losses.
Lenders have been a target for ASIC in its use of its DDO powers. In July it placed a stop order on an offer by Responsible Entity Services Ltd, whose investment product’s sole asset was a loan to a related party for development of a sandstone quarry.
RES’s target market determination said the investment would be suitable for investors looking for a “core component in their investment portfolio”. ASIC said this was “a category of retail investors for whom investment in PPM Units would not have been consistent with their likely objectives.”
ASIC said it has issued 13 interim stop orders in relation to non-compliant target market determinations.