Tough times ahead for agribusiness.

Cooling-off periods are one of the new disclosure requirements in the Financial Services Reform Bill (FSRB) that could cause agribusiness promoters trouble in the future, warns Teys McMahon joint managing partner Greg McMahon.

“Promoters will need to be careful when calculating the start of the cooling-off period for each investment,” he told a recent seminar in Melbourne.

The problem arises from the actual start of the period, he says. The start is from when the investment is accepted and not when the application is received by the promoter.

McMahon points out there could be many months difference between the two dates.

“Often the acceptance does not occur until after the minimum subscription period is reached, which could be several months later,” McMahon says.

“The 14-day cooling-off period will start then and the promoter could be faced with people pulling out of projects at exactly the time they need to be closed.”

McMahon warns promoters will need to be extremely cautious with investment schemes that cannot proceed unless they have a minimum subscription level.

The cooling-off period is only one change facing investment product promoters under the new Bill.

Under the FSRB, prospectuses will become a Product Disclosure Statement (PDS). These have been designed to make the amount of information and disclosure to the investor simpler. However, McMahon warns, they must not be misleading.

“The FSRB makes it an offence to prepare a PDS that is defective, even if the promoter did not know it was defective,” he says.

“The penalty is a maximum fine of $10,000 and for a company it is $50,000, or two years jail.”

McMahon says the penalties are greater if there is a deliberate attempt in the PDS to mislead the investor.

The fines for this offence are up to $20,000 for an individual and $100,000 for a company or five-years jail.

The PDS must also have a number of compulsory disclosure inclusions under the FSRB. These include disclosure of commissions.

The level of commission paid to the sales team must only be disclosed if it impacts on the investment returns, says McMahon.

If the commission comes out of the initial investment fee then it need not be disclosed. But if the commission comes out of the funds being raised, and a separate initial fee is charged, then the commission to the sales force will have to be disclosed.

McMahon says advisers still need to disclose commissions. Only the responsible entities selling products direct do not have to disclose commissions.

Enforcement of the Bill also seems to be taking a new direction, says Teys McMahon Investments joint managing director Michael Teys.

“Our current corporate regulators are media-savvy. ASIC’s new approach to managed investments is to prosecute and publicise,” he says.

Teys says the current areas of focus for the regulators are insolvent trading, inadequate disclosure at the point-of-sale of financial services and the governance of corporate entities.

ASIC faces funding difficulties trying to implement all the new legislation under the FSRB. Teys believes the regulator will concentrate on surveillance, rather than checking every security dealer’s licence application.

“Prosecuting and publicising is relatively cheap and it seems it is effective. Central to the new strategy, ASIC will focus on civil penalties of up to $200,000 for each serious contravention of corporate law that can be proved.”

Teys says ASIC prefers civil penalties as they can be processed more quickly than criminal proceedings. Secondly, civil actions require a lower standard of proof than criminal cases.

“Criminal penalties require proof of guilt beyond reasonable doubt,” he says. “Civil penalties require only proof on the balance of probabilities.”

Under the FSRB, ASIC’s powers will be increased and it will have the ability to issue ‘stop orders’ for the first time. These powers can stop offers, including advertisements that are non-compliant.

“This is a significant increase in ASIC’s stop-order powers. Previously, ASIC’s stop-order powers were confined to non-complaint prospectuses, rather than non-complying advertising,” Teys says.

He says the stop order must be obeyed — which could result in a scheme’s marketing campaign losing credibility.

The FSRB will lead to a “compliance culture” in the fund-raising industry according to Teys. This is going to cost enterprises such as agribusiness schemes dearly to maintain these compliance regimes, he warns.

“As a consequence, the high cost of creating and maintaining such a culture will discourage one-off and small-scale enterprises,” he says.

“Instead of promoting these managed investments, many promoters will choose to merge their operations with others to achieve economies of scale.”

The new Bill will also lead to promoters producing joint ventures with organisations that already have licensed staff, compliance and disclosure systems as their core competencies.

“If ASIC acts in a manner consistent with its stated intentions, and commits resources to surveillance, then promoters presently approaching compliance on a minimalist basis are in for a rude shock,” Teys warns.