New Market Trading Rules

New Market Trading Rules 14 March 2014 Consultation Draft

Contents 1. Introduction... 3 2. New Market advisors... 3 Application of Rules... 3 Accreditation Process... 4 Ongoing Accreditation... 5 Obligations in respect of new listings... 5 New Market advisor s declaration... 6 Obligations in respect of companies listed on the New Market... 6 3. Trading... 8 Pre-trade Process... 8 Risk Check... 9 Risk Warning... 9 Trading... 9 Advising... 10 Fees... 10 Market Making... 10 NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 2 of 10

1. Introduction The New Market will be a market operated by NZX Limited. The trading rules for the New Market will be incorporated into the NZX Participant Rules. This document sets out the proposed changes to the Participant Rules to accommodate the New Market. 2. New Market advisors New Market advisors are expected to provide structured, standardised support for New Market companies before and after listing. Application of Rules A New Market advisor will be required to comply with all the Rules that apply to NZX Sponsors (see Rule 2.4) plus additional requirements that will reflect the important role the New Market advisor has to advise New Market companies after listing (new Rule 3.31, parts of modified Section 7 and Section 23). A new Rule 2.8 will be included setting out the Rules that will apply to New Market advisors. These will be as follows: Section 1: Definitions and Administration; Section 2: Summary of Rules for Market Participants; The following Rules in Section 3: Market Participants: Application - Rule 3.1.1, Rule 3.1.2, Rule 3.1.3(a), (b), (c), (e) and (f), plus new paragraphs (g) and (h) (see below) Overseas applicants - Rule 3.2 (if applicable) Responsible Executives Rule 3.4 Companies Rule 3.5 Partnerships Rule 3.6 Compliance with NZX Rules Rule 3.9 Management Arrangements Rule 3.10 Employee Training Rule 3.14 Contractual Basis of Rules Rule 3.16 Resignation as a Market Participant Rule 3.17 Transfer and Assignment of Rights Rule 3.18 Approved Organisations Rule 3.19 Designation as an Additional Class of Market Participant(s) Rule 3.20 Proposed Broking Office or Association with Another Market Participant Rule 3.21 Overseas Broking Offices Rule 3.22 Transitional Provisions Rule 3.23 Insurance Rule 3.26 Record Keeping Rule 3.27 Emergency Contact Details Rule 3.28 Changes in Software, Name and/or Location Rule 3.29 Employee Contracts Rule 3.30 NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 3 of 10

Ongoing Requirements New Rule 3.31 (see below) Section 7: Primary Market Participants; Section 8: General Obligations of All Market Participants and Advisors; and Section 21: NZX Powers Parts of New Section 23: Rules Applying to the New Market. A New Market advisor that is to distribute or underwrite an offer will also need to comply with the additional requirements that apply to Distribution and Underwriting Sponsors (i.e., comply with the Employee Trading requirements in Rule 10.5 and meet the capital adequacy requirements in Section 19) (see Rule 2.5). Accreditation Process NZX will follow its usual process when considering applications from persons wishing to be New Market advisors. Existing Participants wishing to perform the role of a New Market advisor will need to demonstrate to NZX that the additional requirements for New Market advisors are met before they will be permitted to act as New Market advisors. Additional paragraphs will be added to Rule 3.1.3, to ensure that NZX can assess whether applicants have the appropriate experience and capability to perform the role. These paragraphs will provide that NZX shall designate an Applicant when: (g) the Applicant seeks accreditation as a New Market Sponsor and NZX is satisfied that the Applicant has relevant experience in order to be able to assess the suitability of applicants for listing and to assist an applicant for listing on the New Market to ready itself for listing; (h) the Applicant has relevant experience in order to be able to provide the ongoing support contemplated by Section 23E of these Rules. A Guidance Note will provide more detail of relevant experience under paragraph (g) (and also in respect of paragraph (f) that requires NZX to be satisfied as to an applicant s management structure). Examples of appropriate experience may include: The applicant has practised corporate finance for at least the past two years; The applicant has had a significant involvement during that time in at least 3 transactions involving fund raising from members of the public or involving listing on a registered exchange; The applicant has a qualified executive, being a person who has acted as lead in a corporate finance role in transactions as referred to above; The applicant has practised corporate advisory or law for at least the past two years; and The applicant has demonstrable experience in advising on listing rule compliance. NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 4 of 10

There will be additional requirements for those who will be involved in distribution and underwriting because of the additional risk involved. The Rules applying to Distribution and Underwriting Sponsors will apply. Ongoing Accreditation NZX will establish a process for regular review of New Market advisors performance that will be a standard condition of all New Market advisor accreditations. The process will be set out in a Guidance Note, and will require the New Market advisors to provide a report to NZX in respect of activities in bringing companies to the New Market and in respect of services provided to New Market companies. NZX will review each New Market advisor s performance and consider whether they have demonstrated continued eligibility to be a New Market advisor. NZX will take into account information available to in relation to the New Market companies the New Market advisor has been involved with. Insert new Rule 3.31 A New Market advisor must meet the requirements for accreditation under Rule 3.1.3 at all times. NZX may suspend or revoke an NZX advisor s accreditation if NZX finds that a New Market advisor no longer fulfils the requirements of Rule 3.1.3. A person who has had its accreditation revoked under this Rule may appeal that decision to the NZ Markets Disciplinary Tribunal. A Guidance Note will set out the process for regular review of New Market advisors, with reference to the criteria for accreditation. New Rule 3.31 follows a similar approach to Rule 21.12, under which NZX can revoke the designation of a Market Participant in particular circumstances. Obligations in respect of new listings All of Section 7 will apply to the New Market. This Section applies to Primary Market Participants, and relates to bringing companies to the New Market. A new Rule 7.8 will be included imposing additional requirements on a New Market advisor A New Market advisor will be required to ensure that an applicant is suitable for listing on the New Market. A New Market advisor will be required to submit a New Market advisor s Declaration to accompany an application for listing by applicant. A New Market advisor will breach the Rules if any statement in the New Market advisor s Declaration was false or misleading (including by omission) unless the New Market advisor can demonstrate that they had reasonable grounds to believe that the statement was true at the time the declaration was made. NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 5 of 10

NZX will publish a Guidance Note to assist Sponsors in their assessment to support the declaration. New Market advisor s declaration The form of New Market advisor s declaration in relation to the listing of a company on the New Market ( Applicant ) will be set out in an Appendix to the Rules and will be in the following form: Declaration To be given on behalf of the firm by the Managing Principal (where the Participant is required to have a Managing Principal under the Rules) or the Responsible Executive: The Applicant meets the requirements for listing as set out in the New Market Rules; The directors of the Applicant are fit and proper persons to govern the company; The Applicant is appropriate for listing, by reference to guidelines published by NZX from time to time; All subscribers in the initial public offer (if a public offer is to be made immediately prior to listing) are qualified to trade on the New Market; Directors and senior management of the Applicant are capable of managing a listed company; The New Market advisor and its executives are independent from the Applicant. The Declaration would be in addition to the usual application required under Rule 7.2 for assurance that authority to act has not been withdrawn. A New Market advisor will be able to rely on other NZX Participants to ensure that subscribers in a public offer are qualified to purchase securities on the New Market. See below in relation to the process for ensuring that investors are qualified to trade on the New Market, which will need to be adopted in the IPO process. Details of what is required for independence will be contained in a Guidance Note. Obligations in respect of companies listed on the New Market A new Section 23 will include Rules relating to a New Market advisor s ongoing obligations in respect of a company listed on the New Market. New Section 23E A New Market advisor who provides services to a New Market company as contemplated by New Market Listing Rule 17, must enter into an agreement with that New Market company in relation to the provision of those services which must include the provision of advice in relation to compliance with the New Market Rules. A New Market advisor must advise NZX as soon as practicable if it believes that a New Market Company has breached the New Market Rules. A New Market advisor must be able to demonstrate at all times to NZX s satisfaction that it and NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 6 of 10

its executives are independent from any New Market Company to which it provides services contemplated by the Listing Rules. New Market Companies will have an obligation to have a relationship with a New Market advisor under the New Market Rules for a three-year period following listing. The Guidance Note will include detail concerning the matters that must be taken into account when considering whether a New Market advisor is independent. NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 7 of 10

3. Trading Pre-trade Process New Rules will be included in Section 23 to ensure that investors purchasing shares in New Market companies are aware of the differences in the disclosure framework for the New Market as follows. Firms will be required to satisfy themselves that investors are qualified to trade on the New Market and will be given a number of options to do so. New Section 23 Before a Trading Participant enters a buy Order for a security Quoted on the New Market into the Trading System for a client (including when an Order is entered via Direct Client Order Processing or Direct Principal Order processing), that Trading Participant must have satisfied itself that the client is qualified to trade on the New Market. Where a Trading Participant accepts orders from an NZX Advising Firm, the NZX Advising Firm confirming to the Trading Participant that the client is qualified to trade on the New Market can meet this requirement. The Trading Participant or the Advising Firm (as the case may be) must hold written records that evidence that the client was qualified to trade on the New Market at the time the Order was placed. Evidence that a person is qualified to trade on the New Market may be: Confirmation from the client that the client has completed the risk check and received a copy of the risk warning by providing the Firm with a reference number generated by NZX together with a statement by the client that they have completed the risk check and received the risk warning; Evidence that the Firm has completed the risk check on behalf of the client, with the client s consent, and using information provided by the client and that the client has received a copy of the risk warning; Evidence that the client is a wholesale investor within the meaning of section 5C of the Financial Advisers Act 2008 and that the client has received a copy of the risk warning; and Evidence that an NZX Advisor or an NZX Associate Advisor who provides personalised advice to the client has taken reasonable steps to ensure that an investment in New Market companies generally is suitable for the client and that the client has received a copy of the risk warning. Retail client and wholesale client will have the meaning in the Code of Professional Conduct for Financial Advisers. It will not be adequate to meet the requirements of this Rule by incorporating the confirmation in standard terms and conditions. NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 8 of 10

All other Rules and legal requirements, for example, relating to on-boarding clients and relating to trading/settlement generally will apply. Risk Check The risk check is a process that will be defined in procedure requiring the completion of all the following steps: Registration on [NZX s website] as [user]; Completion of [online form]; Attainment of defined minimum [grading]; Viewing of Risk Warning; Acceptance of Risk Warning; and Issue of unique identifier by NZX as proof of completion of process. An NZX Firm can accept a reference number generated by NZX as proof that a client has completed the risk check. Firms will most likely want a confirmation from the client that they have completed the risk check in order to comply with the Rule mentioned above requiring written evidence that the procedure has been completed. The risk check process will apply if there is an IPO prior to listing and the New Market advisor will need to demonstrate that all subscribers are qualified. The risk warning will also be included in the listing document. Risk Warning The risk warning is a statement that will be set out in procedure as follows: The New Market is a registered market operated by NZX Limited, a registered exchange. The New Market is a market for smaller companies that are typically at an earlier stage of business development and the risks of investing in companies listed on the New Market may be higher than investing in other companies. Some of the factors that may give rise to these risks are: The New Market Rules require companies to keep the market informed about important events, but the disclosure rules differ from those that apply to companies listed on the NZX Main Board. Sometimes a New Market company may be aware of price sensitive information, but may not be required to release that information to the market. Trading volumes may be low, and share prices may be volatile, which means it may take longer to sell or buy shares in New Market companies. Trading All the requirements in Section 10 will apply to trading on the New Market. No amendments should be required to this section as they are stated to apply to dealing in Securities on all securities markets. NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 9 of 10

Trading hours will be set from time to time by NZX in a notice following current practise (see definition of Trading Hours). New rules will be included in section 23 following the approach taken in Rules 22.7, 22.9 and 22.10 that apply to trading on the FSM; that is setting out the various trading sessions for the New Market, obligations in relation to Crossing and Reporting and Settlement. However, a different approach will be taken in respect to session states, which will be set out in Procedure to provide for greater flexibility to amend the trading hours and timing of auctions during the Trading Day as the New Market develops. Advising Rule 5.2 will be amended to expressly require that only NZX Advisors and NZX Associate Advisers can advise clients in respect of the New Market. Fees Fees will be set by NZX. (Rule 8.16 and 21.3) Market Making A new Rule will be included in section 23 relating to New Market market-making following the approach taken in Rule 22.5 that applies to the FSM. This will enable NZX to enter into market making arrangements to support liquidity on the New Market. NEW MARKET TRADING RULES CONSULTATION DRAFT 14 MARCH 2014 10 of 10