Capital Raising: Reminder of FMCA Exclusions

Rosie Clark

This article appeared in the Otago Daily Times, October 2016.

In last month’s article David Smillie looked at exclusions under the Financial Markets Conduct Act 2013 (FMCA) which are available for businesses seeking to raise money from investors. David’s article focused on offers made to close business associates, relatives, and employees. This article will focus on the offers made to “wholesale investors” and “small” offers.

The exclusion regime under the FMCA determines whether or not full disclosure is required during offers of financial products such as shares.

The “wholesale investor” class comprises a number of different categories which generally focus on the wealth or experience of the investor. Underlying this class of exclusions is the expectation that a wealthy person or experienced investor is better placed to assess the merits and risks of a transaction and seek further information as required.

In this article I will look at four different categories of “wholesale investors” namely, investors who satisfy the “investment activity criteria”, “large” investors, “eligible investors” and investors making large investments.

A person will satisfy the “investment activity criteria” if in the last two years they have owned or acquired a portfolio of financial products worth at least $1 million. Alternatively, they may have been employed by an investment business and participated to a material extent in the investment decisions made by that investment business for at least two years within the last 10 years.

“Large” investors are investors who in the last two years had net assets or turnover in excess of $5 million.

The exclusion for “Eligible Investors” targets a group of investors who might not satisfy the thresholds in the “investment activity criteria” but nevertheless have previous experience in dealing with financial products that allows them to assess the merits of a transaction and their own information requirements. The difference is that this exclusion relies on the investor providing a certificate as to these matters which is confirmed by an authorised financial adviser, accountant, or lawyer who can validate the experience that the investor is relying upon. This places a high degree of responsibility on the professional certifying these facts. This certificate must contain a prescribed warning statement which notifies the investor that they are not being provided with full disclosure and that they enjoy fewer legal protections than fully regulated offers. A certificate of this kind is valid for two years.

Investors subscribing for a minimum investment of $750,000 in a particular financial product are also excluded from the disclosure requirements. However, the offeror must still provide the prescribed warning statement in a document that contains the key terms of the offer and receive a written acknowledgement from the investor.

The small offers exclusion is limited to offers which are made to fewer than 20 people, over a course of 12 months, which raise up to $2 million. The offer must be a personal offer to the investor, meaning the investor must be ‘likely to be interested in the offer’ without needing to be advertised to. The investor must be given a warning statement similar to those provided to wholesale investors and the Financial Markets Authority must be notified of each small offer made.

Our two articles have provided a brief overview of the exclusion regime in the FMCA. The different levels of regulation based on the closeness of the relationship between the offering business and the investor and the size of the investment is a sensible approach and is welcomed. These exclusion regimes provide a roadmap for how small businesses may begin to raise capital in different phases of their growth with limited and cost effective disclosure.