Rosie Clark

March 2014... In the current financial market, emerging businesses can face an up hill battle to secure new capital to finance their growth aspirations. The problem for these businesses is that the Securities Act 1978 requires companies to comply with onerous disclosure requirements when issuing shares to the public, which include the requirement to prepare an investment statement and prospectus. The cost of complying with these requirements can be uneconomic in circumstances where the amount of capital to be raised is relatively small and start up costs need to be kept to a minimum.

This is poised to improve, with the first wave of reforms in the Financial Markets Conducts Act 2013 (FMCA) coming into effect on 1 April 2014. The FMCA seeks to create a regulatory framework which avoids unnecessary compliance costs and promotes innovation and flexibility in the financial markets. The FMCA introduces three new exceptions to the usual disclosure requirements which will be particularly interesting for emerging businesses, namely, peer-to-peer lending and crowd funding; small offers; and employee share schemes.

Crowd funding is becoming a familiar concept in New Zealand, particularly with social media interest in campaigns run via online platforms such as GiveALittle and PledgeMe. Using these platforms, members of the public can contribute money to a vast array of different causes and initiatives. These contributions are typically donations and the contributor does not receive financial interest in the outcome of the initiative or project.

From 1 April 2014, owners of crowd funding or peer-to-peer lending platforms will be able to apply for a licence which will enable their users to offer equity and debt securities to the public without having to comply with the usual disclosure requirements.

The precise criteria for obtaining a licence and the caps on crowd funding and peer-to-peer lending will be the subject of regulations which are still being finalised. However, it is expected that a limit of $2 million per twelve month period will be imposed on how much a borrower may borrow or an issuer may raise without having to comply with the usual disclosure requirements.

Businesses will also be able to make “small offers” directly to the public without having to satisfy the usual disclosure requirements. A “small offer” is an offer of debt or equity securities which is subscribed for by no more than twenty people and does not raise more than $2 million in total in any 12 month period. In addition, to qualify for this exception, the issuer or borrower may not advertise their offer.

The rules for employee share schemes will also be relaxed. At present, if a company wanted to offer shares to its employees, the company is required to comply with the usual disclosure obligations unless one of the statutory exceptions applies. These exceptions include people who are a “close business associate”, “wealthy person” or “habitual investor”. The “close business associate” exception has been held by the courts to only apply to employees in senior management positions, so this will not assist with issuing shares to non-management employees, and the latter two exceptions will only apply to a small percentage of the workforce. Under the FMCA, an issue of shares to employees will be exempted from the usual disclosure requirements if the offer is made as part of the remuneration arrangements or otherwise in connection with the person’s employment; raising funds is not the primary purpose of the offer to the employee; and the total number of shares issued to employees in a twelve month period does not exceed 10% of the number of shares issued by the company at the start of the 12 month period. The clear purpose of this exemption is to allow shares to be issued to employees for remuneration purposes. This will assist emerging businesses manage staff costs while retaining staff at a time when their cash flow position might be tight.

The net effect of these new initiatives should be to make equity capital more accessible to small and emerging businesses.