This article appeared in the Otago Daily Times, December 2016.
This article deals with recent changes to the Financial Markets Conduct Act 2013 (FMCA) in relation to organisations involved with the management of communal facilities in property developments. This issue has traditionally been somewhat of a headache for property developers and their advisors in the past so these new changes are welcomed.
It is relatively common in new property developments for the developer to also build certain communal facilities for use by owners in the development, for example; essential infrastructure such as access ways, stormwater systems, sewage systems and sometimes other amenities such as playgrounds, pools and tennis courts. Often the developer will establish a company or an incorporated society to own and manage these facilities and each property owner will also own shares in that company or be a member of the society (as the case may be) and will pay levies to contribute to the maintenance of the communal facilities.
Under the previous Securities Act 1978 (now replaced by the FMCA) shares in a company were caught by the definition of “equity securities” and membership in an incorporated society was caught by the catch-all definition of “participatory securities”. This meant that the usual rules for a public offer of securities would normally apply (ie. full disclosure involving a registered prospectus and investment statement) however an exemption notice issued by the previous Securities Commission in 2007 meant that developers could take advantage of more limited disclosure requirements as it was accepted that these kinds of interests were not “financial investments” in the true sense.
From 1 December 2016 existing incorporated societies that manage communal facilities will no longer be regulated by the old Securities Act or the 2007 exemption notice. Also, under the FMCA, the membership interests in an incorporated society that is established to manage communal facilities will not be “financial products” for the purposes of the Act and therefore existing and new societies will not be required to comply with the requirements of the FMCA. An incorporated society should only be subject to the FMCA if it amounts to a “managed investment scheme”.
Under the FMCA shares in companies are “equity securities” and “financial products” and that applies equally to companies that manage communal facilities on behalf of property owners. However the Financial Markets Authority (FMA) has addressed this in two ways.
Firstly, the FMA has issued a new Designation Notice which provides that shares in companies managing communal facilities that are issued or transferred after 28 October 2016 will not be “financial products” for the purposes of the FMCA. It is however important to note that this exemption will only apply to companies whose shareholding, constitution and activities meet certain specified criteria – that includes requirements that the company’s constitution must prohibit the company from carrying on any other activities, the company may only carry on “incidental activities” if the purpose is to offset costs of managing the communal facilities and shares can only be held by a person who is an owner of a property in the relevant development.
Secondly, from 1 December 2016 existing shares in companies that manage communal facilities will not be regulated by the old Securities Act or the previous 2007 exemption notice. Instead the FMA has issued a new Exemption Notice which provides relief for existing shares that were previously issued in reliance on the old exemption notices under the Securities Act. Each such company is however required to give a notice to its shareholders within 3 months advising them about the new exemption and providing a statement in the form set out in the Exemption Notice.
Developers involved with new subdivision developments and those people involved with the management of existing communal facilities should be considering these new changes to make sure they qualify and receive the maximum relief available under the FMCA.