introduction

Offers of securities in New Zealand are regulated by the provisions of the Financial Markets Conduct Act 2013 (FMCA).

The disclosure requirements of the FMCA for offers of securities are substantial and come with material responsibilities and risks for both companies and their directors.  This is the case not only for share offers, but also offers of options, convertible securities and debt securities.

The disclosure requirements of the FMCA automatically apply to all offers of securities unless one or more of the exclusions in Schedule 1 of the Act apply.  Schedule 1 contains a jumble of exclusions for (in essence) private and/or small investment offers, and is essential reading for technology companies and their advisers who wish to raise capital outside public markets.

This guidance note summarises the Schedule 1 exclusions that are potentially relevant to private technology companies raising capital in New Zealand.  Unfortunately, the exclusions (and how they interact with each other) are finickity, so you and your advisors will need to become very familiar with the detailed requirements of the exclusions you are relying upon.

wholesale investors

general exclusions (cl 3(2), 37-40, 44-46, 49 of sch 1)

An investor is a wholesale investor if:

  • the investor is an investment business (as described in detail in the FMCA)
  • the investor meets at least one of the following investment criteria:

criteria

description

portfolio value the investor owns, or at any time during the 2 year period before the offer has owned, an investment portfolio of at least NZ$1 million in aggregate
prior investment value the investor has, during the 2 year period before the offer, made investments of at least NZ$1 million in aggregate
experience in investment business the investor has, within the last 10 year period before the offer, been employed or engaged in an investment business and has, for at least 2 years during that 10 year period, participated to a material extent in the investment decisions made by that business
  • the net assets of the investor and the entities controlled by the investor exceeded NZ$5 million on the last day of the last 2 accounting years
  • the turnover of the investor and the entities controlled by the investor exceeded NZ$5 million in each of the last two accounting years, or
  • the investor is a government agency.

Helpfully, the FMCA contains a safe harbour regime that requires a company to treat an investor as a wholesale investor if the investor self-certifies:

  • that they are a wholesale investor (by reason of falling within one of the categories set out above),
  • as to the applicable wholesale investor category and states the grounds on which that category applies, and
  • that they understand the consequences of certifying themselves as a wholesale investor.

While not strictly necessary in order for an investor to qualify as a wholesale investor, we would expect that most companies will require investors who are seeking to rely on the above wholesale investor categories to self-certify as a condition of investment.  The certificate is valid for 2 years and must include a warning statement in the form prescribed in the regulations.  Briefly, that statement warns that the full disclosure obligations do not apply to the offer, and that the investor will have fewer legal protections for their investment.

A company cannot rely on the investor’s self certification if it knows that in fact the investor did not fall within the stated wholesale investor category.

A template wholesale investor certificate can be found on our website. To ensure compliance with the exclusion, the wording of the certificate should not be changed by the investor.

eligible investors (cl 3(3)(a), 41-43, 46, 49 of sch 1)

An investor also qualifies as a wholesale investor if the investor self-certifies in writing that they are an eligible investor on the grounds that they:

  • have previous investment experience that allows them to assess the merits of an investment or class of investments, their information needs in relation to an investment or class of investments, and the adequacy of any information provided
  • understand the consequences of certifying themselves as an eligible investor.

The investor must also:

  • state in the certificate the grounds for their self-certification
  • obtain a written confirmation of the certificate signed by an independent financial adviser, chartered accountant, or lawyer (Independent Advisor).

The certificate is valid for 2 years and must include a warning statement in the form prescribed in the regulations.  Briefly, that statement warns that the full disclosure obligations do not apply to the offer, and that the investor will have fewer legal protections for their investment.

A company cannot rely on an investor’s self certification if it knows that in fact the investor did not have the experience stated in their certificate.

We have discussed the role of the Independent Advisor in confirming each investor’s self certification with the Financial Markets Authority (FMA).  The FMA have advised that the Independent Advisor is not required to take any steps to assess whether the information set out in the certificate constitutes sufficient previous investment experience for the purpose of self-certifying as an eligible investor.  The role of the Independent Advisor is limited to:

  • confirming that the experience stated in the certificate does in fact relate to the sale or disposal of shares or other financial products (rather than merely, say, attending a seminar on the subject)
  • advising the investor as to the consequences of self-certifying as an eligible investor.

The Independent Advisor must not confirm a certificate if it has reason to believe that in fact the investor did not have the experience stated in their certificate.  Some public commentary from the FMA on the role of the Independent Advisor can be found on the FMA website.

A template wholesale investor certificate can be found on our website. To ensure compliance with the exclusion, the wording of the certificate should not be changed by the investor or the Independent Advisor.

investments of at least NZ$750,000 (cl 3(3)(b) of sch 1)

Finally, an investor will also qualify as a wholesale investor if the amount invested by the investor (plus any other investments the investor has already made in the company for securities of the same class) is at least NZ$750,000.  The FMCA regulations provide that in this case, the company must:

  • provide to the investor a warning statement in the form prescribed in the regulations. Briefly, that statement warns that the full disclosure obligations do not apply to the offer, and that the investor will have fewer legal protections for their investment
  • obtain from the investor a written acknowledgement in the form prescribed in the regulations, which states (among other things) that the investor understands that they have fewer legal protections for their investment.

close business associates (cl 4, sch 1)

This exclusion applies to:

  • directors or senior managers of the company or of a related company (a very helpful exclusion)
  • holders or controllers of 5% or more of the voting shares of the company
  • related companies
  • holders or controllers of 20% or more of the voting shares of a related company
  • spouses, children, parents, or siblings of close business associates of the company
  • other investors with a close professional or business relationship with the company or a director or senior manager of the company so that the investor is able to assess the merits of the offer or obtain information that will enable them to assess the merits of the offer.

We recommend relying on the first five bright line exclusions, and the other objective exclusions in Schedule 1, before relying on the more subjective sixth exclusion.

relatives (cl 5 of sch 1)

This exclusion applies to:

  • spouses, civil union partners or de facto partners of a director of the company
  • grandparents, parents, children, grandchildren, siblings, nephews, nieces, uncles, aunts or first cousins of a director of the company (or of any person in the above category)
  • any spouse, civil union partner or de facto partner of any person in the second category, and
  • trustees of some trusts that relate to a director of the company or their relatives.

crowd funding (cl 6 of sch 1)

The crowd funding exclusion applies to offers made via crowd funding platforms.  This exclusion will only apply if the crowd funding platform is licensed by the FMA.  A company can raise up to NZ$2 million (aggregated with any fundraising under the small offers exclusion or any peer to peer lending) on licensed crowd funding platforms in any 12 month period.

employee share schemes (cl 8 of sch 1)

For an offer to qualify under the employee share schemes exclusion, the offer will need to meet the following requirements:

  • the offer must be made to employees or directors of the company (or any subsidiary), or to contractors who provide their services principally to the company (or any subsidiary), as part of their remuneration, or in connection with their employment or engagement, and
  • raising funds must not be the primary purpose of the offer.

The company must also provide a limited disclosure package to each applicable employee, contractor and director containing:

  • a description of the share scheme and its terms and conditions
  • the company’s latest annual financial statements and latest annual report, with a statement that (if applicable) the financial statements are not audited.  Alternatively, the company may state that participating employees, contractors and directors have a right to receive those documents free of charge from the company, and
  • a warning statement in the form prescribed in the FMCA regulations. Briefly, that statement warns that the full disclosure obligations do not apply to the offer, and that the employee, contractor or director will have fewer legal protections for their investment.

The number of shares and/or options that may be issued under the employee share scheme exclusion in any 12 month period is limited to 10% of the total number of shares on issue in the company at the start of that 12 month period.

Our detailed comments on the employee share purchase schemes exclusion can be found on our blog.  Simple share option templates that comply with the requirements of this exclusion can be found on the templates section of our website.

persons under control (cl 9, 48 of sch 1)

The close business associates, relatives, wholesale investors and employee share schemes exclusions are extended to apply to any investor that is controlled by a person or entity that falls within one of those exclusions.

For example, if a person or entity qualifies as a close business associate of a company raising capital in a private offer, then a trust controlled by that person or entity will usually also qualify for the exclusion.

small offers (cl 12 – 14 of sch 1)

This exclusion applies to personal offers that are limited to a maximum of 20 investors contributing a maximum of NZ$2 million in any 12 month period (aggregated with any fundraising under the crowd funding exclusion or any peer to peer lending).

To qualify as a personal offer, the offer must be made only to (and must only be capable of acceptance by) the following person(s).

interested people

Investors who are likely to be interested in the offer, having regard to:

  • previous contact between the company and the investor
  • some professional or other connection between the company and the investor
  • statements or actions by the investor that indicate that the investor is interested in offers of that kind (e.g. through that investor’s membership in an angel network).

minimum income threshold

Investors who have had an annual gross income of at least NZ$200,000 for each of their two most recent income years.  A chartered accountant does not need to certify the investor’s income.

Importantly, in order for a company to rely on this exclusion, the company must not advertise the offer to any person or entity that does not fit into one of the personal offer categories set out above.  Advertising has a wide meaning under the FMCA – it is essentially any communication promoting an investment offer to a section of the public.  Therefore companies making a small offer need to be careful to limit their communications about the offer to investors falling within the personal offer categories.

Because of the advertising restriction applying to the small offers exclusion, the FMA have advised us that companies using the small offers exclusion in combination with other exclusion categories are required to make one offer to potential investors who fit into the personal offer categories, and a separate offer to all other potential investors.  This is obviously cumbersome, and we will be interested to see how market practice develops around this exclusion.  Some public FMA commentary on the use of the small offers exclusion in combination with other exclusion categories can be found on the FMA website.

A company relying on the small offers exclusion must provide each investor with a warning statement in the form prescribed in the FMCA regulations.  Briefly, that statement warns that the full disclosure obligations do not apply to the offer, and that the investor will have fewer legal protections for their investment.

The company must also notify the FMA within 1 month after each accounting period in which the offers are made, stating:

  • that it is relying on the exclusion
  • the type of securities being offered
  • whether the company has distributed a document containing the key terms of the offer and if so, the date on which the document was first distributed, and
  • the number of investors to whom the securities have been issued or sold by the company within that accounting period.

Overall, we think companies will find this exclusion somewhat frustrating to apply due to the subjective nature of the personal offer definition coupled with the consequences of the advertising restriction.  Companies may also find managing the rolling limit on the number of investors and the investment cap, and complying with the FMA notice requirements, burdensome.

other exclusions

The FMCA also includes three other exclusions which might be relevant to private technology companies in some circumstances:

  • offers of equity securities under a dividend reinvestment plan that meets the detailed criteria set out in the FMCA (cl 10 of sch 1)
  • offers of securities for no consideration (cl 11 of sch 1), and
  • offers of securities that comprise more than 50% of the company’s voting rights where there are less than five investors and those investors act jointly or in concert, subject to those investors being in a position to obtain the information necessary to assess the merits of the offer and the adequacy of the information provided (cl 15 of sch 1).