New Zealand: Crowd funding and small offers – what are the unintended consequences for issuers?

Since first emerging overseas in 2008 after the Global Financial Crisis, the global crowd funding market has experienced strong growth reportedly raising over USD16 billion in 2014 and USD34 billion in 2015[i]. In New Zealand while traditional donation based crowd funding, such as the well-publicised Givealittle bid to buy an Abel Tasman beach, has been around for longer, but equity crowd funding is new and has received a lot of media attention. In its first year to August 2015 the New Zealand equity crowd funding market reportedly raised $12.4 million for 21 companies.

If you are considering a crowd funding or small offer strategy, here is an overview of the things you need to consider.

What is equity crowd funding?

Equity crowd funding involves the use of online websites to raise funds from large numbers of investors investing small amounts in return for shares and other rewards. Businesses in New Zealand seeking to raise equity capital by way of crowd funding are subject to the Financial Markets Conduct Act 2013 (FMC Act). Companies must use a licensed crowd funding service provider supervised by the Financial Markets Authority (FMA). There are currently eight licensed providers, but the more active online platforms are PledgeMe, Snowball Effect and Equitise. The platforms are increasingly also offering private and wholesale investor options.

There can be some unexpected compliance consequences when choosing crowd funding and we have explored here the key compliance issues that are likely to affect these companies.

What are the key compliance issues you need to consider when crowd funding?

While every company looking to raise equity capital through crowd funding will be different, there are four key compliance areas that you will need to consider.

  1. What you need to know about the FMC Act exclusions for crowd funding and small offers

Traditional equity offerings to the public have attracted significant compliance costs, with FMA approved offer documents required. Under the FMC Act, the disclosure rules have been relaxed to allow for new innovative funding options such as crowd funding and small offers. Although providing exclusions to the normal regulatory requirements of the FMC Act, these funding options do have limitations which will need to be considered carefully:

  • equity crowd funding offers can only raise up to $2 million in any 12 month period. There is however no limit on how much a single investor can invest in the offer; and
  • small offers of debt or equity can only raise up to $2 million from no more than 20 persons over 12 months, provided it is a 'personal offer' meaning that each investor must be connected personally or professionally to the issuer (or through an angel investor network), or have annual income of at least $200,000.

The $2 million crowd funding cap will include any capital raising through peer-to-peer lending and the small offers exception but not under the wholesale investor exclusions.

  1. What you need to know about the Takeovers Code

When most people or businesses think of the New Zealand Takeovers Code (the Code) they probably associate it with companies whose shares trade on listed stock exchanges. However if a company expands its shareholding to 50 or more voting shareholders, whether through crowd funding, small offers or otherwise, it may become subject to the Code. Being classified as a Code company can create significant costs of Code compliance for small companies raising relatively small amounts of capital from shareholder's. Every capital raising or share transaction triggering the Code's fundamental rule requires an independent advisers report on the merits of the transaction for other shareholders, in addition to the cost of legal advisers and holding a shareholders meeting.

In July 2015 the Takeovers Panel recognised that these costs may be disproportionate and potentially stifle growth for small to medium enterprises, and it issued a class exemption, known as the Takeovers Code (Small Code Companies) Exemption Notice 2015 (the Exemption). In order to qualify for the Exemption, a company must:

  • be unlisted; and
  • have total assets (including any assets of subsidiaries) of less than $20 million.

The Exemption applies to each relevant issue or transfer of shares only if:

  • the board of directors resolve that opting out of full Code compliance is in the best interests of the company;
  • all shareholders receive a disclosure document with an objection period of at least 21 days; and
  • objections represent less than 5% of shareholders not relying on the Exemption.

There are also a number of other ways to avoid being classified as a Code company if the Exemption cannot be applied. Companies could consider offering non-voting shares to investors or look at alternative structures such as using limited partnerships or nominee companies. The Takeovers Panel has indicated in its guidance note[ii] that it is not averse to companies restructuring their holdings so that they do not fall under the definition of Code company.

  1. What you need to know about financial reporting

In broad terms, a company is required to prepare financial statements and have them audited if it has at least 10 shareholders that hold voting shares. If a company is required to prepare and audit financial statements only because it has 10 or more shareholders, the shareholders can opt out of those obligations, unless the company's constitution expressly prohibits opting out. This means a crowd funder may opt out of the financial reporting requirements.

Notwithstanding this, any company that uses the 'small offer' exclusion under the FMC Act and has 50 or more shareholders as a result will be an 'FMC reporting entity' and have to prepare financial statements and have them audited. Such companies might consider other arrangements if reporting compliance costs will be too high.

  1. What you need to know about setting up the company administration

Start-ups and companies that grow from a small number of founder shareholders to having a large and diverse number of small shareholders may face a range of administrative challenges. From our experience these could include:

  • managing shareholder pre-emptive rights for new share issues;
  • maintaining the share register; and
  • effective investor relations and communications for voting and annual meetings.

Crowd funding service providers offer a range of solutions such as outsourced share registry management, electronic communications systems or providing nominee companies. These compliance solutions, although helpful, will still be an additional cost companies will need to weigh up when considering the benefits of crowd funding the new equity capital.

Other alternatives that could be considered would be to offer classes of shares that are non-voting and/or excluding pre-emptive rights to help reduce the number of ongoing shareholder meetings, voting and notices.

Footnotes

i '2015CF – Crowdfunding Industry Report' April 2015, Massolution

ii Consolidated Guidance Note – Small Code Companies (April 2013)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions