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.


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.

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