The Financial Markets Conduct Act 2013 (FCMA) was enacted late last year. When fully implemented it will replace the Securities Act 1978 as the governing legislation for offers of securities to the New Zealand public, effectively re-writing New Zealand’s securities laws.The FCMA will benefit some growth companies by offering wider and clearer exemptions from the requirement to issue regulated disclosure documents when raising capital from private investors or issuing shares or options to employees. A number of the exemptions intended to benefit growth companies are expected to take effect from April this year and the remainder are expected to take effect at the end of the year.This article summarises some of the key changes to the exemption regime intended to benefit growth companies and when they will take effect. Any growth company which is about to implement an employee share plan or raise capital should be aware of the new exemptions and potentially factor them into timing decisions being made now.
EMPLOYEE SHARE PLANS
Offers of securities to limited to employees, directors and contractors providing personal services under an employee share purchase scheme will be exempt from the securities disclosure regime provided:
- the offer is in connection with the remuneration arrangements for each offeree;
- capital raising is not the primary purpose of the offer; and
- the securities offered under the scheme in any 12 month period do not represent more than 10% of the relevant class of securities already issued by the issuer.
This exemption is scheduled to take effect from 1 April 2014 and will provide a clear exemption for employee share schemes which should apply in most cases. This compares to the current position under the Securities Act where regulatory disclosure will usually be required for employee share offers unless the offer is limited to a handful of directors and senior employees who might qualify as ‘close business associates’ of the issuer.
SMALL OFFERS
Offers of securities to a wider class of eligible persons (compared to the current ‘eligible person’ criteria under the Securities Act and the other new exemption categories under the FCMA) will also be exempt from 1 April 2014 provided:
- securities are not issued to more than 20 persons in any 12 month period; and
- no more than $2 million is raised by the offeror from the issue of securities in any 12 month period.
Subject to the above criteria for a ‘small’ offer being met, relevant securities can be offered by way of a ‘personal offer’ to any person who:
- is likely to be interested in the offer having regard to previous contact between the offeror and the offeree, some professional or other connection between them or actions or statements by the potential offeree indicating that they are interested in offers of this kind (such as their membership of an angel network); or
- had (together with any controlled entities) annual gross income of at least $200,000 for the last 2 completed income years (or is controlled by a person who meets that income criteria).
The $200,000 income test largely matches the current income test within the ‘eligible person’ criteria of the Securities Act, although the widening to include controlled entities and the apparent omission of a chartered accountant certification requirement are helpful.However the concept of allowing a ‘personal offer’ to persons who are likely to be interested in the offer through previous contact or association with the offeror or their own conduct (such as angel club membership) introduces a wider band of potential offerees compared to the relatively narrow ‘relatives and close business associates’ exception category under the Securities Act.The extended ‘personal offer’ concept comes with a prohibition against wider ‘advertising’ of the offer, where the offeror must take reasonable steps to ensure that any communication regarding the offer is only received by people who meet the eligibility criteria for a ‘personal offer’.
OTHER EXEMPTION CATEGORIES AND EFFECT
Apart from a handful of initiatives which MBIE describes as ‘growth-focussed initiatives’ which will take effect from 1 April 2014 (including the employee share scheme and small offer exemptions described above and commencement of the licensing process for the operators of crowd-funding platforms), the overhaul of the rest of the exemption regime which will determine whether a securities offer is regulated or not is expected to take effect from 1 December 2014.Without getting into the detail of the other new exemption categories which will take effect from December this year it is worth highlighting a few key changes:
- the new exemption categories are generally clearer and more definitive compared to the more general exemption definitions in the Securities Act; for example:
- the ‘habitual investor’ exception and the ‘eligible person’ tests are replaced by a detailed list and description of ‘wholesale investors’ (which incorporates a more limited ‘eligible investor’ concept relating to sophistication and experience);
- the relationships which qualify as ‘close business associates’ and ‘relatives’ respectively are also listed and better defined;
- the definition of “wholesale investors” effectively increases the basic asset test from $2 million to $5 million, but adds persons who own an investment portfolio of financial products having a value of at least $1 million and persons investing more than $750,000 in the offer (the latter compares to the previous Securities Act exclusion of offers where the minimum subscription was $500,000, but now applies on an individual investor basis); and
- there is an exemption for financial products where no consideration is paid.
SUMMARY OF THE KEY IMPLICATIONS
Overall, it is debatable whether the FMCA widens or narrows the net for requiring regulated disclosure (compared to the existing position under the Securities Act). Some of the current Securities Act exemptions are tightened or thresholds increased, but new exemptions are introduced. However, the imminent new exemptions for employee share schemes and small offers will be beneficial for many growth companies.The employee share scheme exemption offers a clear exemption which will apply to most employee share offers which are made on typical terms for such schemes.For capital raisings which fit under the ‘small offer’ thresholds, the exemption for ‘personal offers’ is certainly wider than the existing exemptions and introduces a helpful new exemption category of people likely to be interested in the offer. The clear exemption for members of angel investor organisations and the allowance of self- certification for investors who meet the income threshold will also reduce the compliance burdens for angel organisations and for offerors making ‘small offers’.The improved clarity of the exemption regime is an improvement. While some offerors who were prepared to take the risk of relying on broad interpretations of the more general Securities Act exception language for the likes of ‘habitual investors’ or ‘close business associates’ may regard this as disadvantageous, most will regard the greater certainty under the FCMA exemption regime as more desirable.That said, there will still be room for alternative interpretations of the scope of some of the exemptions. The question of what other conduct of a potential offeree may be sufficient to indicate an interest in an offer of the kind of a particular ‘small offer’ (angel membership being just one example), is a case in point. This language is quite open, however the offeror must be able to point to some action of statement of the offeree which indicates an interest in such opportunities.The employee share scheme and small offer exemptions will initially take effect as additional exemptions under the Securities Act (supplementing the existing exemptions under that Act). The existing Securities Act exemptions will also remain in effect until the wider FCMA exemption regime comes into effect on 1 December this year. For companies considering small offers, arguably the widest scope of combined exemptions will apply between 1 April and 1 December this year.
Andrew Lewis Law
January 2014