Growth companies in New Zealand are set to receive some additional options for raising capital with the implementation of new rules for crowd funding.  From April 2014 under the FMCA, New Zealand companies will be able to offer shares to investors sourced via crowd funding platforms without needing to comply with the otherwise rigorous and costly disclosure requirements of the Securities Act 1978.

Crowd funding enables projects or companies to be funded by pooling small individual contributions of money from a large number of people.  Crowd funding platforms have been popular for some time as a way to raise funds for creative projects, or to source capital to bring early prototypes of new products to market.  However, crowd funding has effectively only operated as a way of pooling donations or pledges, offering non-monetary rewards as incentives for contributions (such as an advance purchase of a new product, or creative rewards such as t-shirts or posters).  This is because under New Zealand's current securities laws (and indeed the securities laws of most countries) it is unlawful to offer any economic return in a project (such as royalties or an investment return) to the public without adhering to the onerous disclosure obligations under the Securities Act, requiring a prospectus and/or investment statement.

The FMCA is following reforms of these rules in other countries, including the United States, in introducing the ability to offer equity investments via crowd funding.  Other new funding options being introduced under the FMCA include the ability to crowdsource debt via peer-to-peer lending.  It is hoped that these reforms will help growth stage companies access new sources of capital, as well as creating new pathways for active investment by New Zealanders and opportunities for 'feel good' investments rather than just donations in support of particular projects.

To counterbalance the more relaxed disclosure requirements, there will be a cap on how much money can be raised by a company using these methods ($2 million over a 12 month period across all of the so-called 'safe harbour' initiatives under the FMCA, which include crowd funding and peer-to-peer lending), and there may also be limits on how much any individual can invest (either in a single company, or through crowd funding platforms in general).  The investor caps are currently being consulted on as part of the process surrounding the introduction of the regulations.

While a simpler regulatory environment will exist, crowd funding will obviously still be regulated and any crowd funding platforms will need to be run by financial service providers licenced by the Financial Markets Authority (FMA).  The FMA is currently consulting on the minimum standards and conditions for these licences.  The proposed standards are extensive and will create a number of issues for providers, including how to educate investors, assess the suitability of companies seeking to use the platforms to raise funds, ensure any investor and issuer caps are not breached, deal with conflicts, maintain adequate professional indemnity insurance and adhere to any other specific conditions or limits that may be imposed by the FMA.  We anticipate that, due to the small New Zealand market and the high threshold for obtaining a licence, only a few crowd funding providers will emerge and succeed in the long term in New Zealand.

Submissions on the draft FMCA regulations, including those relating to crowd funding, closed on 5 December 2013 while submissions on the proposed licence standards and conditions close on 12 December 2013.  We will provide further updates on crowd funding (and the other new capital raising options under the FMCA) closer to their implementation.