Medicinal cannabis company Medical Kiwi Limited (Medical Kiwi) has admitted to breaching the fair dealing provisions in Part 2 of the Financial Markets Conduct Act 2013 (FMCA). As part of its equity crowdfunding offer via the crowdfunding platform PledgeMe Ltd, Medical Kiwi included false and misleading statements on its information memorandum and campaign page.

Medical Kiwi has given an enforceable undertaking to the Financial Markets Authority (FMA), including an undertaking to make a payment of $250,000 in lieu of a pecuniary penalty.

A link to the media release is available.

Who needs to read it? Why?

This update will be of relevance to all issuers of financial products under the FMCA, especially those exempted from prescribed disclosure under Part 3, because it illustrates the FMA’s willingness to enforce the fair dealing provisions in Part 2 of the FMCA, in those cases.

What does it cover?

Medical Kiwi’s false or misleading statements included:

  • Statements in the information memorandum that Medical Kiwi had a “cannabis licence”. This licence to cultivate a prohibited plant for medical or scientific research expired during the offer period. The statements were also misleading in that they omitted any explanation of other licences required, but not yet obtained, in order to lawfully produce medicinal cannabis.
  • Statements to the effect that Medical Kiwi had contractual arrangements with Hektares including a signed partnership agreement for the pre-sale of Medical Kiwi’s first two years of production. However, the agreement with Hektares was non-binding and contained a clause allowing Hektares to terminate immediately.

In addition to admitting to the contravention and making a payment of $250,000, Medical Kiwi has offered the following undertakings:

  • Issue a correction of the misleading statements or omissions via its website, the Medical Kiwi PledgeMe campaign page, and communications to all participating investors;
  • Offer to refund and exit shareholders who participated in the crowdfunding offer;
  • Create policies and practices that provide proper governance of disclosure to be reviewed for compliance by an FMA-approved independent consulting firm; and
  • If Medical Kiwi seeks to compliance list on a licensed market, it will not undertake a “same class” offer, which allows listed companies to raise capital with reduced disclosure requirements, before its shares have been quoted for at least nine months. This requirement will not affect Medical Kiwi undertaking an initial public offering (IPO), which requires full compliance with Part 3 of the FMCA.

Our view

The FMA’s action against Medical Kiwi is a timely reminder to all issuers of financial products under the FMCA, that they are subject to the fair dealing obligations in Part 2, even if they are exempted from prescribed disclosure under Part 3. The fair dealing provisions of the FMCA play a fundamental role in maintaining investor trust and confidence in the financial markets.

Equity crowdfunding issuers like Medical Kiwi using a licensed crowdfunding service provider do not need to prepare a product disclosure statement (PDS) or register documents on the Disclose register under Part 3 of the FMCA. They are in the same position in that regard, as others who issue financial products only to wholesale investors. Accordingly, all wholesale issuers should carefully review their due diligence process for their information memoranda and other marketing collateral, to ensure the process is adequate to ensure that material does contain false or misleading representations contrary to section 22, and that their marketing activities more broadly do not involve misleading or deceptive conduct under section 19 of the FMCA. They should also consider (even though the FMA did not refer to it in Medical Kiwi’s case) section 23 which prohibits representations which are not substantiated at the time they are made, whether or not they are false or misleading.

The FMA points out fair dealing provisions are important because they help ensure investors are still able to make informed decisions, particularly considering businesses utilising equity crowdfunding are often start-ups that come with greater investment risk.

The FMA has increasingly brought enforcement proceedings in a wider range of circumstances. This enforcement action against Medical Kiwi is another indication of the FMA taking a more vigilant and proactive regulatory approach. See our article on the speech the FMA made recently in relation to enforcement, which reflects this approach. As our article points out, it is important to:

“Beware of over-deference to the wishes of your marketing department for sales pitches to customers that are not diligently backed up by strong processes. Promises must be kept, and representations must be substantiated at the time they are made. But it is not just sales pitches that create risks – well-intentioned aspirational statements, particularly in the ESG area, need to be supported by a robust programme.”