This note is a summary of upcoming developments in New Zealand securities law relating to“crowd funding” and “person-to-person lending” (also known as “peer to peer lending”).
Both forms of finance are restricted by the prohibitive cost and regulatory burden imposed by current securities laws. However these restrictions will be lifted by the Financial Markets Conduct Act 2013 (Act). This change introduces an important new source of finance for growth stage companies and, potentially, a source of strong returns for investors.
The Act is relevant to you if you are:
- involved in an early stage company which is seeking to access capital but does not want the cost and regulation associated with a full disclosure exercise;
- an investor interested in the growth stage of the market; or
- an intermediary considering offering services to growth stage companies or investors in New Zealand.
These services can begin to operate from April 2014.
Financial Markets Conduct Act and Crowd Funding
The Act has created a new category of "licensed intermediary" for financial products. By acting through a "licensed intermediary", companies and individuals will be able to access equity (crowd funding) and debt (person-to-person lending) without rigorous disclosure obligations.
The detailed requirements to operate/use services are to be set out in regulations (Regulations). The Regulations are yet to be drafted, but Cabinet papers on the topic indicate what will be required. Set out below is a summary of the likely requirements. This will be updated when the Regulations are drafted, due in October this year.
What is Crowd Funding?
Traditional crowd funding is the pooling of a large number of small contributions to fund a business or project, usually through an internet-based platform.
Individual contributors generally receive no direct financial reward or interest for their contributions. Instead they receive rewards like a signed copy of the CD which was produced using crowd funding contributions. Under existing law, because there are no financial returns to investors, this activity is not regulated.
A more recent development has been the use of electronic platforms for raising funds where investors receive company shares or other financial returns that depend on the success of the business. Under the current law, the use of this type of crowd funding would be subject to disclosure requirements, likely outweighing the benefits of getting the funds in this way.
The Act overcomes this disclosure obstacle through its prescribed intermediary services exemption, which enables:
- providers of crowd funding platforms to obtain a licence; and
- subject to certain additional requirements (described below), companies to offer shares through the crowd funding platform without substantive disclosure requirements.
What is Person-to-Person Lending?
Person-to-person lending services facilitate loans by matching potential borrowers to one or more lenders, usually through an internet-based platform.
There are a number of major overseas person-to-person lending services, such as Prosper and Lending Club in the United States and Zopa in the United Kingdom. However, as with crowd funding platforms, such services have not been able to operate in New Zealand as applicable securities laws result in disproportionate expense.
As with crowd funding, the Act permits person-to-person lending through its new category of prescribed intermediary services. Person-to-person lending arranged through a licensed intermediary is exempt from many of the Act’s requirements.
Before a platform can begin to provide these services in New Zealand, it will need to satisfy a number of criteria. Some criteria will need to be met on setting up the platform and others will need to be met before a particular company raises finance or an individual invests.
The detail will be in the Regulations. However, we set out below the likely criteria. We refer, first, to those criteria which are common to crowd funding and person-to-person lending services and, second, to certain specific requirements for each different type of service.
Click here to view table.