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New rules to boost market

12 August 2014

This article first appeared in The Press on 12 August, 2014

The strong run of new listings or initial public offerings (IPOs) to the New Zealand share market through 2013 has continued unabated through the first half of this year.

IPOs already completed in 2014 include Genesis Energy, Intueri Education Group, Gentrack Group, Serko, ikeGPS Group, Scales Corporation, Metro Performance Glass and Vista Group.  ERoad is still in progress.

The Genesis IPO concluded the Government’s Mixed Ownership Model programme, the aim of which was to release funds for new investment.  The private sector IPOs have been motivated by a wish to raise new growth capital or to allow foundation investors to cash in some of their profits – or a mix of both.

The result has been to increase the NZX Main Board’s market capitalisation from around $43 billion in February 2009 (near the depths of the global financial crisis) to around $87 billion currently. 

Outside individual company decisions, some of the factors which have driven this growth are:

  • relatively low global interest rates, which have made the traditionally high yields of New Zealand listed companies particularly attractive to overseas investors
  • rising domestic household savings, with over $16 billion under management by KiwiSaver scheme providers and over $26 billion in the New Zealand Superannuation Fund, and
  • positive market sentiment generated by the relatively strong performance of the New Zealand economy, success stories such as Xero and a string of successful IPOs through 2012 and 2013.

There are some small signs now that the flow of IPOs is beginning to slow.  But the Financial Markets Conduct Act 2013 (FMCA) - a once in a generation rewrite of securities law – should give renewed momentum to our capital markets when it comes fully into force later this year.

These reforms are a product of a journey which began in July 2008 when the Labour Government appointed the Capital Market Development Taskforce chaired by experienced investment banker Rob Cameron to develop a blueprint to invigorate New Zealand’s (then torpid) capital markets. 

The FMCA clarifies existing and, in some cases, creates new, capital raising options to supplement the traditional IPO, many of which should allow companies to access funds more easily – and cheaply – than before.

Several of these have been available since 1 April, the rest will become available following the second implementation phase of the FMCA on 1 December.

We expect that the new rules will mean less emphasis on the prevailing ‘one size fits all’ IPO process, the glossy and expensive to produce phone-book-sized offering documents, the extensive prescribed disclosures, and the other inefficiencies that have come to characterise the pre-FMCA regime.

The enhanced equity raising mechanisms under the FMCA have reduced disclosure and governance requirements and include:

  • a new ‘small offers’ exclusion for offers which do not seek to raise more than $2 million within any 12-month period and which are limited to 20 investors who are connected to the issuer either professionally or personally
  • the use of licensed crowd-funding platforms for offers to retail investors of up to $2 million in aggregate over 12 months, with the ability to raise amounts outside this cap from wholesale investors
  • clarified, bright line tests for offers to ‘habitual’ or ‘experienced’ investors
  • the ability for listed issuers to issue securities of the same class as those already quoted with minimal offer documentation, and
  • streamlined employee share offers where the offers do not exceed 10 per cent of a company's total shareholding in any year and are made as part of an employee's remuneration arrangements.

The Financial Markets Authority (FMA), which succeeded the Securities Commission in May 2011, will be responsible for administering these reforms so much will depend on the quality of its administration.  To date, the signs are promising.

The FMA’s engagement with the industry, policy-makers and consumers has been generally constructive and well received and FMA Chief Executive Rob Everett has promised in the FMA’s Statement of Performance Expectations for the 2014-2015 year that this approach will continue so that the new regulatory environment “promotes confidence and participation in New Zealand’s financial markets”.

Our thanks to Chris Gillies for writing this article.

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