This article was first published in ALB magazine in August 2013
New Zealand is about to legislate for crowd funding and peer-to-peer lending as sources of equity and debt raising.
The Commerce Minister considers that they have the potential “to open up significant new opportunities for small businesses to raise growth capital”, and their particular suitability for small, innovative ventures should ensure that they find a place in the small business dominated New Zealand market.
The opportunity arose (rather serendipitously) through the Financial Markets Conduct Bill (FCMB) – the centrepiece of the Government’s “once in a generation” rewrite of New Zealand’s capital markets law – which is now winding its way through Parliament and is expected to come into effect in April 2014.
We are aware that the Australian Government is also reviewing its legal framework in relation to crowd funding and would expect that the New Zealand legislation will be of interest to that review.
Crowd funding platforms in New Zealand include PledgeMe, Boosted and GiveALittle. They are typically engaged in supporting charitable or creative projects where contributors receive benefits in kind rather than an ownership stake or financial return. A peer to peer lending service – Lendit – was established in 2008 but is in hibernation until the law is changed, having received a cease and desist notice from the Securities Commission (since superseded by the Financial Markets Authority).
The problem, as in Australia, is that widespread equity or debt offerings attract substantial compliance costs as even the provision of a small loan or equity contribution is likely to trigger mandatory disclosure and governance obligations – including the preparation of a prospectus and investment statement (and for debt products, a trust deed also).
The FCMB removes this impediment by creating a new category of “licensed intermediary” - offers through which will be exempt from the normal disclosure and governance requirements. Initially this was intended to apply only to peer-to-peer lending services but, during the FCMB’s long gestation, it was decided to extend it to crowd funding.
While licensing is compulsory for certain other financial service providers under the FCMB, the regime for “licensed intermediaries” will be voluntary. Should they want to allow people to offer equity or debt securities through their platforms, they must be licensed to qualify for the exemption.
Although most of the detail will be delivered through regulation and the regulations are still being developed, recently released cabinet policy papers give a guide to the likely shape of the proposed licensing requirements.
Because the policy-makers are treading new ground and no-one is sure how these new formats will evolve or what the market response will be, the Government has opted for a flexible approach – with careful supervision and monitoring by the FMA.
Proposed licensing requirements for the provider of a peer-to-peer lending or crowd funding service include:
- the platform being generally open to people meeting pre-defined criteria and the licence holder acting as a fair and neutral broker between those seeking funds and investors (this would include not recommending particular borrowers or issuers as a good risk)
- FMA being satisfied that the key processes involved in the platform are fair, orderly and transparent provision of prescribed information in a “service disclosure statement” to lenders or investors, and written client agreements with lenders or investors
- mechanisms for establishing the identity and creditworthiness of borrowers (in the case of peer-to-peer lending)and the good character and reputation of directors, senior managers or controlling owners (in the case of crowdfunding)
- FMA being satisfied with the way in which information about the service and the risks involved is disclosed to prospective lenders or investors, and
- satisfactory background checks on the owners and operators of the holder of the market services licence.
No limits are proposed on how much an investor may invest or a lender lend in any given timeframe. But a limit of $2 million per 12 month period will be imposed on how much a borrower may borrow or an issuer may raise.
The same cap applies to the “small offer” (or “20/2/12”) exclusion in the FCMB - but such offers will be restricted to 20 investors and may only be advertised to people meeting certain criteria. No such restrictions are currently planned for crowd funding and peer-to-peer lending, although Cabinet proposes that the $2 million cap for these services will include funds borrowed or raised by small offers.
The US JOBS (Jumpstart Our Business Startups) Act 2012 is more restrictive than the FCMB model in that it is subject to a number of conditions, including caps on how much people can invest. Persons on less than $100,000 a year are capped at $2000 a year or 5% of their income, whichever is the greater, while investors on higher incomes can go to 10%.
The US exemption has not yet come into effect as the required accompanying Securities Exchange Commission rules have not yet been finalised.
It is worth noting that crowd funding and peer-to-peer lending has been most widely adopted in the European Union, particularly the United Kingdom, Italy and Spain. Italy recently passed rules allowing for equity crowd funding, but this is limited to start-up companies in high innovation areas.
Bradley Kidd is a partner at Chapman Tripp specialising in financial services and corporate law.