FAQs

Click on any of the topics below to find answers about offer information. If you don’t find the answers you are looking for, please contact us.

Topics

Due diligence

Kinds of financial products

Product Disclosure Statements (PDS)

Financial information

Schedule 1 offers

Transitioning from the Securities Act to FMC Act 

 

Due diligence

Where a due diligence committee has been established prior to an offer, is it necessary to appoint a law firm as the Chair of that committee?

No. Whilst legal advisers can play a key role in helping to design the due diligence process any person with the necessary skills can chair a due diligence committee. For more information on the due diligence process and who should be involved please see Going Public- a Directors Guide.

Is there a standard due diligence process for issuers who intend to make a regulated offer of financial products?

No, the due diligence process will depend on a number of factors including the size and type of offer being made, the complexity of the issuer’s business, how long the business has been in operation and its future plans, including how the proceeds of the offer will be applied.

Directors must establish a due diligence process that is reasonable and proportionate in the circumstances to ensure the adequacy and accuracy of the disclosure documents.  This is likely to involve input from subject matter experts and advisers.  The directors’ personal involvement in the process will depend on the extent to which the offer falls within the issuer’s business as usual activities.  Where directors rely on employees, advisers or fellow directors to complete due diligence, they should ensure they remain satisfied the due diligence processes are robust and working effectively.

See pages 8 and 9 of our Guidance Note: Effective Disclosure.

What is the extent of the due diligence process required for an issuer intending to make a ‘same class’ offer under clause 19 of Schedule 1 of the Act?

There is no ‘standard’ due diligence process (see the above question and answer). However, listed issuers will already be subject to continuous disclosure obligations and therefore should have existing processes to identify material risks and information.  These processes may include use of a risk register that is regularly reviewed and updated. The existing on-going due diligence processes should mean the issuer is able to run a much more streamlined due diligence process for the ‘same class’ offer.

 

Kinds of financial products

I manage a collective investment scheme that is structured as a company in which I sell shares to investors.  Should I comply with the FMC Act requirements for equity securities or for a managed investment scheme?

Shares in a company are equity securities, but the FMA has a power to re-classify financial products where appropriate, if in substance the financial product is more like another kind of financial product. For example, we may designate a particular offer of shares as being an offer of managed investment products if it is in substance a collective investment scheme, and would be more appropriately regulated as a managed investment scheme. 

Where an issuer is looking to offer a financial product that has unusual features or has features of another kind of product, we encourage you to discuss the proposed offer with us at the early stages. See our pre-registration review service page for more information. 

Do I have to give employees a PDS if I offer them a ‘phantom share’ scheme?

No, not unless the phantom share scheme involves the offer of a financial product.  Most phantom share schemes do not involve an offer of financial products under the FMC Act. 

Phantom shares are a contractual agreement between a company and their employees that provide a right to a cash payment at a future time or event.  The cash payments are typically tied to either the performance of the company’s share price (plus dividend returns, in most cases) or a measure of company performance such as EBITDA. 

Phantom shares are not equity securities because they are not shares.  Usually, they are not derivatives either, because:

  • phantom shares offered either as part of or in association with an employment agreement, may fall within the carve-out, as detailed in section 8(4)(c)(i) of the FMC Act, applying to agreements for the future provision of services
  • phantom share schemes that make discretionary payments to employees, where there is no obligation for future provision of service from the employee, would not normally involve an ‘agreement’ that the employee should receive the payment.  Under section 8(4)(a) of the FMC Act, a derivative is an agreement involving consideration from both parties. These phantom share schemes are in substance a gift with no financial exposure for the employee and therefore not a derivative. 

It is possible a phantom share could be considered to be a derivative in some circumstances. This happens where the rights are not granted for future provision of services and there is consideration given by the employee, e.g. where the employee is required to make payments if the value of the shares falls. We do not believe this is a common structure for phantom share schemes but a PDS may be required in such circumstances. 

I hold funds in trust for clients in connection with the services I provide. Are my activities as a trustee regulated by the Financial Markets Conduct Act 2013(FMC Act)?

If a genuine trust arrangement exists, and your business does not provide financial services, your activities are not regulated by the FMC Act. Consult your legal adviser if you are unsure whether your business holds client funds under a trust arrangement.

It is not uncommon for service providers to hold funds received from, or on behalf of, clients in trust.  Examples are lawyers holding client funds in relation to a sale and purchase agreement, or businesses offering pre-payment facilities to purchase their goods or services.

If a genuine trust arrangement exists (this will generally be evidenced by funds being held in a separate trust account maintained with a registered bank) the act of holding funds in trust does not, in itself, constitute a financial product that is regulated by the FMC Act. This is because funds held in trust are not ‘deposited with, lent to or otherwise owing from the service provider’ as required by the definition of ‘debt security’ in the FMC Act.

While funds are held on trust by a service provider, clients will generally be deemed to hold an ‘equitable interest’ in respect of their funds. Under the FMC Act, an equitable interest in a financial product can be a financial product. However, we do not consider that an equitable interest which arises in the context of a bare trust arrangement is something which is regulated by the FMC Act.  This is because the way in which the equitable interests arise is not caught by the FMC Act’s concept of what is involved in an offer of debt securities for issue. Consult your legal adviser if you are unsure whether your business holds client funds under a ‘bare trust’ arrangement.

 

Product disclosure statements (PDS)

Should joint lead managers (and other third parties) include a disclaimer of liability in a product disclosure statement (PDS) or on the Disclose Register entry?

No. We believe the use of disclaimer wording in a PDS, or on the Disclose Register entry is contrary to the spirit and intention of the FMC Act.   

Any such disclaimer is likely to be misleading to investors, and is unlikely to be clear, concise and effective. Under the FMC Act, third parties will only have liability for information in a PDS if they have been involved in a contravention about that information. If a third party has been involved in a contravention, stating that the PDS has been prepared solely by the issuer and disclaiming liability will not in itself have any effect. 

We note that a number of PDSs registered during the early implementation period of the FMC Act have included disclaimer wording about the liability of joint lead managers. We do not intend to take action about these but we have indicated to relevant parties, we do not expect to see such disclaimers in future.

Is it necessary to follow the prescribed wording in the regulations, including the wording in the prescribed warning statements?

Yes, an issuer is only permitted to use different wording if the differences are necessary because particular information doesn’t apply to their offer or the change is necessary to ensure the statement is not false, misleading, deceptive or confusing, and those differences don’t go further than what is necessary to address that.

Reference: clause 9, FMC Regulations

Can information that is not required by the regulations be included in a PDS?

Yes, provided the additonal information comes after:

  • for equity, debt and managed investment products in funds and other schemes — the section in the PDS on tax
  • for derivatives — the section in the PDS ‘about the issuer’.

Additional information may also be included in other sections of the PDS if it does not detract from the prominence of the required information. Length restrictions must be met and there are strict limitations on the information that can be included on the front page of the PDS or in the Key Information Summary.

Reference: clause 34, FMC Regulations

Do I have to follow the format of a PDS described in the regulations?

Yes.  You must follow the format of the PDS set out in the relevant schedule of the Regulations.  You will also need to take note of the requirements in Part 3 of the Regulations (regulations 15 to 72).

Can I have a glossary of defined terms in my PDS?

Yes.  You can include a glossary where this assists the clear, concise and effective presentation of information.  However, where certain information is required to be included in a particular section of the PDS (such as descriptions required in the Key Information Summary), the text included in that section must convey all the necessary information without an investor needing to cross-refer to the glossary. 

The glossary is considered part of the PDS and so length restrictions must be met.

Can an offeror send a PDS electronically to a prospective investor?

Yes.  Offerors need to ensure investors are given the PDS before applications to invest are accepted. The best way to do this electronically is to email the PDS directly to the investor.  In any event, the investor must be able to store the PDS in a permanent and legible form. We recommend offerors should not email web links, which could break and cannot usually evidence that the investor has actually been given the PDS.

However, if the application form used by an investor was attached to the PDS, the application form prominently identifies the relevant PDS and the form includes a written confirmation that the investor has received the PDS, then the offeror is treated as having given the PDS to the investor, even if only a web link was originally sent to the investor.

When is a PDS required when offering financial products?

A PDS must be given to investors before they invest in ‘regulated offers’.  Regulated offers include offers: where a financial product is being issued for the first-time and in some circumstances where an offer is made to sell a financial product already issued.

When selling financial products, a PDS is required in the situations described in clauses 31-34 of schedule 1 of the Act.  These are broadly:

  • where products were issued with the intention for the original holder to deal with them
  • if the issuer advises, encourages, or knowingly assists the offeror in the offer of the financial products
  • when the offeror controls the issuer and the products are not sold through a licensed market.

However, no disclosure for offers, by way of issue or sale, is required if an exclusion under part 1 of schedule 1, of the Act applies (although see the exception to this in clause 12 (4) of the ‘small offers’ exclusion).

There may be other limited disclosure requirements or warnings in place of a PDS in some cases. For more information, see a summary of Schedule 1 exclusions under the FMC Act.

What sort of risks should be described in an equity PDS?

The ‘Risks’ section of the PDS should describe circumstances that affect the particular issuer, or the particular equity securities that make the risks of investing different from the risks of other issuers or equity securities.  You should distinguish between the ‘circumstances’that affect the particular issuer, and the potential ‘impact’ those circumstances could lead to.

The focus should be on circumstances that ‘exist or are likely to arise’ in relation to the particular issuer, where they ‘significantly increase the risk to the issuing group’s financial position, financial performance, or stated plans. There is no need to describe in this section of the PDS any circumstances that do not ‘significantly increase’ the risks to the issuing group’s financial position, financial performance, or stated plans.

Descriptions of the relevant circumstances should include information that:

  1. makes it clear why those circumstances are significant to the particular issuer or the particular equity securities (as compared to other issuers or equity securities)
  2. helps investors to assess the ‘likelihood’ of any impact arising from those circumstances
  3. helps investors to assess the ‘nature’ of any impact arising from those circumstances; and
  4. helps investors to assess the ‘potential magnitude’ of any impact arising from those circumstances.

One way of addressing these requirements is using a table to show these four characteristics for each relevant circumstance, although other formats may also be effective.

Should the Key Information Summary (KIS) summarise all risks included in the main risk section of an equity PDS?

No, under clause 12 of Schedule 3  of the regulations, the KIS needs to include a ‘brief summary’ of just ‘the most significant’ circumstances disclosed in the main risk section. 

Do I need to include information in the ‘Selected financial information and ratios’ table about all business acquisitions and disposals that have occurred within the ‘relevant periods’ prior to an equity offer?

No, the ‘Selected financial information and ratios’ table in an equity PDS only needs to contain material information about the acquisitions and disposals if the financial information about those acquisitions or disposals is material information.

Issuers should not rely on a fixed quantitative measure (such as a percentage of net assets) to determine whether financial information about a particular acquisition or disposal is material information. The comparative size of transactions is a factor to be taken into account, but other factors are also likely to be relevant, such as the nature of the acquisition or disposal and when it happened.

We recommend directors avoid over-relying on opinions from auditors to determine whether information is material or not.  Directors should be best placed to understand what information would be reasonably expected, or likely to, influence those who commonly invest in financial products, when they decide whether to acquire the equity.    

How do I amend a PDS that has already been lodged on the Disclose register?

You can lodge a replacement PDS in order to correct, update, or add to an existing PDS. Alternatively, you can lodge a supplementary document for the same purpose, unless regulation 46 of the FMC Regulations 2014 applies.

When must I lodge a replacement PDS rather than a supplementary document?

Regulation 46 states that a supplementary document cannot be used to:

  • supplement a PDS for an offer of managed investment products in a managed fund; or
  • to supplement any part of the key information summary (KIS)unless the document covers the whole KIS.

What is required when lodging a replacement PDS or supplementary document?

You must include a statement at the beginning of the new document:

  • explaining it replaces or supplements an existing PDS;
  • identifying the PDS that it supplements or replaces; and
  • if it’s a supplementary document, identifying all previous supplementary documents lodged with the Registrar in relation to the offer . It must also be explained the new document is to be read together with the PDS it supplements and any previous supplementary documents.

You will also need to state on your website the replacement PDS or supplementary document has been lodged and describe where and how a copy can be obtained.

Note: where an offeror becomes aware its disclosure is defective and applications have already been made by investors, the offeror must take further steps. The choices open to an offeror are set out in section 80 of the FMC Act 2013.

Reference: sections 71-75 and 79-80 of the FMC Act 2013

I have lodged a PDS for a regulated offer of convertible financial products (debt securities that are convertible into equity securities of the issuer at the option of the holder).  Does section 82 of the FMC Act continue to apply to the new product (ie the equity securities) once the convertible debt securities have been issued?


No. For non-continuous offers of convertible financial products that are convertible at the option of the holder, section 82 of the FMC Act will only apply to the offer up to the point of issue of the original convertible securities. This is because both the original debt securities and the new product cease to be offered at that point. Section 82 prohibits offering, or continuing to offer products if:

  • there are false or misleading statements, omissions or new matters requiring disclosure in the PDS, application form or register entry, and
  • the matter is materially adverse from the point of view of the investor.

Section 82 does not apply to the financial products after the convertible debt securities have been issued, however, regulation 54 of the FMC Regs (see below) will apply if the equity securities are not quoted at any time when the product holder may exercise the option to convert.
Regulation 54 provides that if the issuer becomes aware of:

  • a false or misleading statement, or omission 
  • from the PDS, application form or register entry, 
  • or a circumstance has arisen since the PDS was lodged that would have been required to be disclosed in the PDS or register entry, 
  • and the matter is materially adverse from the investor’s point of view,

then the issuer must as soon as becoming aware of the matter, send a copy of a correct document (or a notice of how to obtain a copy of a correct document) to all holders of the convertible financial product and make it publicly available.

References: section 82 of the FMC Act and regulation 54 of the FMC Regs

Financial information

Equity offers

I’m an issuer looking to offer equity securities. When is it appropriate to provide pro forma financial information in a PDS?

There are two situations when an issuer can provide pro forma information in a PDS:

  1. where there is a business acquisition
  2. where there are material changes affecting the comparability or usefulness of the financial information.

In both situations, the use of pro forma information provides directors the flexibility to ensure investors get the best financial information about the business they are about to buy shares in.

For example, if you recently bought a business, you can reflect that acquisition in the historical results to show investors how the company would have performed.

In the second situation, it’s up to you to decide whether there are certain factors that materially affect the statutory selected financial information, such that pro forma financials are more useful for investors. The regulations provide some examples when this may be appropriate, including; ‘changes to accounting policies’, ‘business combinations’ or ‘dispositions’.

What do I need to consider when providing pro forma information in a PDS?

The PDS must always identify any pro forma information that is included — either in addition to or as a substitute for GAAP-compliant financial information. The PDS must also briefly:

  1. describe the basis on which the pro forma information has been prepared
  2. identify where on the Disclose register the principal assumptions on which the pro forma information is based can be obtained, and
  3. identify where on the Disclose register the reconciliations to the GAAP-compliant information can be found.

You’ll also need to ensure your assumptions are reasonable so the information presented is not misleading, and is clear, concise and effective.

Pro forma information should not be used to re-write the history of the business on offer as if you had run it differently. Show investors what the business would look like by including prospective financial information. For example, you shouldn’t restate actual historical information to exclude significant debtor write offs when you no longer have the customers whose debt has been written off. Neither should you exclude specific marketing expenses you don't intend to incur going forward. If your intention is to turn around an underperforming business, the actual historical financial information, together with the prospective financial information, can ‘tell that story’.

References: Schedule 3, clause 35 and clause 39 (l) of the FMC Regulations

I am an issuer that has recently acquired (or will soon acquire) another business. The acquired business wasn’t required to produce GAAP compliant accounts or have them audited, so our directors have concerns about the integrity of the numbers. Are we able to exclude the financials for the acquired business from our PDS?

If the business acquisition is a material purchase, you are required to provide selected financial information about that business in your PDS. The financial information must be prepared in accordance with GAAP, so some additional work may be necessary to produce it. Unaudited non-GAAP financial statements should be uploaded to the Disclose Register.

Your due diligence performed prior to purchase of the business should provide a degree of clarity about the integrity of the numbers. Directors should consider including a description of the scope of their due diligence and their findings in the PDS. Concerns can be further explained in the ‘Risk’ section for investors to understand the potential impact on the numbers, if a likely mistake in those financials would significantly increase the risk to the issuing group’s financial position, financial performance or stated plans.

 

Debt offers

I’m an issuer looking to offer debt securities. When is it appropriate to provide pro forma financial information in a PDS?

There are two situations when an issuer can provide pro forma information in a PDS:

  1. where there is a business acquisition
  2. where there are material changes affecting the comparability or usefulness of the financial information.

In both situations, the use of pro forma information provides directors the flexibility to ensure investors get the best financial information about the business they are about to invest in.

For example, if you recently bought a business, you can reflect that acquisition in the historical results to show investors how the company would have performed.

In the second situation, it’s up to you to decide whether there are certain factors that materially affect the statutory selected financial information, such that pro forma financials are more useful for investors. The regulations provide some examples of when this may be appropriate, including  ‘changes to accounting policies’, ‘business combinations’ or ‘dispositions’.

What do I need to consider when providing pro forma information in a PDS?

The PDS must always identify any pro forma information that is included — either in addition to or as a substitute for GAAP compliant financial information. The PDS must also briefly:

  1. describe the basis on which the pro forma information has been prepared
  2. refer to the register where the principal assumptions on which the pro forma information is based, and
  3. identify where the reconciliations to the GAAP-compliant information can be found.

You’ll also need to ensure your assumptions are reasonable so the information  presented is not misleading, and is clear, concise and effective.

Pro forma information should not be used to re-write the history of the business on offer as if you had run it differently. Show investors what the business would look like by including prospective financial information. For example, you shouldn’t restate actual historical information to exclude significant debtor write offs when you no longer have the customers whose debt has been written off. Neither should you exclude specific marketing expenses you don't intend to incur going forward.  

References: Schedule 2, clause 37 and clause 39(h) of the FMC Regulations

 

Schedule 1 offers

When will an issuer who relies on an exemption under schedule 1 of the Act be considered a FMC reporting entity for the purposes of the Financial Reporting Act 2013?

Unless specified, there is no requirement for an entity making an issue relying on exemption, under schedule 1 of the Act, to file financial statements with the Registrar of Companies. The only circumstance specified in FMC Regulations is when an entity has gained 50 or more shareholders through offers using the small offers exclusion.

References: clause 12 of schedule 1 of the FMC Act and regulation 251 of the FMC Regulations.

Wholesale investor - large 

Is a ‘safe harbour’ certificate required for a wholesale investor categorised as ‘large’?

No. An issuer may rely on other reasonable steps to assess the investor’s net assets or turnover. These steps will depend on whether there is any reasonable doubt as to whether the investor meets the test in clause 39 of Schedule 1 of the Act. If there is any reasonable doubt that the investor meets the test, then the steps taken to assess the investor’s net assets or turnover will need to be more robust than that required for investors who have clearly been well over the $5m net asset or turnover thresholds for at least the last two financial years.

I am offering financial products to wholesale investors within the meaning of clause 3(2) of Schedule 1 of the FMC Act.  Can a safe harbour certificate, given under clause 44 of Schedule 1, be included as part of, or attached to, the offer documentation provided to those investors?

A safe harbour certificate given under clause 44 of the FMC Act is only effective if the certificate is in a separate written document. The Act does not define what is required for a certificate to be ‘a separate written document’ but we encourage offerors to take a practical approach to determine the degree of separation required.

We believe the main considerations will be whether the investor:

  • will need to separately consider the safe harbour certificate when signing the relevant documents; and
  • would recognise the safe harbour certificate as a separate document.

Generally, if the safe harbour certificate is attached to any other documentation we would expect it should be easily separated by the investor. If the offer documentation is sent electronically, it is acceptable to include the certificate as a separate link or attachment.

References: clause 3(2) of schedule 1 of the FMC Act, clause 44 of schedule 1 of the FMC Act and clause 46(1) of Schedule 1 of the FMC Act

Wholesale investor - eligible investor

What is the level of experience needed to qualify as an eligible investor? Is training enough?

To qualify as an eligible investor , a person must have ‘previous experience in acquiring or disposing of financial products’ which allows them to assess the factors listed in clause 41(2)(a) to (c) of the Act.

Simply attending training (irrespective of the nature and quality of that training) is not, in itself, enough because the person cannot be said to be experienced in acquiring or disposing financial products, and cannot certify themselves as an ‘eligible investor’.

After a person has experience in acquiring or selling financial products, it is up to that person to determine whether those acquisitions or disposals have given them sufficient experience to sign an eligible investor certificate. If the person believes they have sufficient experience to assess the factors listed in clause 41(2)(a) to (c), then they may sign an eligible investor certificate.

Does an offeror need to validate the information provided by an investor in an eligible investor certificate?

No.  They are not required to independently verify the information in the certificate as correct, but they must have no reason to believe that the information is incorrect. 

Who can sign off the confirmation of an eligible investor certificate? Do they need to independently verify the information in the certificate is correct?

An authorised financial adviser (AFA), a chartered accountant, or a lawyer can certify the certificate. However, this person cannot be an associated person of the offeror, provider or other relevant person. The definition of an associated person is in section 12 of the Act.  If the person signing off the certificate is a chartered accountant or an AFA, they cannot be someone who has in the last two years, provided professional services to the offeror, provider or other relevant person.

The purpose of the independent certification is to ensure the investor has been sufficiently advised of the consequences of giving an eligible investor certificate.  The person certifying the certificate must have no reason to believe the information is incorrect.  They also don't need to verify the information in the certificate, or make an assessment as to whether the experience is sufficient or not.

Wholesale investor - $750,000 minimum investment

What is the difference between this test and the old Securities Act minimum subscription test?

The Securities Act test was for a minimum subscription of $500,000 and also applied where the same investor had paid at least $500,000 previously, within 18 months, to the same issuer.

The FMC Act test increases the minimum amount payable by the investor on acceptance of the offer to at least $750,000. The exclusion also applies where the amount payable by the person on acceptance of the offer plus the amounts previously paid by the person for financial products of the issuer of the same class that are held by the person add up to at least $750,000.

Under the FMC Act, the issuer is required to give a warning statement at the front of every document containing the key terms of the offer. The issuer also needs to get a written acknowledgment from the investor that they have received the warning document.

See our consultation on limited exclusions from the requirement to give a warning statement and get a written acknowledgement from the investor. Also see our exemptions page the status of any exemptions. 

Reference: clause 3(3)(b)(i) and (II), schedule 1 of the Act

Offers under employee share purchase schemes

Can the exclusion for employee share purchase schemes apply to shares that are offered to eligible employees as part of an IPO?

Yes, provided arrangements have been made to distinguish the employee share offer from the general pool. These arrangements should make it clear that the employee offer is not made with the primary purpose of raising funds for the issuer.  They could include reservation of a certain number of shares from the general pool, and establishing eligibility criteria based on criteria such as years of service, respective roles and responsibilities.

Issuers should also check the 10% limits are met and that they comply with the warning statement requirements in clauses 9 – 12, schedule 8 of the FMC Regulations.

Is an offer of shares that is made to a long-term employee as a loyalty bonus an offer under an employee share purchase scheme exclusion, or is it more appropriate to treat it as an offer for ‘no consideration’?

Although it is possible for the ‘no consideration’ exclusion to apply to employees, there is generally consideration provided by the employee for shares issued under a long-term employee incentive plan (the employee stays with the employer). The exclusion for employee share purchase schemes is intended to cover a range of different share offers to employees, including offers for which no cash payment is required.

It is also possible there may be no ‘offer’ of shares if shares are gifted to an employee for no consideration and without being part of a wider remuneration arrangement.  If there is no ‘offer’ of financial products the share transfer will not be a regulated offer under the FMC Act.

Small offers

I’m an issuer relying on the small offers exclusion. Could the financial reporting requirements in Part 7 of the FMC Act apply to me?

Yes. If you have gained 50 or more shareholders through the exclusion for small offers you will be an ‘FMC reporting entity’. 

References: clause 12 of schedule 1 of the FMC Act and regulation 251 of the FMC Regulations.

What are the general requirements for ‘small offers’?

They must be for equity or debt securities. They must be ‘personal’, which means the offer may only be made to certain individuals as set out in clause 12(5) of schedule 1 of the FMC Act. They must be for no more than $2m to no more than 20 investors in a 12 month period. No advertising is permitted, a warning statement must be provided to investors and notification to FMA is required.

References: clause 12, 13 and 14 of schedule 1 of the FMC Act, clause 24 of schedule 1 of the regulations, clauses 16-18 of schedule 8 of the regulations.

If a special purpose vehicle company (SPV) purchases shares in a small offer and underlying investors purchase shares in that SPV, should all underlying investors be counted for the purposes of the 20-investor limit?

No.  However, in this scenario there are two separate ‘offers’ to consider.  The first offer of shares relates to the shares that are purchased by the SPV.  The second offer relates to the shares of the SPV itself which are sold to the underlying investors. The ‘20-investor limit’ refers to a maximum of 20 people to whom the financial products may be issued or who have bought shares under a particular offer. 

Where an SPV ‘fronts’ the investment of other investors, the SPV is counted as one investor. The second offer of shares by the SPV may be a regulated offer unless it also meets the requirements of one of the schedule 1 exclusions, for example it may also be a ‘small offer’.

The use of SPVs to hold shares offered under a small offer gives angel investors considerable flexibility to structure their investments.  We would be concerned if any offers became too ‘large’ using this structuring method.  If we started to see much larger offers using these structures to come within the small offer exclusion we may consult on whether it would be appropriate to use our designation powers under subpart 3 of Part 9 of the FMC Act to prevent such offers being excluded.  Any such designation would only take effect on offers made after the designation.

How does the small offers exclusion apply in situations where investors invest via a nominee company that holds the shares on trust for investors?

The small offers exclusion can be relied on where investors invest via a nominee company. In general, this type of investment structure will involve a personal offer to a group of investors, who may then accept the offer and ask for their interests to be issued to the relevant nominee company.  In substance there would not normally be a separate ‘offer’ to the nominee company. However, all the underlying investors that receive equitable interests in the offeror’s shares must be counted for the purposes of the 20-investor limit.  This is because section 8(5) of the FMC Act treats the equitable interests received by those underlying investors as equity securities.

Can a company raise money from overseas the same time it is raising up to $2m from New Zealand investors under a small offer?

Yes. When calculating the ‘$2m limit’ in any 12-month period, you can disregard any funds received from an offer that:

(a) does not require disclosure under part 3 of this Act because of any other exclusion under this schedule; or

(b) is not received in New Zealand; or

(c) is a regulated offer that is separate from the small offer.”

Can a company advertise an offer to wholesale investors if the ‘small offer’ exclusion applies to some investors?

Yes. The offeror must take “all reasonable steps” to ensure any advertisement, about the small offer, is not received by any retail investors who don’t meet the ‘personal offer’ requirements. An issuer may advertise a contemporaneous wholesale offer as long as that advertisement is clear that the wholesale offer may only be accepted by people meeting the requirements for a wholesale investor.

If an issuer makes contemporaneous ‘small’ and ‘wholesale’ offers, the onus will be on the issuer to ensure only investors included within the ‘small’ offer are those that meet the requirements of a ‘personal offer’ in clause 12(5) of schedule 1 of the FMC Act and who were known to the issuer prior to any advertising.

It is common for angel investor networks to notify their existing members about new offers, and those members may then pass on information to others. For contemporaneous ‘small’ and ‘wholesale’ offers the issuer should ensure any communication to the angel investor network makes it clear there are two offers and only the wholesale offer communication is able to be passed on to other wholesale investors.

Other exclusions can also be used in conjunction with the ‘small offer’ exclusion. Issuers relying on the ‘offers of financial products through licensed intermediaries’ exclusion and the ‘small offers’ exclusion, must ensure the combined amount raised does not exceed the $2-million aggregate limit per year.

If you have concerns about proposed advertising structures you may contact us at compliance@fma.govt.nz to discuss your proposals.

Offers of financial products of same class as quoted financial products

I’m an issuer of existing quoted fixed rate notes and I want to offer new floating rate notes. Can I rely on the exclusion for offers of financial products of the same class as quoted financial products?

Yes, the new floating rate notes can be of the ‘same class’ as the existing quoted fixed rate notes if they have identical rights, privileges, limitations, and conditions - except for a different redemption date or interest rate or both.

However, be aware that the terms and conditions of fixed rate and floating rate notes often differ, especially regarding the calculation of interest periods, which would result in those financial products not being of the ‘same class’.

For example, a typical fixed rate note pays interest equally in semi-annually or quarterly amounts and delays the interest payment until the next business day if the scheduled payment date falls on a non-business day (Following Business Day Convention). However, a typical floating rate note pays interest quarterly determined in accordance with the actual number of days in each interest period. If the scheduled payment date falls on a non-business day, interest is paid on the next business day, unless that day falls in the following month, in which case interest is paid on the preceding business day (Modified Following Business Day Convention).

In the above example, the fixed rate and floating rate notes would probably not be considered of the ‘same class’. This is because even though debt securities may have different interest rates and still be of the ‘same class’, the terms relating to the interest periods are not identical.

References: clause 19 of schedule 1 of the FMC Act and section 6(3) of the FMC Act.

 

Transitioning from the Securities Act to FMC Act

We have developed information sheets to help providers of financial products understand how and when they will need to transition to the FMC Act regime. Each sheet includes a working example of the key activities for each product type and indicative timings, including useful tools that will help to address each step of the transition. We will update each information sheet as we develop additional guidance and tools.

I am an issuer making a transition from the Securities Act to the FMC Act. What do I need to do for notification purposes, both to the Registrar and FMA?

This depends on whether you have issued a prospectus under the Securities Act or whether you relied on a statutory, or FMA exemption.

For the former (ie if you had a prospectus under the Securities Act), refer to the NZ Companies Office where there is a notification form for those making transitions. The form notifies both the Registrar and FMA. An offer or scheme cannot be registered on Disclose unless notice of an effective date has been given.

For the latter (ie you were not required to have a prospectus because you were relying on a statutory or FMA exemption), you should email compliance@fma.govt.nz. There is no template for this notification. In your email, please tell us the issuer, the nature of the offer and the transition date.

The notification does not apply to offers that are not considered offers to the ‘public’ defined by the Securities Act. Non-public offers transition into the FMC regime automatically if they are regulated offers.

FMC references: clauses 7 and 19 of schedule 4 of the Act.

Is there is a need to lodge a notice of an effective date when extending a superannuation scheme prospectus?

No, the ‘effective date’ is the date continuous issuers come into the FMC Act regime (which can be any date between 1 December 2014 and 1 December 2016). Extension of a Securities Act prospectus is not notification of an effective date.

How long can an issuer rely on the Securities Act exclusions for offers to ‘eligible persons’, ’relatives or close business associates’, ‘habitual investors’, ‘ persons who are each required to pay or have previously paid a minimum subscription price of at least $500,000 for the securities’ or ‘persons selected otherwise than as a member of the public’?

Issuers can no longer rely on these Securities Act exclusions (from 1 June 2015). If the issuer cannot rely on any of the exclusions contained in schedule 1 of the FMC Act the offer will be a regulated offer.

Reference: clause 57 of schedule 4 of the FMC Act.

Does the five-day day waiting period apply to continuous issuers transitioning from the Securities Act?

Yes, the waiting period (defined in section 65 of the FMC Act) applies to the first PDS lodged for a class of financial products.

Reference: sections 6, 65 and 69 of the FMC Act.

Transition information sheets