The COVID pandemic has paved the way for innovation, and many New Zealanders spent 2020 investing time and money into their new or existing businesses. When raising capital to grow their business, however, many business owners find themselves limited by the size of their wallet. While interest rates are currently at an all-time low, trading banks’ lending terms are arguably the strictest in recent memory.
There are, however, alternatives to using personal funding or borrowings; you can offer shares in the company in exchange for funds (or ‘capital’).
While this method of capital raising sounds relatively straightforward, it can be a costly and complex process for business owners to navigate. When a business elects to raise capital by offering shares, it is governed by the Financial Markets Authority of New Zealand (FMA) and the Financial Markets Conduct Act 2013 (FMCA). Broadly, the FMA requires any offer of shares to be accompanied by a full suite of disclosure documents in accordance with the FMCA; these disclosure documents are expensive and time-consuming to prepare. The ongoing reporting associated with these activities is also significant and often requires substantial professional assistance from accountants and lawyers.
There is, however, another option that is lighter in its compliance requirements. Business owners can limit their share offer to investors who meet the eligible criteria of Schedule One of the FMCA. Schedule One offers are frequently the ideal solution to allow a company to raise capital while only making limited disclosure and, in some circumstances, no disclosure at all.
The easiest, and most frequently used, process is to use the relatives exemption. This rule allows the company to offer shares to immediate relatives of the directors such as spouses/partners, parents, children, siblings, and aunts and uncles, as well as relatives with whom the directors have a step-relationship. There are no limits on the amount of capital a company can raise this way, and no there are no disclosure requirements to either the new shareholder/s or the FMA.
Another commonly-used pathway to raise capital is to use the exemption for licenced intermediaries. These are the licensed crowdfunding or peer-to-peer lending facilitators.
The licenced intermediary acts as a matchmaker for the company seeking capital and an investor looking to invest in a business. This kind of capital raising is limited to $2 million raised within any 12-month period. While some of the capital raised by the licensed intermediary will be used to ‘clip the ticket’ as commission, raising capital in this way means your company itself is not required to make any disclosures, and that the licensed intermediary will complete all disclosure and reporting to the FMA on your behalf. The upside is also that it frees up your time as a business owner to focus on investing the funds raised wisely and it shifts the obligation of compliance onto a third party.
The FMCA’s small offers exemption allows you to offer shares to up to 20 shareholders in any 12-month period. The aggregate of all the capital raising must not exceed $2 million in any 12-month period. These 20 people must meet certain eligibility criteria, and you must ensure that there is no public advertising of your share offer.
If done correctly, however, shares offered and issued in this way only require very limited disclosure, a prominent warning statement on the offer document and notification to the FMA of your reliance on this exemption to offer shares.
DISCLAIMER: All the information published in the Property eSpeaking, Commercial eSpeaking, Trust eSpeaking, Rural eSpeaking, and Fineprint newsletters is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Property eSpeaking, Commercial eSpeaking, Trust eSpeaking, and Fineprint may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: [email protected] Ph: 029 286 3650 or 04 496 5513.