FAQs

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. While 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 several 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.

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 the 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.

I am an e-money payment provider. Do I need a licence or other authorisation under the FMC Act?

There is no specific licence for e-money institutions or payments service providers (together, providers) in New Zealand.

Instead, providers will have a range of obligations under New Zealand’s financial services regulatory regime, including the Financial Markets Conduct Act 2013 (FMC Act) and, potentially, the Non-Bank Deposit Takers Act 2013 (NBDT Act), which is overseen by the Reserve Bank of New Zealand. 

The level of regulation will largely depend on whether providers are issuing debt securities as part of their service offering.  This would be the case if, in connection with the e-money or payments service, providers accept customer deposits or hold customer funds otherwise than on trust.  Read about the NBDT regime on the Reserve Bank’s 

Read about issuing debt securities in New Zealand on our website

If customer funds are genuinely held on trust (this will generally be evidenced by funds being held in a separate trust account and maintained with a registered bank) this will not, of itself, be a debt security.  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.  You should seek legal advice if you are unsure whether your payments service may involve issuing a debt security (as this will have regulatory consequences under the FMC Act and, potentially, require a licence from the Reserve Bank under the NBDT Act).  Read about trust accounts and debt securities in our FAQ

Providers who do not issue debt securities will still have regulatory obligations.  For example:

Fair dealing provisions in Part 2 of the FMC Act will apply.  These are broad principles that prohibit (among other things) misleading or deceptive conduct and the making of false, misleading or unsubstantiated representations in relation to the supply of financial services.  Read more about the fair dealing regime

Providers will likely need to register on the Financial Service Providers Register (FSPR) and, if services are provided to retail clients in New Zealand, join an approved dispute resolution scheme.  Read more about registering on the FSP

Providers will likely have obligations under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 which will include customer due diligence or “KYC” obligations.  Read about New Zealand’s AML/CFT regime

More broadly, we expect all financial service providers holding customer funds on trust to do so in accordance with industry best practice and applicable trustee duties.  This means, for example, ensuring that trust accounts are clearly identified as such, ensuring that the service provider’s own funds are held separate from customer funds, and keeping clear and readily accessible trust account records.

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 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 for more information. 

I hold funds in trust for clients in connection with the services I provide. Are my activities as a trustee regulated under the FMC Act?

If a genuine trust arrangement exists, and your business does not provide financial services, your activities are not regulated under 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 for a sale and purchase agreement, or businesses offering pre-payment facilities to purchase their goods or services.

Under the FMC Act, 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. 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’.

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. Consult your legal adviser if you are unsure whether your business holds client funds under a ‘bare trust’ arrangement.

Additionally, even if your ‘bare trust’ arrangement does not constitute regulated activity on its own, there may be features of your product which, when the business/customer relationship is viewed in the round, point to a debtor/creditor relationship, meaning that your product may still be a debt security under the FMC Act. You should seek legal advice if you are unsure whether your product is a debt security.

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 its 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. 

Should joint lead managers (and other third parties) include a disclaimer of liability in a 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 several 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.

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 (i.e. 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 Regulations 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.

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

You must include a statement at the beginning of the new document that explains it replaces or supplements an existing PDS; identifies the PDS that it supplements or replaces; and if it’s a supplementary document, identifies all previous supplementary documents lodged with the Registrar about the offer. It must also explain 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 are set out in section 80 of the FMC Act 2013.

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

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 KIS unless the document covers the whole KIS.

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

You can lodge a replacement PDS 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.

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 considered, 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 the 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.    

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 FMC Regulations, the KIS needs to include a ‘brief summary’ of just ‘the most significant’ circumstances disclosed in the main risk section. 

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

The ‘Risks’ section of the PDS should describe circumstances that affect the issuer, or the 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 issuer, and the potential ‘impact’ those circumstances could lead to.

The focus should be on circumstances that ‘exist or are likely to arise’ for the 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 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); helps investors to assess the ‘likelihood’ of any impact arising from those circumstances; helps investors to assess the ‘nature’ of any impact arising from those circumstances; and helps investors to assess the ‘potential magnitude’ of any impact arising from those circumstances.

One way of addressing these requirements is by using a table to show these 4 characteristics for each relevant circumstance, although other formats may also be effective.

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 FMC 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 FMC 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.

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

Offerors need to ensure investors are given the PDS before applications to invest are accepted.

A PDS for an offer is treated as being given if the application form used is included in or attached to the PDS, the application form prominently identifies the relevant PDS and the application form includes a written confirmation that the investor has received the PDS.

Offerors can give investors the PDS by electronic means. While offer disclosure rules are technology neutral, disclosure must be done in a way that prominently identifies the PDS for the offer, ensures the investor can readily store the PDS in a permanent and legible form and that the offeror can evidence that the PDS was given to the investor. This means not all forms of electronic communication will be suitable.

PDS by email

Email attachments are generally the best form for disclosure. The email with the PDS attachment can be accessed from multiple devices and readily retrieved for future reference. Emails with a hyperlink to the PDS can be used but offerors must ensure the link is accessible on an ongoing basis – a link that subsequently breaks cannot usually evidence that the investor has been given the PDS. A PDS provided through a hyperlink must also be storable in a permanent and legible form by the investor.

PDS by webform

Offerors may use a webform that prominently identifies the PDS for the offer. When using webforms, to ensure that the offeror can evidence that the PDS has been given before applications to invest are accepted, we recommend that offerors ensure that the investor downloads the PDS for the offer and confirms that the PDS has been downloaded before the investor can proceed to invest. The investor must be able to store a PDS provided using a webform in a permanent and legible form. 

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.

What do I need to include in a PDS word count to comply with the length limits in the FMC Regulations 2014?

The FMC Regulations specify the maximum words allowed in a PDS. However, the overriding obligation of a PDS is that it should be clear, concise and effective, so we encourage issuers to use fewer words where possible. 

In calculating the word count, you should include all words, including those used in tables and graphs. 

You can exclude the cover page’s word count if it does not contain any relevant information beyond what is required or allowed for the cover page. (Reference: Regulation 21(2) of the FMC Regulations) 

You should include any numbers used within the text of the PDS in your word count. However, any numbers used in financial tables and graphs may be disregarded. 

For an offer of convertible financial products, the relevant word count is the one which relates to the initial convertible product. For example, for an offer of debt securities convertible into equity securities, the word count would apply to the debt securities, in this case, 15,000 words for the PDS and 1,500 for the key information summary. 

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

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

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

Yes, provided the additional information comes after the section in the PDS on tax for equity, debt and managed investment products in funds and other schemes and in the section in the PDS about the issuer for derivatives.

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.

Is it necessary to follow the prescribed wording in the FMC 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 it 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.

Who do I contact if I want to produce a PDS in both te reo Māori and English?

Email us at [email protected] with the subject line “PDS help”. Please engage with us early in the process of producing your dual-language PDS.

Can I produce a dual-language PDS in other languages?

This exemption only enables dual-language PDSs in te reo Māori and English. If you are interested in producing a PDS in another language, please contact us at [email protected] with the subject line “PDS help”.

Does the FMA have a Māori language glossary for terms to use in the PDS?

The FMA has not produced a Māori language glossary or prescribed statements in te reo Māori. However, we have been consulted on a vocabulary development project for financial terms in te reo Māori. 

Can I have a glossary of terms in te reo Māori in a dual-language PDS?

Yes. You can include a glossary where this assists the clear, concise and effective presentation of information. To rely on the exemption, all information in the PDS, including any glossary, must be provided in both te reo Māori and English. The glossary is considered part of the PDS and therefore the word count must be met for the English text.
Where certain information is required to be included in a particular section of the PDS, the text in that section must convey all the necessary information without an investor needing to cross-refer to the glossary.

What content do I have to count towards the PDS length limit to comply with the exemption notice?

The exemption specifies the maximum number of words allowed in the English text of the PDS. Information that uses the same words in te reo Māori and English (e.g. proper nouns, numerical digits, an address, a logo or an internet site) only needs to be counted once for the purposes of calculating the word count.

For further guidance on calculating the PDS word count, see our PDS FAQs on this page.

Who needs to certify the Māori language text of the dual-language PDS?

A translator certified under Te Ture mō Te Reo Māori 2016/the Māori Language Act 2016 must give written confirmation that the Māori language text within the PDS is an accurate translation of the English text, in all material respects.

Te Taura Whiri i te reo Māori/the Māori Language Commission (Te Taura Whiri) certifies te reo Māori translators. A register of certified translators is kept on Te Taura Whiri’s website.

You can contact Te Taura Whiri at [email protected] for details of certified translators with experience in financial and legal documents. 

Do I have to present the two languages in any particular format? 

Generally, the PDS must comply with the requirements set out in the FMC Regulations (20 to 72) and the relevant schedule of the FMC Regulations. However, the exemption provides some flexibility to allow for two languages within the PDS. It exempts from any provision, including order and format requirements, to the extent required to allow the Māori language text to be interposed with the corresponding English text; or included before, after or alongside the corresponding English text, in a place and manner the issuer considers to be clear, concise and effective.

Can I translate only part of the PDS into te reo Māori?

No. To be able to rely on the exemption, the full text of the PDS must be presented in both te reo Māori and English. All required and permitted information must be provided in both te reo Māori and in English. While you cannot include any information in only one language, translation is not required for information that uses the same words in both te reo Māori and English (e.g. proper nouns, numerical digits, an address, a logo or an internet site).

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

There are 2 situations when an issuer can provide pro forma information in a PDS: where there is a business acquisition, and 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 with 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 FMC Regulations provide some examples when this may be appropriate, including ‘changes to accounting policies’, ‘business combinations’ or ‘dispositions’.

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.

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:

describe the basis on which the pro forma information has been prepared

identify where on the Disclose Register the principal assumptions on which the pro forma information is based can be obtained, and

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

There are 2 situations when an issuer can provide pro forma information in a PDS: where there is a business acquisition, 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 with 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 could 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 FMC 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 describe the basis on which the pro forma information has been prepared; refer to the register where the principal assumptions on which the pro forma information is based and 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

When will an issuer who relies on an exemption under Schedule 1 of the FMC Act be considered an 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 an 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 - $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 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 acknowledgement 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. 

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

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 FMC 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, clause 44 of Schedule 1 and clause 46(1) of Schedule 1 of the FMC Act.

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 2 financial years.

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 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.

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.

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 wholesale offer at the same time if 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 ‘small’ and ‘wholesale’ offers at the same time, 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 possible for the issuer to use the same information material to advertise the offer to all potential investors if the material makes it clear to each potential investor the basis on which the information is being supplied to them, and whether the personal offer is open to them or not.

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 ‘small’ and ‘wholesale’ offers made at the same time, the issuer should ensure any communication to the angel investor network makes it clear there are two offers, and only the wholesale offer is able to be passed on to other wholesale investors.

Other Schedule 1 exclusions may also be used in conjunction with the ‘small offer’ exclusion and, in these circumstances, the above comments regarding advertising and using the same information material also apply.

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 $2million aggregate limit per year.

If you have concerns about proposed advertising structures you may contact us at [email protected] to discuss your proposals.

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 does not require disclosure under part 3 of this Act because of any other exclusion under this schedule; or is not received in New Zealand; or is a regulated offer that is separate from the small offer.

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.

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 2 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.

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 a notification to the FMA is required.

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

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. This is 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.