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12 September 2017
by Patrick Wilson & Erin Littbarski


Equity Investments

With fewer traditional options today for growth potential investments, many people invest in equity funding schemes (such as shares in a company undertaking some project). These schemes can take various forms and use various mechanisms including crowdfunding and the ‘small offers’ exemption under the Financial Markets Conduct (FMC Act) legislation. The common feature is that these are collective investments that are intended to operate outside the Managed Investment Scheme (MIS) licensing, governance and disclosure requirements of the FMC Act because they offer shares in a company.

This means that the promoters/issuers of the schemes do not have to provide you with as much information and protection as is required under the FMC Act.

Designation Notice

However, such schemes may not necessarily fall outside the FMC Act as they may be caught under a recent Financial Markets Authority (FMA) Designation Notice and be considered an MIS.

The FMA is well resourced and is scrutinising investment schemes that are purportedly either outside the FMC Act or utilising an exemption from the disclosure provisions of the FMC Act. The Financial Markets Conduct (Shares in Investment Companies) Designation Notice 2017 (Notice) is one such move by the FMA to stop any purported equity offers that are in substance MIS offers.

The Notice designates shares as Managed Investment Products (MIP) where they fall within a three step test:

1. The shares are issued by an investment company; and

2. There are reduced powers of shareholders and/or unreasonably entrenched key service provider arrangements; and

3. The shares are not quoted on the NZX main board or on the ASX (i.e. NZX main board shares and ASX shares are excluded).

This test relies on the following two key principles:

• Reduced powers of shareholders: Where the shares offered do not confer usual equity voting rights, or confer limited voting rights, or disproportionately restricted rights to vote, they are in economic substance MIPs in a MIS.

• Entrenched key service provider arrangements: Where the key service provider(s) is entrenched to such a degree that it is impossible or impractical to terminate that service provider’s arrangements, those shares are in economic substance MIPs in a MIS.


If, under a typical equity investment arrangement, shares in a company set up for a particular project (a Special Purpose Vehicle of ‘SPV’) are considered MIPs then the company issuing the shares will need to provide a licensed Manager and an independent Supervisor (a registered statutory trustee) to look after investors’ interests. It will also be required to comply with the full investor disclosure requirements under Part 3 of the FMC Act unless the SPV can rely on other exemptions.

The FMA has also clarified that shares designated as MIPs cannot be offered using an equity crowdfunding service in order to avoid the disclosure requirements. The Notice includes a designation that prevents issuers from offering shares as an unregulated offer by using the disclosure exclusion for equity crowdfunding offers made through a licensed intermediary (eg a licensed crowdfunding service provider).

Other Disclosure Exemptions

The other disclosure exemptions in Schedule 1 of the FMC Act remain available. However, they are more limited than people think.

For example, the ‘Small Offers’ exemption only applies to “personal offers” which, along with the advertising (promoting) restrictions, can make it more limiting than it seems. The Small Offers exclusion requires an offer to persons already connected with the company or to persons that have an annual gross income of more than $200,000. The exemption is very detailed and is designed for existing businesses (for example, a company raising capital for its ongoing operations) or investor groups (Angels) and not one-offs. So, use of the Small Offers exemption for a series of promoted single-event companies will be a clear FMA target.

The trap for the ‘Small Scheme’ is that it can be used only once; that is, a promoter cannot set up a series of '5 investor only' companies which will be caught by “promoted by a person, or an associate of a person, who is in the business of promoting managed investment schemes’.

So, both those exemptions are really only available to genuine one-off raises for a company’s own purposes, not repetitions of a template which will come under the designated MIS (which is in substance what they are).

Anything that avoids the full disclosure requirements of the FMC Act will be eventually looked at. The FMA also advises that in circumstances where an issuer structures an offer to avoid being caught by the tests but breaches the Notice’s key principles, the shares may still be in economic substance MIPs and may individually be designated MIPs. Penalties for breaching the FMC Act may then apply to the promoters/issuers. The investment itself may in turn be compromised.

These niceties are still to play out as the FMA gets around to these groups of non-complying offers.

Advice If Uncertain

The FMC Act and its Regulations comprise 1,000 pages of complex legislation. Because of significant penalties for not complying with the legislation, it requires expert advice from lawyers specialising in the legislation. Stace Hammond can assist either investors or promoters to ensure the full FMC Act implications of these types of investments are being met.