Financial Markets Authority grants first equity crowd funding licences

Introduction

The Financial Markets Conduct Act 2013 (FMCA) came into effect earlier this year on 1 April 2014 with the implementation of Phase 1.  The remainder of the FMCA is due to come into effect on 1 December 2014 with the introduction of Phase 2.  Phase 1 introduced licensing requirements for equity crowd funders wanting to offer their services.  On 31 July 2014 the Financial Markets Authority (FMA) granted the first of these licences to equity crowd funders PledgeMe and Snowball Effect.

While the relevant provisions of the FMCA came into effect on 1 April 2014, equity crowd funding has only become possible recently due to the licensing requirements imposed under the FMCA that must be satisfied by equity crowd funders before they are able to provide services to potential investors.

What is equity crowd funding?

Equity crowd funding is a financial service offered by a person who acts as an intermediary between a company wanting to issue shares, and investors wanting to purchase shares, by offering an equity crowd funding platform (for example a website) through which the company can make such an offer to the public.  Persons offering such services are known as equity crowd funding platforms, equity crowd funding providers or simply equity crowd funders.

Under the FMCA companies wanting to offer shares are generally required to prepare a product disclosure statement for potential investors – known as an investment statement or prospectus under the former Securities Act 1978.  However, certain exemptions exist under the FMCA (and Securities Act 1978) that mean such disclosure is not required when a licensed equity crowd funder is used to raise funds.  When using licensed equity crowd funders, companies are able to raise up to $2 million in any twelve month period without the usual disclosure obligations set out above (although this $2 million limit includes funds raised under the FMCA’s peer-to-peer lending and small offer exemptions).  Instead of the usual disclosure obligations, companies using licensed equity crowd funders are able to provide more limited information about their business when making offers than is normally required.

Equity crowd funders are able to charge for their services. Companies using their services will be required to sign client agreements detailing what the company must do so that the equity crowd funder can monitor and check up on them to ensure continued compliance with the FMCA.

Licensing

As mentioned, the FMCA sets obligations on equity crowd funders requiring them to obtain a licence from the FMA before being able to provide their services.  To become a licensed equity crowd funder, there are certain minimum standards the licensee must meet and maintain.  These standards include, without limitation, that the applicant:

• Has fit and proper directors and senior managers;
• Is capable of complying with its licensing conditions while still being able to effectively perform the offered service;
• Has not demonstrated any reason for the FMA to believe it may contravene its obligations; and
• Is registered as a financial services provider.

Obligations and conditions on equity crowd funders

Once a licence is granted, the licensee will also be under ongoing obligations, which include:

• Compliance with the fair dealing provisions under the FMCA, which, broadly speaking amount to not making false, misleading or unsubstantiated representations;
• Having written agreements with investors;
• Having arrangements to provide investors with information to assist such persons in making purchase decisions; and
• Ongoing monitoring and compliance to identify material changes in circumstances and ensure certain reporting obligations are met.

Licences granted by the FMA will contain conditions to support the licensee’s obligations under that licence, which include conditions imposed by the FMCA, FMA and under associated regulations.  Applicants must demonstrate their capability of meeting these obligations before a licence will be granted.  By way of example only, such conditions might include, but are not limited to:

• Provision of only market services to which the licence relates, and for which persons are authorised to provide under the licence;
• Informing the FMA of changes in key people such as directors and managers and those responsible for the activities required for the licensee to be able to deliver its service;
• Having systems and procedures to ensure maintenance of relevant records that the FMA can inspect without unnecessary delay; and
• Providing the FMA with any information to allow it to monitor on-going capability and to ensure effective performance of the service in compliance with the FMCA eligibility criteria.

First licences issued

As mentioned above, on 31 July 2014, Wellington-based PledgeMe and Auckland-based Snowball Effect became the first equity crowd funders to be licensed by the FMA, four months after the FMCA came into force.  Although neither planned to initially, these equity crowd funders have the potential to build secondary markets, whereby investors are capable of trading equity in projects. 

PledgeMe has already raised $2.5 million in the last two years through reward-based equity crowd funding, and launched its service in mid-August.  Snowball Effect also launched its service in August, offering investors shares in Marlborough based craft brewery Renaissance Brewing, who were seeking to raise $600,000 to $700,000 in funding.  Over 200 companies have already contacted Snowball about raising capital.

The future

On 1 December 2014 Phase 2 of the FMCA comes into force, introducing the remainder of the FMCA.  From this date, crowd funders must be licensed before being able to offer their services, unless an exemption under the transitional provisions applies.  Therefore, for those crowd funders wanting to offer their services, it is prudent to begin the licensing application process now, to ensure that they are legally compliant and ready to go from 1 December 2014.

Equity crowd funding is recognised internationally as an innovative form of investment to the public and an effective method for opening up opportunities for smaller businesses to raise capital growth.  With 12 companies initially putting forward expressions of interest, and Armillary Private Capital (who has partnered with well-known United Kingdom based organisation Crowdcube) looking likely to be granted a licence in the near future, equity crowd funding looks set to be an ever changing landscape in the future.

If you would like further information please contact Laura Monahan on 07 958 7479.