Securities Act: Exemption Notices for charities and not-for-profit organisations

Securities Act (Charity Debt Securities) Exemption Notice 2013

The Securities Act (Charity Debt Securities) Exemption Notice 2013 (Charity Exemption Notice) came into effect on 1 December 2013 and replaces the Securities Act (Charitable and Religious Purposes) Exemption Notice 2003 (2003 Exemption Notice). 

The Charity Exemption Notice applies to those registered under the Charities Act 2005 who raise funds through offering debt securities to support their charitable purpose.   The Charity Exemption Notice exempts charities from the trustee, registered prospectus, investment statement, and advertising certificate requirements.

What information does a charity need to provide to a prospective investor?

In accordance with the Charity Exemption Notice, a charity must ensure every prospective investor, before they sign up to the offer provided by the charity, is provided with an information document that complies with clause 6 of the Charity Exemption Notice. 

The information document must include a clear warning statement at the front of the document explaining to prospective investors that the charity is not subject to standard offer document requirements under the Securities Act 1978.  Specific wording for the warning statement is provided under clause 6 of the Charity Exemption Notice.

In addition to the warning statement, the following information is required:

• Reference to the list of authorised financial advisers that appears on the Financial Markets Authority’s website;
• Information required by clauses 2, 9, 10, 11 and 12 of Schedule 13 of the Securities Regulations 2009;
• A description of the charitable purpose for which the money paid by investors will be used;
• Terms and conditions of the offer;
• Reference to the requirement to be a member of a dispute resolution scheme;
• Reference to any risks associated with the debt securities;
• Any other material information; and
• A statement notifying the investor that they can request a copy of the most recent audited financial statements of the organisation without being charged a fee.

To limit the overall risk and impact of any charity failure on financial markets, the Charities Exemption Notice sets out a maximum amount of funds that can be raised by the charity at any one time.  The maximum amount is $15 million, which is the total debt securities that can be offered and owing at any one time.  This limit came into effect on 1 December 2013.   

However, there is an exception in the case of religious organisations, described under the Charity Exemption as “body corporate or unincorporated, that is organised and subsisting, or carrying on business for religious purposes, whether or not it is also exists for other purposes”.  Religious organisations may have until 1 April 2015 to comply if:

• They provided debt securities under the 2003 Exemption Notice on or before 1 November 2013; and
• As at 1 February 2014, the amount owing under the outstanding debt securities together with the total amount of the debt securities being offered exceeds $15 million.

Financial Markets Authority – what information do they need?

Charities must, before offering debt securities, provide the Financial Markets Authority with the following information, which must be confirmed on an annual basis:

• Written notice stating that they intend to rely on the Charities Exemption Notice;
• A copy of their information document;
• Information about their directors and senior managers who are responsible for the offer and management of their securities and about the procedures in place for the management and oversight of the investments;
• A statement of its charitable purpose;
• Copies of its most recently audited financial statements and the auditors notes;
• Amounts owing under outstanding debt securities and amounts offered; and
• The total capital and assets of the charity calculated at the end of its most recently completed accounting period.

Summary

The Financial Markets Authority considers that the exemptions provided under the Charities Exemption Notice do not cause significant detriment to investors as they are provided with a warning at the beginning of the information document, the limit on funds able to be raised is set at $15 million and minimum prescribed required information is to be provided to the Financial Markets Authority.

It is important to understand the information required under the Charities Exemption Notice and Securities Regulations 2009 before drafting an information document to be provided to prospective investors.  Undertaking a review of your current information document or completing an information document from the beginning can be comprehensive and require technical legal knowledge to ensure all information is covered in detail and in form.

Securities Act (Community and Recreational Purposes) Exemption Notice 2013

The Securities Act (Community and Recreational Purposes) Exemption Notice 2013 (Community Exemption Notice) came into effect on 1 December 2013 and replaces the exemption provided under the 2003 Exemption Notice. 

The Community Exemption Notice exempts organisations from the requirements of a statutory supervisor, registered prospectus, investment statement, and advertising certificate.   The Community Exemption Notice applies to not-for-profit organisations where they offer interests which give members a right to use the organisation’s assets or other property in return for payment of membership fees or subscription.   

A not-for-profit organisation is described as an organisation, whether incorporated or not, that is carried on other than for the purposes of profit or gain to an owner, member or shareholder, such as community-based recreational clubs.  The Community Exemption Notice covers organisations that are not registered under the Charities Act 2005. 

What does the Community Exemption Notice provide?

In accordance with clause 5 of the Community Exemption Notice, the exemption will apply as long as the rules of the not-for-profit organisation meet certain requirements, which are:

• The holders of the securities do not have any interest or right to participate in any capital, assets, earnings, royalties or other property of that organisation or scheme, other than the rights listed in subclause (2); and
• Payments to the organisation by the holders of those securities is limited to the amount of the fees or subscription.

The rights listed under subclause (2) are:

• The right to use or enjoy assets or property of the not-for-profit organisation;
• The right to vote at any meeting of the not-for-profit organisation; and
• The right to share with the other members of the not-for-profit organisation in the property of the organisation upon its winding up.

Summary

The exemption provided under the Community Exemption Notice is there to relieve not-for-profit organisations of the stringent rules and regulations under the securities law regime. 

It is important that the rules of the not-for-profit organisation are clear and cover the requirements under the Community Exemption Notice should the organisation wish to rely on the exemption. 

Conclusion

The scope of securities law is broad.  In order to comply with the specific requirements set out under the exemption notices, attention to detail and a comprehensive understanding of securities law is needed. 

If you are a charity that offers debt securities to the public, review your information document to ensure it contains the required information and ensure you are providing the Financial Markets Authority with the correct information.

If you are a not-for-profit organisation, conduct a review of your rules to ensure they are worded correctly to comply with the Community Exemption Notice.   

If you would like further information please contact Jessica Middleton on 07 958 7436.