New Zealand: Disclosure obligations when issuing shares in NZ

If your startup is at the stage where it is looking to grow and needs capital, you will typically want to issue new shares to raise those funds. In New Zealand, the issue of shares (and other securities) to members of the public is a heavily regulated area subject to extensive disclosure obligations unless your investors (or offer) fall within certain exclusions. These disclosure obligations and exclusions will impact both whether you can raise capital and how you can do so.

This article will summarise the disclosure obligations framework, followed by a discussion of the more common exclusions available and how your startup can take advantage of them when raising capital.

How Do Disclosure Obligations Affect My Startup?

Many startup founders raise capital to help fund their startup's operations and grow their business. If you are a company issuing shares (or other securities) to raise capital, the general rule is that you must comply with disclosure obligations under financial markets conduct laws. This includes preparing and issuing a disclosure document in relation to your share offer (called a product disclosure statement).

The purpose of the disclosure requirements is to protect unsophisticated investors. It does so by requiring that companies provide the following information:

• sufficient information about the company;
• the company's financial position and relevant financial reports; and
• details of the proposed offer.

The reason for disclosure is so that unsophisticated investors understand the risk they are taking when investing in the company.

The legal requirements for the content of a disclosure document are prescriptive and extensive. As a result, the full disclosure process required is time-consuming and expensive. It can even be a barrier to small companies looking to raise capital. Fortunately, to support the growth of smaller companies, there is a framework of exclusions available that startups can take advantage of. If one or more of these exclusions apply, you may not need to issue a disclosure document.

Exclusions to the Disclosure Obligations

Wholesale Investors

The main disclosure exclusion is for wholesale investors. An offer of shares or other securities to wholesale investors in New Zealand will not be considered a regulated offer. As such, your startup will not need to prepare a disclosure document in these circumstances.

A wholesale investor is an investor who falls within any one of certain defined categories, including:

• individuals that are an "investment business" (including entities whose principal business is investing, underwriting, financial advising, and trading shares or other securities);
• persons that meet certain investment activity criteria, as follows:
  • the person owns a portfolio of shares (or other securities) worth at least NZ$1 million or has done so in the last two years;
  • the person has traded at least NZ$1 million of shares (or other securities) in the last two years; or
  • the person has worked in an investment business and has participated to a material extent in the investment decisions made by the business for at least two years during the last ten years.
• persons that are "large", meaning it has net assets of more than NZ$5 million or total consolidated turnover of more than NZ$5 million per year, for both in each of the two most recent financial years; and
• government agencies.

These exclusions are summarised below.

Certified Eligible Investors

A person will be a wholesale investor if the person self-certifies, in relation to the offer, that they have previous experience in acquiring or disposing of shares (or whatever the type of security is that is being offered) that allows them to assess:

• the merits of the offer (including the value and risks of investing in the securities on offer);
• their own information needs; and
• the adequacy of the information provided.

To rely on this exclusion, the investor must self-certify the following:

• that they are an eligible investor;
• the grounds for that certification; and
• that they understand the consequences of certifying themselves as such. This must also be supported by confirmation from an independent advisor, such as a lawyer or accountant.

Finally, the company offering the shares must be comfortable that the investor has the relevant experience.

Minimum Investment Threshold

A person will be a wholesale investor if, in relation to the offer of shares:

• the minimum amount payable by the investor on acceptance of the offer is NZ$750,000; or
• the amount payable on acceptance of the offer plus the amounts previously paid by the investor for the same type of shares in the same company add up to at least NZ$750,000.

Other Exclusions

In addition to the wholesale investor criteria, some other disclosure exclusions may be applicable, particularly in a startup context. These include, but are not limited to, where the offer is:

• made to a "relative" of a director of the company making the offer;
• made to a "close business associate" of the company making the offer;
• a "small offer"; or
• made under an employee share purchase scheme.

What Do These All Mean for My Startup?

The policy underpinning these exclusions is that these types of investors are in a position to understand the nature and risk of their investment without the need for additional disclosures and protections. As a result, there is less need to protect the relevant investors by requiring a company to prepare a disclosure document.

Therefore, if your investor(s) or offer falls within one of the exclusion categories above, your company may not need to issue a disclosure document.

Importantly, applying the disclosure exclusions can be complex and, in some cases, require you to follow a prescriptive process. For example, you may need to make particular warning statements to your investors. As such, you should always seek legal advice to canvas your options and make sure your proposed course of action is compliant.

An Example Case Study

It is possible to combine exclusions in relation to one offer. Here is an example.

Your startup is seeking to raise $1.2 million from 12 investors. You have never raised capital before. Currently, you can make use of the small offer exclusion, which is available when a company raises less than $2 million from less than 20 investors during a 12-month period. However, the small offer exclusion operates on a 12-month rolling basis. This means that if your startup wanted to raise further capital under this exemption nine months after the first raise, it could not raise more than $800,000 from more than eight investors. Importantly, $1.2 million has already been raised from four investors, and the rule is $2 million by 12 investors within a 12-month period.

Out of the initial 12 investors, 4 are considered eligible investors. Together, these 4 investors invest $600,000. The company does not have to include these investors (or the $600,000) in the small offer calculation. By excluding these investors, you can now raise an additional $600,000 from an additional 4 investors using the small offers exclusion should you need to.

Key Takeaways

As a startup, you will likely need to raise capital at some stage. Extensive disclosure obligations will apply unless your offer or investors fall within certain prescribed exclusions. Provided that each of your investors falls within one of the exclusions, your startup can raise as much capital as it chooses without having to issue a disclosure document.