New capital markets regime off to strong start

A key purpose of the Financial Markets Conduct Act 2013 (FMCA) is to encourage innovation in capital markets and the evidence from the first 18 months is that it is already delivering on that aspiration.

A key purpose of the Financial Markets Conduct Act 2013 (FMCA) is to encourage innovation in capital markets and the early indications from the first 18 months is that it is already delivering on that aspiration.

Some early external evidence of the FMCA’s effect may be that the World Economic Forum Global Competitiveness Report for 2015-2016 ranks New Zealand first for financial market development – up from third last year.

So what innovations has the FMCA delivered, and how widely are they being used?

Eight platforms have been licensed and, as at 30 September, had collectively raised almost $13.7 million through 24 successful offers. Another 11 bids failed to achieve the minimum funding target. But, while the success rate on a project basis was only 69 percent, it was 90 percent on a funding basis.  

Snowball Effect is the market leader, having been responsible for more than two thirds of the money raised. Crowdfunding is now firmly part of the furniture in New Zealand but we would expect that there may be some consolidation among providers as the market matures.

Peer-to-peer lending
Four peer-to-peer lending licences have been granted, with Harmoney New Zealand being the most prominent.  It was first into the market and has raised over $100 million in its first year of operation. It has now established a platform to launch into Australia.

Same class offers
Same class offers allow listed issuers to issue further quoted financial products with minimal documentation. They have been a big hit, with 25 offers in the year to 30 June 2015, raising $1.2 billion. Due diligence (DD) typically involves (for equity): a focused review of board papers, review of continuous disclosure compliance, confirmations from senior management and from the Audit committee.  

But practice does vary. Some issuers elect to run what looks like a “traditional” DD procedure with a due diligence committee (DDC) involving directors, management and advisers and a relatively extensive “sign-off” process. Others have elected a more streamlined approach, dispensing with external advisers and/or reducing director membership on the DDC. 

The FMCA regime has also improved issuer assisted sell-downs (e.g. SLI Systems) and block trades (Contact/Origin). The spur is that an issuer can now be involved to assist a sell-down without formal offering documents being required - and, unless the sell-down is by a controller (Contact/Origin), without even requiring a “cleansing notice”. Previously, if the issuer assisted, a prospectus and investment statement was required, meaning issuers tended to be extremely cautious about becoming involved. 

Initially, same class offers were adopted mostly for rights issues but they are increasingly being used also for debt issues. Two high profile corporates - Sky City and The Warehouse – have recently done bond issues using a Product Disclosure Statement under the FMCA, which sets them up to use the same class mechanism for any future bond issues.

Unlisted exemption
Further flexibility has been provided through the government’s decision to allow the Unlisted share trading platform to operate as an unlicensed financial product market. Unlisted has been operating since 2003 as an option for smaller or start-up companies and may have been forced to close without the licensing exemption.

Financial Markets Authority (FMA) Chief Executive Rob Everett commented in the FMA’s annual report for the 30 June year that, although the early response to the FMCA had been positive, there were a number of businesses which had yet to engage with the new opportunities available.  

The most conspicuous example of this is that of the 301 offers made over the year, only 24 were in the new PDS format against 252 old-style prospectuses. This was possible because the transitional provisions in the FMCA allowed offerors to use the Securities Act 1978 instead of the FMCA if that was their preference. That option expires on 1 December this year for equity IPOs.  

Roger Wallis is a partner at Chapman Tripp specialising in corporate and securities law.

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