Disclosure exclusions a boost to employee share offers

The overhaul of the laws that govern New Zealand’s financial markets took another big step recently with the passing into law of the Financial Markets Conduct Act. The new regime established under the Act will be phased in over the next few years. Right now though, it’s worth concentrating on two aspects of the new regime that should be of interest to many businesses around the country: a broader exclusion from the standard disclosure requirements which should make offering employee share schemes easier; and wider-ranging exclusions which should make raising capital more cost-effective.

Employee share schemes can be a great way to attract, retain and incentivise staff, particularly for early-stage companies. However, they aren’t widely used in New Zealand. Part of the problem is that the rules you currently need to comply with in order to offer an employee share scheme make doing so impractical and, in a lot of cases, also undesirable.

The exclusion that will be available under the new regime is less restrictive than the current rules, and will enable employers to offer these schemes with more flexibility, and on a more cost-effective basis. Officials have acknowledged that it’s important to facilitate these schemes whilst, at the same time, also ensuring that employees receive basic information about the investment decision they’re making. So, certain disclosures will need to be made to participating employees, including the company’s latest annual report and financial statements (to the extent available), information about how the shares can be sold, and prescribed statements about the risks of employee share schemes. The new exclusion should be able to be used from 1 April next year.

In terms of general capital raising; currently there are a range of exclusions from the need for full compliance with the Securities Act when sourcing capital from investors. There’s a lot of uncertainty and subjectivity associated with the current exclusions, which has meant that they’re not as helpful as they should be. The new Act carries over a number of the current exclusions, but makes them clearer with the introduction of more bright line tests.

A significant change will be the introduction of a small offer exclusion. This will allow companies to raise up to $2million from up to 20 investors in any 12 month period, through "personal” offers. The rationale here is that compliance with the full disclosure requirements would outweigh the benefits of making the offer. It’s expected that companies that want to use the small offer exclusion will need to provide a prescribed warning statement to investors and notify the FMA that they’re using it. The purpose of this is twofold. Firstly, to ensure investors are aware of their regulatory position and secondly, to help the FMA to monitor the level of activity taking place in this area. This exclusion is also expected to come into force from 1 April next year.

There’s plenty to plan ahead for, but if you’re looking at setting up an employee share scheme or raising capital in the next few months it’s business as usual and you still need to comply with the current rules under the Securities Act.

For those interested in other aspects of the new regime, the next step in its implementation will be consultation on the draft regulations to provide a lot of the detail for the framework established under the Act (including the content of the new disclosure documents), as well as on the new licensing frameworks and other key operational changes.

This article was first published in the Your Law column in the Sunday Star Times on 29 September 2013.

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