Clampdown on longstanding exemption for charities

For most not-for-profits (NFPs), fundraising is a significant challenge. The Financial Markets Authority (FMA) has recently undertaken consultation on certain long-standing exemptions from our securities laws in the area and last month put its proposals into effect with the issuance of two new exemption notices. The rules which govern certain fundraising by NFPs, particularly debt offerings, have changed in a big way.

What we’re talking about here are organisations established exclusively for charitable, educational, religious or recreational purposes that raise money by offering debentures, bonds or notes (debt securities) to the public or, in return for subscription fees, grant members rights to use the organisation’s facilities (participatory securities). We’re not talking about donations or sponsorship, which aren’t caught by securities laws.

For many years NFPs have been able to offer debt securities and participatory securities to the public without needing to comply with the usual prospectus, investment statement and independent supervision requirements and, in the case of religious organisations, to an unrestricted level.

The rules for debt issues have changed significantly. For the time being, NFPs will still be able to offer debt securities without having a prospectus, an investment statement or an independent supervisor. However:

  • Now, the organisation has to be a registered charity to take advantage of the relief available.
  • The warning statement which has to be given to the people who the NFP is borrowing money from is now more extensive. So too are the requirements for the information document that has to be given to those people. It must include not only basic information such as a description of the security and the risks associated with the investment, but also any other information that is material to the offer. Officers of these organisations will need to ensure that thorough due diligence is done in order to meet the requirements and minimise the risk of liability for the organisation and themselves.
  • The NFP is limited to having $15millon in debt securities outstanding at any time. The purpose of this restriction is to limit the overall risk and impact of any organisation failure on financial markets.
  • Before making the offer, the NFP has to provide the FMA with notice of its intention to make the offer, a copy of its information document, and extensive information about the organisation itself (which has to be updated annually). The purpose of this requirement is to help the FMA monitor fundraising in the area.
  • The NFP has to provide a copy of its most recent audited financial statements to any offeree within five working days of a request for them, free of charge.

Once the new regime being established under the Financial Markets Conduct Act 2013 (FMCA) comes into force, however, the exemption will expire. At this stage it’s not expected that similar exemptions will be granted. Unless a major demand for exemptions develops, NFPs will need to comply with the same rules as everyone else when raising funds. They can either fully comply or make the offer within the exclusions available under the new regime.

The rules for funding structured as participatory securities remain much the same as they’ve always been. That is, as long as certain minimal requirements are met, these interests can be offered without the usual requirements of a registered prospectus, an investment statement and independent supervision. These interests are not expected to be caught under the FMCA regime, so this should continue to be the case once it’s in place.

This article was first published in the Your Law column in the Sunday Star Times on 26 January 2014.

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