Capital Raising for Irrigation – Financial Markets Conduct Act 201318 Mar 2016 |
Most directors will be familiar with the requirement to issue a prospectus under the old Securities Act 1978 (“Old Act”) when an “offer to the public” is made. However, the old regime was recently replaced with the repealing of the Securities Act 1978 in favour of the Financial Markets Conduct Act 2013 (FMCA).The FMCA came into force on 1st April 2014 with transitional provisions phasing out the Securities Act over time.
With the key provisions of the FMCA in place for over a year, it is appropriate to consider changes for the shareholders and directors of irrigation companies and the way they raise capital going forward, with reference to tools typically used by irrigation companies.
Uptake risk – stakeholder surveys
A useful tool under the old regime was the ability of the company to “test the water”, with a survey to prospective investors from the company seeking a non-binding indication as to whether they would be interested in subscribing for shares in the company, assuming indicative share price and certain key rights and obligations. This enabled the company to gauge likely uptake prior to going to the expense of preparing and issuing a formal prospectus.
The Securities Act 1978 provided for an exemption in respect of the documents seeking a preliminary indication of interest which do not involve any obligation or commitment on the part of the shareholder, limited the information provided to the name of the company, description of the shares, terms of the shares, intended use of the money, details of who the shares have been issued to.
Under the FMCA there is an express statutory provision approving such documents (or “advertisements” in securities regulation language). Section 91 of the FMCA provides it is not a requirement to file a product disclosure statement (successor to prospectus in the new Act) if the offer contains a statement that no money is currently being sought, no shares can be applied for, and when the offer is ultimately made, it will be made in accordance with the Act. Section 91 also provides for preliminary indications of interest. The key change is that under Section 91(2) a statement that meets these requirements must be prominently displayed in the survey document. The language and technical requirements have changed, but, in general terms the ability for the company to survey prospective shareholders to assess uptake risk, remains.
Product Disclosure Statement (PDS) vs. Prospectus
The FMCA provides a new regime for both disclosure and exclusion. The requirement to complete a prospectus and investment statement for offers to the public will be replaced with a Product Disclosure Statement (PDS). A PDS is meant to be a more streamlined document and removes the duplication of information provided in the Prospectus and Investment Statement.
Rather than there being an “offer to the public” there is now a “Regulated Offer”. All offers are regulated offers unless the offer falls under exclusion under the FMCA.
The requirements for a PDS are prescribed by regulation. The FMA seeks to make PDS documents “clear, concise and effective”. PDS must contain a Key Information Summary (KIS) and there are even limitations as to the number of pages that the document can have. For a share issue document a PDS must be no more than 60 pages or 30,000 words. Under the Old Act, irrigation companies making public offers tended to combine the Prospectus and Investment Statement making for a very weighty document, often over 100 pages long.
The FMCA provides for a central register of Regulated Offers at www.business.govt.nz. The PDS is not registered in the company file, as was previously the case. The new register is designed to make regulated offers and a company’s offer history easier to find and understand.
Exclusions under FMCA
The FMCA takes many of the old exceptions and exemptions and repackages them as “exclusions”. In addition, further new exclusions are provided.
Smaller schemes under the old Act sought to avoid the need to issue a prospectus by relying on their “wealthy person” exemption which applied to persons who had either $2 million in assets or $200,000 in income. In a small scheme it was often the case that farming shareholders’ farming assets exceeded the $2 million threshold. The wealthy person exemption has now been repealed in favour of the “large investor “exclusion” which provides for a person or related entity controlled by that person having net assets exceeding $5 million or a turnover exceeding $5 million.
While the asset threshold has greatly increased from $2 million to $5 million, it now extends to related entities. It was not widely appreciated that the previous exemption was limited to the actual entity subscribing for the shares which created difficulties when the farm asset was held separately from the trading asset e.g. land in the name of the family trust and stock and plant in the name of father and son partnership or a trading company. Another advantage of the Large Investor Exclusion is it provides for a safe harbour certification. If the investor certifies that they are a Large Investor and meet the statutory criteria, the irrigation company issuing the shares is not required to make further inquiry. One of the difficulties with the old regime was that a lot of the risk lay with the issuer. The new safe harbour certifications transfer a significant part of this risk back on the investor (offeree).
Another useful exclusion of the new regime is the “small offers” exclusion which allows for the issuing of shares to up to 20 investors for an amount up to $2 million in any 12 month period. Again, this is maybe suited for small schemes or extension or add-ons for existing schemes. The offer cannot be advertised though and relies on the directors identifying the investors e.g. farmers in the catchment.
The FMCA is a significant and important piece of legislation covering a wide range of securities and regulation matters and the purpose of this article was to simply give an overview of some key issues that are relevant to irrigation companies.
If you would like to discuss any aspect of capital raising for irrigation, please contact David Goodman.
This article was published in the Autumn 2016 edition of Irrigation NZ news