New Irrigation Company Exemption Notice fails to deliver on promise
Column written by Christchurch Partner David Goodman, published in the Autumn 2018 issue of Irrigation News NZ
The Financial Markets Conduct (Irrigation Companies) Exemption Notice 2018 (Irrigation Companies Exemption Notice) came into force on 19 January 2018.
The Irrigation Companies Exemption Notice is along similar lines to the earlier Small Co-operatives Exemption Notice but extends to “Irrigation Companies” which are not co-operative companies. The definition of “Irrigation Company” under the Irrigation Companies Exemption Notice is “a company, other than co-operative company… whose principal activity is managing and operating, under co-operative principles, infrastructure to effect irrigation.”
The Irrigation Companies Exemption Notice firstly sets out technical exemptions that apply to all Irrigation Companies and aligns the Product Disclosure Statement (PDS) disclosure requirements under the regulations with the specific nature of irrigation companies. Secondly, and more significantly, there is an exemption from the requirement to have a full PDS for small irrigation companies. The latter exemption is potentially very helpful, but unfortunately the $5,000 cap severely limits the applicability of the exemption. I discuss this further below, but first I deal with exemptions that have general applicability to irrigation companies.
Every irrigation company is exempt from the requirements in clauses 5 (What is this?) and 12 (Key risks affecting this investment) of Schedule 3 of the Regulations which deals with the content of a Product Disclosure Statement (PDS). The exemption provides for alternative wording for clauses 5 and 12 and, while helpful, there is no real reduction in compliance obligations. There is a further exemption from clause 20 which deals with the requirement to set out in a table a list of the substantial shareholders and relevant interests held by directors and senior managers in the PDS. This is a useful exemption and there is no substitute wording required.
Irrigation companies are exempt from the requirement to disclose certain financial information that may not be particularly relevant to irrigation companies given their cost recovery nature such as EBITDA, NPAT and dividends. The exemptions come with conditions around alternative information and there is no real reduction in the disclosure or compliance requirements. In addition, there is an exemption to Regulation 38 (key financial metrics for offer), but this relates to quoted shares and is of limited application to irrigation companies.
Of much greater significance are the exemptions available to irrigation companies that meet the $5,000 threshold. These irrigation companies are exempt from Part 3 of the Act (Disclosure of offers) and the requirement to issue a PDS. Instead, the irrigation company can issue a much reduced form of the document set out in Schedule 2 together with a “warning.”
The warning states, amongst other things, that “The exemption recognises that shares in these Irrigations Companies are, for the shareholders, more like a membership than an investment.”
The exemption from the requirement to issue a full PDS is therefore targeted at very small irrigation companies. The practical reality is that very few (if any) irrigation companies issue less than $5,000 worth of paid out capital to their members. The average water share in an irrigation company is over $5,000 in value for one share alone. There may be some small horticulturally based irrigation schemes that qualify, but I have yet to meet one.
Lastly, there is an exemption to Part 7 of the Act (Financial reporting) if revenue (i.e. water charges) is less than $2,000,000 per annum. The main advantage here is the ability to avoid the requirement to have audited accounts and to avoid the costs associated with these audits. This is a more useful threshold and may be of assistance to smaller schemes struggling with audit costs.
In conclusion, the Irrigation Companies Exemption Notice, while containing some useful exemptions of general applicability to irrigation companies by making various clauses of PDS’s more relevant to irrigation companies does not reduce compliance obligations, rather only adjusts these obligations. There is also a useful exemption in respect of financial reporting. The main prize, being the exemption from the requirement to issue a PDS in favour of a reduced offer document, is of very limited application.
The great majority of irrigation companies (if not all) will have to issue a full PDS or rely on the typical exclusions under the Financial Markets Conduct Act 2013 including, in particular, the “Large Person” exclusion and the “Small Companies” exclusion to issue shares. There is a strong argument to increase the current $5,000 threshold to a more realistic level.
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