1

Can Clo ud Based Crowd Fun din g Entrep re neu rs be

Taxe d b y H av in g to p ay fee s to be in Bus ine ss?

In 2012 the US passed the Jobs Act to encourage crowd funding to kick start the US economy by providing

funds for SME’s to grow. This sparked interest globally about how crowd funding entrepreneurs might be

controlled.

On 4 March 2014 the New Zealand Minister of Commerce described how the Financial Markets Conduct Act

2013 (“FMC Act”) would affect NZ crowd funding initiatives. “There will be no investor caps for equity crowd

funding, other than the already announced $2 million caps for equity crowd funding that one company can

raise from crowd funding each year. This is an exciting development for start-up companies and investors

which will cause New Zealand to lead the development of crowd funding.”

A new era for New Zealand’s financial markets began on 1 April 2014 with the implementation of the first

phase of the FMC Act. The Financial Markets Authority (“FMA”) is now the primary regulator of conduct in

relation to financial products and financial services in place of the Commerce Commission.

Licenses to operate crowd funding platforms can now be applied for under the FMC Act’s new licensing regime.

The fees for the licenses vary according to the type of license. The fees range from $2,139.00 to $10,695.00

(GST inclusive) plus an hourly rate which FMA staff charge for the period they are involved in processing the

application. Annual levies are payable, designed to recover the ongoing costs of the licensing regime.

Licenses are required for the categories of Crowd Funding Services, Peer to Peer Lending, Managed Investment

Scheme, Independent Trustees, Discretionary Investment Management Services and Derivatives Issuers.

The rest of the FMC Act came into force on 1 December 2014 when new disclosure requirements and licensing

obligations took effect. The new online register or offers of financial products system is operating to ensure

information on financial products and managed investment schemes are available.

The FMC Act retains the “close business associates” exclusion to justify not having to issue a prospectus where

funding is needed for a project. Similarly a new “small offers” exclusion is available where less than 20

investors invest less than $2 million in a 12 month period. The FMA has indicated the interpretation of this

exclusion is likely to follow Australian law. It appears the FMA is looking at this body of law to regulate crowd

funding innovations in New Zealand.

Up to $2 million can be raised from up to 20 investors in a rolling 12 month period. The investors do not need

to be sophisticated or invest a minimum amount, but the promoter’s offer to them must be personal. This is

December 2014

Legal Update

2

This article is provided for general information purposes only and not as legal advice.

defined in the FMC Act to include offers only made to someone likely to be interested in the opportunity who

has had previous personal or professional contact with the promoter.

Australian law indicates that even if investor seekers are able to put together an excluded offer, there are a

number of issues they must still consider. It does not automatically follow they do not need to issue a

disclosure document or that they do not need to be licensed. The Australian Securities and Investment

Commission has a broad anti-avoidance power that enables it to aggregate investment offerings by closely

related parties. The aggregation process could lead to a breach of the caps on the number of investors and the

amount able to be raised under this exception.

Businesses raising capital still need to ensure they are not misleading and deceptive in communications with

prospective investors. Significantly, promoters of excluded offers do not have the benefit of the due diligence

defence set out in the FMC Act for prospectus issuers and their directors.

Time will tell if the controllers of crowd funding sites may prefer to operate their businesses in un-regulated

jurisdiction.

Ross Fanthorpe is a lawyer and partner at Govett Quilliam. He has an interest in innovative ways to kick start

and fund entrepreneurial business. If you have any questions, relating to this article, please feel free to contact

Ross.

Written by

Ross Fanthorpe Partner

DDI: (06) 768-3729 Email: Ross.Fanthorpe@gqlaw.co.nz