Law must balance protection and access
If you've ever tried to raise capital for your business you'll know about the minefield created by our securities laws.
Those laws are there for good reason, mind you. If you've been reading the newspaper you'll know why - but there has got to be a better way to go about it, and thankfully changes are in the works. The changes have already been the subject of a lot of industry discussion, and if you want to have your say, you'll need to act quickly - submissions on the draft new rules in the Financial Markets Conduct Bill close on April 26.
Currently there are a range of exemptions from the need for full compliance with the Securities Act when sourcing capital from investors. But the problem is they are mostly too subjective, and it's too risky for businesses to rely on them. Also, full compliance (which generally requires the preparation of a prospectus and investment statement and carries with it potential civil and criminal liability for non-compliance) can be disproportionately expensive relative to the amount of money that's proposed to be raised.
What's going to change? A number of the existing exemptions are going to be clarified by removing some of the subjectivity. Several new exemptions are likely to be introduced, including:
AA "small offer" exemption borrowed from Australia (also known as the "20/12 rule"), which would permit personal offers of securities to no more than 20 investors in any 12-month period up to $2 million in total, and;
AAn exemption for offers through licensed intermediaries. This should facilitate peer-to-peer lending and crowd funding (in a true investment sense rather than as it is currently, where those seeking the funding offer forms of rewards in return - such as being named in the credits of a film project).
Changes are also proposed to be made which should make it easier to incentivise employees through participating in the growth of a business. This has long been an issue for start-ups, and while a lot of the detail still needs to be worked through, we're definitely heading in the right direction.
These are topical issues and ones which are grappled with the world over. Two weeks ago President Obama signed the Jump-start Our Business Start-ups (JOBS) Act into US law. The JOBS Act came off the back of research which indicated that 90 per cent of the jobs created by businesses come after they go public, and is aimed at providing better access to capital for businesses.
Among its key provisions are the authorisation of crowd funding, the easing of the initial public offering process for emerging growth companies, the removal of certain advertising restrictions and the raising of shareholder number-based thresholds, which dictate when certain public reporting obligations kick in.
The JOBS Act has attracted an outpouring of support for what it's hoped it will do to stimulate the local economy, grow businesses and spur job creation, but it has also attracted quite a lot of criticism from an investor protection standpoint - in that it might undo many of the protections that have been put in place since the Enron debacle.
As always, it's a balancing act between facilitating growth on the one hand and protecting investors on the other.
It will be interesting to see if our regulators strike that balance as the new rules take shape.
Andrew Wallace is a senior solicitor at Auckland law firm Lowndes Jordan. Information given in Your Law should not be a substitute for legal advice.
Sunday Star Times