A combination of lucky timing and a policy commitment to promote innovation in capital markets are set to put New Zealand among the world's early adopters of legislation for crowd funding and peer-to-peer lending as fund raising sources, law firm Chapman Tripp says.
In a Brief Counsel Chapman Tripp notes the Jumpstart Our Business Startups (JOBS) Act in the United States, passed last year but yet to come into force, legislated for crowd funding and peer-to-peer lending as a source of fund raising.
"Now our Government has seized the opportunity created by the Financial Markets Conduct Bill (FMC Bill) to make similar provision here."
The firm points out that no limits are proposed on how much an investor may invest or a lender lend in any given timeframe. However, a limit of $2 million per 12 month period will be imposed on how much a borrower may borrow or an issuer may raise.
Both crowd funding and peer-to-peer lending are internet based methods of money raising.
Chapman Tripp points out crowd funding is generally for small one-off projects with small donations from large numbers of people. Established crowd funding platforms in New Zealand include PledgeMe, Boosted and GiveALittle.
"Crowd funding transactions vary according to the nature of the product, but generally contributors to a non-charitable project will receive a small gift or reward. For example, supporters of a coffee table art photography book may get a free copy, a free signed copy or a free signed copy and a signed photograph, depending upon the size of their contribution," Chapman Tripp says.
Once the FMC Bill is in force, there will be greater flexibility to offer contributors an ownership stake in a business."
Meanwhile, the firm describes peer-to-peer lending as reasonably conventional given lenders expect to be repaid at an agreed interest rate. Leading international peer-to-peer websites include Prosper, Lending Club and Zopa.
Chapman Tripp says under current law, a widespread offer of "securities" through a crowd funding or peer-to-peer lending service will face significant compliance costs. This is because even the provision of a small loan or equity contribution is likely to trigger mandatory disclosure and governance obligations, including the preparation of a prospectus and investment statement.
"From inception, the FMC Bill provided for a new category of 'licensed intermediary', offers through which would be exempt from the normal disclosure and governance requirements. Initially this was intended to apply only to peer-to-peer providers but, during the FMC Bill’s evolution, it was decided to include crowd funding platforms."
The law firm says that although licensing is compulsory under the FMC Bill for other financial services, the regime for “licensed intermediaries” is voluntary.
"Should crowd funding or peer-to-peer service providers wish to allow clients to offer equity or debt securities, they must be licensed to qualify for the exemption. Should they not, they may be able to continue to provide their existing services to clients on a very narrow basis where only a limited number of targeted offers are made, or as a donation only, where there is no provision for contributors to participate in the business or derive a financial return."
Chapman Tripp says crowd funding and peer-to-peer lending have been most widely adopted in Europe, especially in Britain, Italy and Spain.
The FMC Bill is expected to start coming into force next April. See all our stories on the FMC Bill here.