Cygnus Law has made joint submissions on the FMA’s proposed restrictions on the use of “investment companies” in New Zealand. The submissions address a number of matters, including restrictions on crowdfunded offers, the impact on non-regulated offers and the importance of certainty.
The proposed designation addresses concerns about the use of companies as investment vehicles for what are, in effect, managed investments. Retail investors in such companies do not have the level of protection afforded to retail investors in managed investment schemes (even though in economic substance the investments are similar). The effect of the changes would be to automatically convert companies that meet certain criteria into managed investment schemes. Triggers for conversion include where shareholders do not have full voting rights (including to appoint a director) and where the company has an entrenched management agreement on terms that are unfavourable to the company. The consequences of conversion would include a requirement to have a statement of investment policy and objectives (a SIPO) and to appoint a supervisor.
FMA has stated that it intends to issue a designation to address investment companies. The only questions now relate to the precise terms of that designation. This will be the FMA’s third use of its designation power. This power allows FMA to, in effect, change the law, including by converting one type of financial product into another (in this case from shares to managed investment products) and by converting a wholesale offer into a retail offer (which will impose many more regulatory obligations on the offeror). FMA has a related exemption power, which allows FMA to exempt people and transaction from compliance with parts of financial markets law.
Please note that this blog entry is a broad summary only, is not legal advice and should not be acted or relied upon without seeking legal advice.