A discussion paper with draft Financial Markets Conduct Act regulations, recently released by the Ministry of Business, Innovation and Employment, proposes a warning for investors who may use crowdfunding services.
The paper includes a condition for crowdfunding service providers to make a warning statement available as part of the market services license to provide the service, on the home page of their website or on the page on the site immediately before the investor uses the site to apply for or acquire financial products, and prominently displayed on application forms for acquiring financial products using the service.
The warning statement must be in the following form, the regulations propose:
“Equity crowd funding is risky.
“You may lose your entire investment, and must be in a position to bear this risk without undue hardship.
“The law normally requires people who offer financial products to give information to investors before they invest. This requires those offering financial products to have disclosed information that is important for investors to make an informed decision.
“The usual rules do not apply to offers by issuers using this facility. As a result, you may not receive a complete and balanced set of information. You will also have fewer other legal protections for this investment.
“Ask questions, read all information given carefully, and seek independent financial advice before committing yourself.”
The draft regulations also propose that the crowdfunding service provider get confirmation from each investor that they have seen the warning statement, understand equity crowdfunding is risky and that they may lose their investment, could bear that loss without undue hardship and that they understand usual legal protections do not apply.
The confirmation must be gained in a separate document from the one used to agree to use the service.
The paper defines the principal purpose of the crowdfunding facility is to match companies that want to raise relatively small amounts of funds with investors seeking to invest relatively small amounts.
It defines peer to peer lending as a facility for offers of debt securities by way of issue, matching lenders with borrowers lending or seeking loans, for personal, charitable or small business purposes.
Crowdfunding and peer to peer lending also includes broking services, it says.
Under current law, companies can't offer securities without a prospectus or investment statement. But the bill, which recently passed its third reading, creates compliance exemptions for licensed intermediaries (crowdfunding platforms and peer to peer lenders). Issuers and lenders will be restricted to $2 million in a 12-month period.
The ministry is calling for feedback by 5 December. Phase one of the act comes into effect on 1 April 2014 and phase two on 1 December 2014.