Regulation is most sharply focused on the provider - who in turn, is the agent that monitors the issuer or borrower.
What Must the Provider Do?
The FMCA lays out the steps for licensing of the provider. The Financial Markets Authority (FMA) has issued guidelines for those seeking to apply for a licence to be a provider of a peer-to-peer lending or a crowd-funding service.
It is obvious from the demanding requirements of licensing that fly-by-nighters need not apply. Minimum standards must be met including: good character and capability of management and board; effective policies and processes (e.g. anti- fraud and fair dealing policies); systems and operations, including effective ongoing monitoring of issuers and borrowers (e.g. their reporting) ; sufficient and well monitored financial resources.
Licences will also come with certain conditions, amongst them: FMA must be informed if key persons change; records must be compliant; regulatory returns must be provided regularly; systems, policies and controls must be robust; net tangible assets must be positive, calculated monthly. Conditions may also be tailored to providers.
The entire process for licensing and on-going compliance is not simply 'ticking the box'. The wider compliance regime includes FMCA requirements for fair dealing and financial reporting, and anti-money laundering legislation. Under the Financial Advisers Act 2008, there are obligations if licensed entities act as brokers. Thus there is a raft of legislation to observe in applying for a provider's licence. The FMA will help; outside advice is desirable too.
It's a long haul. Indications are that some initial prospective applicants have faded, leaving a determined small group. Once licensed, providers need thorough due diligence on potential issuers or borrowers. They must also assess risks of investors not being repaid in full, and returns that are likely. Before shares are issued or loans made, providers will need to enter into a client agreement with potential investors. They must disclose information including: how investments will be made; financial products issued under the service; how investor money is received and dealt with; and charges being made.
What Must An Issuer or Borrower Do?
An issuer or borrower does not have to be licensed. But, there are still hurdles - fewer than under the Securities Act (and FMCA.)
The issuer or borrower will become a client of the provider. The provider can charge for services. The agreement with the provider will need to detail what the issuer or borrower has to do so that the provider can monitor and check them.
Some of the issuer's or borrower's obligations to the provider include:
Being who they say they are, with no record of misconduct.
Being contactable, accurate address and contact details (to provider and investor).
Making the appropriate disclosures.
Providing financial statements regularly to provider and investor.
Having excellent systems in place so that the business is run in an effective and transparent way.
So you want to invest?
A feature of the new regime is that adequate warning statements are published. The form of these is prescribed. The warnings make it clear that investors may lose their entire investment. Investors must confirm they have read and understood warnings before they can use the provider's service, and invest. The investor becomes a client of the provider, and may be charged a fee.
Will it be worth it? It's likely this new channel for investment may take a while to develop. Comments from the market show investors have been willing to throw donations at new business ideas for a while now. This is a means of formalising support, probably increasing it. Some may be burnt in the process. But overall this seems a positive move in encouraging investment in small New Zealand businesses.
• Tracey Cross is partner and Nicole MacFarlane senior associate, at DLA Phillips Fox
