Regulators would look at toxicity, adverse effects and mental health impacts before any new products were approved.
The regime would also introduce tough new penalties, including up to eight years in prison for importing, manufacturing or supplying analogues of illegal drugs, and up to two years in prison for importing, manufacturing or supplying unapproved substances.
People caught with unapproved products could be fined $300, but it would not be a criminal offence so young people would not be penalised.
The rules would introduce a minimum purchase age of 18 and would restrict which outlets could sell the products, including a ban on dairy sales.
Products would face labelling and packaging restrictions and advertising would be banned except for at point of sale.
Legal highs on sale for at least six months before the new regime comes into effect could still be sold, but they would have to undergo testing within a transition period of six months.
Mr Dunne said the new rules would ensure products were safe for the people who wanted to use and enjoy them.
"But we are putting in place some pretty strict standards and restrictions to make sure that only the safest come through the net."
He expected there would be a drop in the number of products available, but denied it was a "back-door way" to ban all products.
"We haven't gone for a ban because we think there are some substances that may be perfectly safe for people to use - this is an issue that's driven by public safety, not by any other concerns."
Mr Dunne denied the rules would encourage a black market or push users towards illegal drugs like cannabis.
He estimated the legal high industry was worth tens of millions of dollars a year, and determined manufacturers would accept the compliance costs if they felt the return was worth it.
The legislation would be a world first, with countries like Australia and Britain looking to New Zealand's example as a practical solution to the problems they faced in their own countries.
Asked if he would use any of the approved products himself, Mr Dunne said: "Well, it's not really my scene."
The legislation would go before Parliament by the end of the year and become law by next August.
It would replace a temporary ban on 16 substances contained in more than 50 products that have already been removed from shelves.
STRICT TESTING REGIME:
* Manufacturers must pay an $180,000 application fee and up to $2 million in testing costs
* Ministry of Health regulators could take two years to test each new product
* Testing is likely to include human clinical trials in New Zealand
TOUGH NEW PENALTIES:
* Eight years in prison for importing, making or supplying banned substances
* Two years in prison for importing, making or supplying untested substances
* $300 fine for individuals possessing unapproved substances
RESTRICTIONS ON SALE:
* Minimum purchase age of 18
* Restrictions on labelling and packaging
* Ban on sales at dairies and no advertising except at point of sale
