A war of words broke out this week between New Zealand Shareholders Association chairman John Hawkins and Bevan Wallace, chairman of Efficient Market Services which operates the Unlisted market.

Unlisted, which is not a licensed market under the Financial Markets Conduct Act 2013, provides a trading facility for 16 securities including King Country Energy, Rangatira and Skyline Enterprises.

The debate is about the regulation of all trading facilities, not just the NZX.

Hawkins started the ball rolling with a front page editorial in The Scrip, the NZSA’s excellent monthly publication.

Under the heading “Russian Roulette”, he wrote that the Financial Markets Conduct Act “was a once in a generation overhaul of securities laws [that] sets standards and protections on which investors and participants can rely. It addressed a whole host of issues that had allowed the finance company debacle to occur, and by and large has erected a fence at the top of the cliff, rather than waiting to pick up the pieces at the bottom”.

He wrote that “one important change related to the requirement for share markets to be licensed, have comprehensive systems and be subject to rigorous oversight”.

Hawkins is concerned because Unlisted has applied for an exemption from being licensed under the Financial Markets Conduct Act.

He says Unlisted will continue to be an unregulated market if it is exempted from requiring a licence and “the NZSA board has resolved to strongly oppose Unlisted’s application for an exemption”.

He went on to say: “We fought hard and long to improve things for retail investors, and we are not about to allow these to be watered down. We have no desire to encourage a return to ‘the wild west’. In Russian roulette, there is no point in pulling the trigger again, having survived the first time, as the odds of a catastrophe shorten significantly.”

Unlisted’s Bevan Wallace published an open letter this week in response to Hawkins’ editorial.

He wrote that the Shareholders Association “has adopted a position where it considers that the only avenue for public participation in financial product markets is via a licensed financial product market that provides for full application of regulatory investor protections, monitoring and enforcement. No half measures or exemptions. Simply put they seek to deny public participation in any financial product markets that do not satisfy these prescribed conditions.”

Wallace said it was preferable for investors to have a market in which to buy and sell shares, even if it was unregulated, rather than have no facility at all.

He wrote that “Unlisted offers investors increased liquidity, transparency and price discovery, but from the NZSA’s perspective such benefits do not offset the increased risk of unwary public participation”.

“Yes, Unlisted market participation may well be riskier for investors than participation on a licensed financial product market but Unlisted provides the opportunity for returns unburdened with the direct and indirect compliance costs associated with a licensed market.”

He went on to say: “Without some risk-taking we will not achieve the necessary development of [the] capital market to unleash the potential for job and wealth creation contained in the business plans of many small to medium-sized New Zealand enterprises.”

The Hawkins/Wallace debate is timely, particularly in light of the rules and regulations regarding crowdfunding in New Zealand and recent international developments.

Crowdfunding is a way of raising finance by asking a large number of individuals to give a small amount each. Equity fundraising is where individuals receive shares in return for their contribution.

Equity crowdfunding platforms, which are usually internet-based, have to be licensed by the FMA but the ongoing rules and regulations are light.

The FMA’s requirements are:

• The crowdfunding platform must display a warning telling investors about the risks involved.

• The platform must have a complaints process and be a member of a dispute resolution scheme.

• It must disclose how its service works, the fees it charges and what checks, if any, have been done on companies raising money.

Crowdfunding regulations in New Zealand are considered to be lighter than elsewhere, as companies can raise up to $2 million without a formal prospectus.

A recent article in the Australian Financial Review, under the heading “Kiwi crowdfunding ‘too easy'”, shines the spotlight on our crowdfunding regulatory structure.

Crowdfunding legislation is expected to be introduced in Australia this year and the managing director of crowdfunder Equitise, Chris Gilbert, says he has lobbied Australian politicians for a tougher regime than New Zealand’s.

Gilbert was quoted as saying: “The thing that scares me is that the process is made too easy in New Zealand. We don’t want to make it too loose with what’s required [in Australia].”

Gilbert’s Equitise has completed two crowdfunding deals in New Zealand, raising $455,300 for Retirement Income Group and $211,000 for TRNZ Digital Travel Guides.

There will be increasing focus on crowdfunding organisations because they will probably set up trading facilities to enable investors to buy and sell shares post issue.

Brad Gilbert told the Australian Financial Review that Equitise was looking to build a secondary market into its platform as soon as possible.

One of the biggest challenges facing law makers is to establish an evenly balanced regulatory regime for stock exchanges and other trading facilities.

This balance has been difficult to achieve. Thirty years ago it was far too light, but now trading platforms, including Unlisted in New Zealand, are saying regulations are too heavy handed and restrictive.

Legislation has been enacted in the United States to enable smaller companies to raise money in a more cost-effective manner.

From Friday, changes to the Jumpstart Our Business Startups Act (JOBS Act) will allow companies to raise new capital under a more light-handed regulatory structure.

The new rules, which apply to companies raising between US$20 million ($28 million) and US$50 million, will remove the costly requirement for new raising to be vetted by local state officials and the need to issue quarterly reports. As well, companies will no longer have to list on recognised stock exchanges.

From Friday, companies will be able to issue new shares to any investors whereas previously they could raise money only from individuals with a net worth of more than US$1 million or annual income of at least US$200,000.

There is no clear winner in the Hawkins/Wallace debate, but the NZSA chairman plays an important role in raising these regulatory issues and Unlisted cannot realistically expect to remain unlicensed.

The best option for New Zealand is that companies of all sizes should be able to raise new capital in a cost-effective way and that there is a range of trading facilities for shareholders to buy and sell securities.

Large companies can raise capital through traditional IPOs and their shares are traded on the NZX.

Small companies can raise new money through crowdfunding but there are no trading platforms for these securities. It is important that appropriate trading platforms are established for these companies if crowdfunding is to continue to attract new money.

The big gap in the market is for companies trying to raise between $1 million and $5 million because a traditional IPO and stock exchange listing are too costly for them.

Unlisted could play an important role as far as these companies are concerned but it is hard to see this occurring until it is licensed.

One thing is certain, the trading platform will not receive any support from John Hawkins and the Shareholders Association until it is willing to be more compliant with New Zealand’s regulatory regime.


Brian Gaynor

Portfolio Manager