New Zealand

Author: | Published: 4 Jan 2001
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Small and medium-sized enterprises (SMEs) are the backbone of the New Zealand economy. The development of SMEs has, in the past, been constrained by a lack of capital necessary for expansion. External sources of funding for start-up, or expansion capital have typically been restricted to bank borrowing and a limited number of government schemes.

The 1970s saw the establishment of the government-run Development Finance Corporation (DFC), which primarily financed new export-oriented businesses, as the main source of development funding in New Zealand. In the 1980s the government set up a small business venture capital fund aimed at companies with export potential. This failed, however, to show positive returns. In 1985, following several venture capital company formations, the New Zealand Venture Capital Association (NZVCA) was set up. By 1987, 14 members and 22 associate members were listed. However, the 1987 share market crash led to the disappearance of virtually all of these venture capital companies.

Traditionally, New Zealand had a small and relatively unsophisticated capital market with limited sources of debt and equity funding. It had previously suffered from a lack of financial expertise and a competitive specialized capital market enjoyed by larger, more sophisticated economies. However, although the New Zealand market is limited in size, there are now very positive changes occurring in the venture capital arena. It is an exciting time for SMEs and entrepreneurial businesses in New Zealand as many more funds are becoming available and high-quality financial expertise is increasingly accessible.

More funds lead to success stories

The combination of a government commitment to venture capital, with several initiatives in progress, and the availability of an increasing number of venture capital sources, has meant there are numerous success stories to fuel the optimism. One well-known example is the computer animation of the America's Cup yacht racing for TV viewers. This is a leading example of the type of New Zealand-created concepts which are emerging.

Government initiatives

New Zealand's deputy prime minister, Jim Anderton, has stated: "Our research has indicated that there is no shortage of good ideas, nor is there any great shortage of venture capital. One of the hurdles is how to develop the idea and proposed business plan to the point where the financial community is comfortable with the proposals."

The New Zealand government is showing a clear commitment to helping innovative businesses, and the overall strategy for economic and regional development is underpinned by various new initiatives including an e-commerce strategy.

The enterprise awards scheme

This scheme gives financial support to innovative entrepreneurs and SMEs, helping them to test and develop concepts with strong growth potential. The awards cover a wide range of activities such as feasibility studies, prototype design and testing, through to protection of intellectual property and human resource development.

Regional partnerships programme

This programme aims to enhance regional economies, and focuses on financially supporting different regions to attract major businesses to set up in their areas, and promote local businesses.

Investment ready scheme

This programme helps innovative entrepreneurs and SMEs to raise start-up or expansion capital. It provides training and information seminars and focused workshops, to help with business assessment, deal-making and gives accessible professional expertise to SMEs that demonstrate concepts with growth potential.

E-commerce-related legislation

Having recognized the importance of e-commerce, the New Zealand government has adopted a strategy with a view to making New Zealand world class in embracing e-commerce for competitive advantage. One of the government's priorities is to implement various legislation to accommodate the e-environment. The central focus of this is the Electronic Transactions Bill (which has yet to become law). The main objectives of the bill are to:

  • facilitate the use of electronic technology;
  • remove barriers to carrying out electronic transactions; and
  • allow statutory requirements about form (in writing, signed, posting) to be met through the implementation of certain conditions for electronic transactions.

The New Zealand government has also stated its intention to review outdated legal frameworks in light of the use of new technology.

Private equity

New Zealand's potential for growth and development has been recognized by private equity funders. This recognition has led to the establishment of numerous venture capital and private equity funds. New Zealand has also seen a commitment from large corporate funds, such as Telecom and Carter Holt Harvey, which in the last year have established corporate venture funds. The market for development capital has benefited from the establishment of numerous medium and smaller-sized funds, which are now available to innovative entrepreneurs and SMEs.

Legal aspects for investors/ investees in New Zealand

When wanting to set up a business, source funds, or invest in New Zealand, it is important to consider the implications of the following legal regimes:

Foreign investment

Overseas investment in New Zealand is supervised by the Overseas Investment Commission. The Commission's consent is usually required for any non-resident planning to acquire New Zealand assets having a value exceeding NZ$50 million, land exceeding five hectares, or for certain other investments in industries which have been classified as 'sensitive'.

Securities laws

Fund-raising from the public in New Zealand, through a public offering of securities, is regulated by a disclosure regime governed by the Securities Act 1978. The definition of an offer of securities to the public is very wide, catching almost all primary offers.

The Securities Act requires that offers of securities to the public in New Zealand must be the subject of a registered prospectus, and that before subscription, investors must receive an investment statement.

Unlike a number of comparable overseas jurisdictions, the level of disclosure required for a registered prospectus and investment statement is prescribed by regulation. This requires a checklist approach to the drafting of disclosure documents, but promotes uniform levels of disclosure and comparisons between offers of investment products.

Takeovers code

With effect from July 1 2001, the existing patchwork of regulation governing company takeovers will be replaced by a new Takeovers Code. The Code will only apply to companies which are either listed on a New Zealand stock exchange, or have more than 50 shareholders and NZ$20 million in assets.

The Code's objectives are to legislate for equal treatment for all shareholders in the event of a takeover offer, and to do away with a number of the identified defects in the present regulatory framework.

Competition regime

The Commerce Act 1986 is the primary legislative tool used to promote competition in markets within New Zealand. The Act contains behavioural prohibitions, such as making certain restrictive trade practices illegal, and also regulates business acquisitions which would result in the acquisition or strengthening of a dominant position in the market. Changes have been proposed for the business acquisition provisions to replace the dominance test with the Australian test of substantially lessening competition.

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