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New Zealand

New capital market initiative launched

The New Capital Market (NCM) is an initiative by the New Zealand Stock Exchange designed primarily to assist small and medium-sized companies in raising capital for new growth-oriented businesses. It is envisaged that strong incentives – in particular simplified disclosure and reduced listing and brokerage fees – will encourage companies to enter the NCM and eventually graduate to full listing on the main board of the stock exchange.

NCM companies are initially set up as shell companies with their sole asset being cash of between NZ$200,000 ($90,980) and NZ$600,000, raised from directors and officers. An application to list on the NCM is submitted to the stock exchange and must be accompanied by a standard form offering document that will be used to offer shares to the New Zealand public. A NCM company must raise between NZ$400,000 and NZ$600,000 from the initial public offer (this amount will be subject to a NZ$1,000,000 cap on the amount of capital the company can have at the time of listing). When the public offer closes, the NCM company will list if it meets the spread requirement that at least 300 public shareholders hold at least 25% of the issued capital. Each of these investors must hold at least 1,000 shares, which are issued at 50 cents each. The maximum number of shares that can be issued to any one public investor is 2% of the total number issued to the public. This all means that the company will have a large spread of shareholders from which to launch future rights issues to raise further capital.

NCM companies cannot start any form of business prior to listing. Essentially, they will need to rely on the quality of their directors and the reputation of their organizing broker to promote themselves to investors.

Once it has listed, an NCM company's shares will be available for trading through the stock exchange's FASTER trading system. Further, the company has 18 months to undertake a "Key Transaction" worth more than NZ$1,000,000.

The Key Transaction is subject to review by the stock exchange and must be an acquisition of assets (other than cash), or an acquisition or amalgamation with another business situated in New Zealand and/or Australia. The NCM issuer must be the amalgamated company (or continuing entity). Before undertaking a Key Transaction, a NCM company must distribute a valuation report to shareholders for their consideration before meeting to vote on the proposal. Minority shareholders (being those other than the initial directors and certain others) are given a separate right of approval. Other required resolutions include major transaction approval.

An NCM company's offering documents cannot promote any envisaged Key Transaction (other than identify a transaction as a potential Key Transaction).

Once the Key Transaction is completed, and subject to certain criteria, the company may elect to be fully listed on the stock exchange. Alternatively, the stock exchange may, at its discretion, approve an application by a NCM company to no longer be listed as a NCM company. If, however, a NCM company's average end-of-day market capitalization over a continuous period of 20 consecutive business days has exceeded NZ$10,000,000, or the issued share capital exceeds NZ$10,000,000, the NCM company will be deemed to be listed on the stock exchange's main board and will be subject to the listing rules governing issuers listed on that board.

The key aims of the NCM are to create opportunities for investors and people with ideas and initiative, lower the costs of access to equity capital and the public securities market, and share and spread the risks and gains from new business development. It should be pointed out, however, that investing in the NCM is highly speculative.

NCM companies will provide an easier, low-cost listing alternative to back door listings on the stock exchange. However, despite the lower fees of NCM companies, companies wishing to list straight away on the main board will still benefit from a back door listing on the stock exchange.

The stock exchange has established several safeguards to protect a NCM company's shareholders from abuse by promoters while that company is listed on the NCM. These include the prevention of dividend payments or other distributions, payment of directors' fees, and provision of financial assistance to buy the company's securities.

The NCM regime looks likely to present exciting opportunities to many small and medium-sized businesses. The key ingredients to its success will be the attitude of those business people who seek to exploit the opportunities, and the increase in investor faith from early NCM companies that achieve outstanding success.

James Aitken and Hamish Walker

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