Four Questions When Raising Start-up Investment Funds from Family and Friends in New Zealand 14 Jul 2017 Post by: Steven Moe , Kris Morrison
If you have a start up one of the first things you need to find is money to fund the research and development of your new idea.
Rather than turning to a bank sometimes founders look instead to their friends and family for financial contributions. What are some of the key things to think about if you want to go down that route and seek contributions from them?
1. Will This Ruin the Relationship?
The first point is not a legal consideration as such - more of a home grown truth: money has a unique way of affecting relationships (often in a bad way). You may think your relationships are above this and of course there is 100% certainty your new idea will be the next Facebook. But if whatever your friend or family member invested was lost how would this impact that relationship?
If you can foresee that there could be hard feelings and resentment then you need to seriously weigh up if it is worth risking that relationship.
2. What Contribution Will They Make?
Second, think about what form the contribution will take. Will you be seeking loans from people with a fixed end date and payment of interest? Or do you actually want to bring people on board as shareholders in the company and involve them in the future success that you will hopefully enjoy?
Most people who are approached will realise it is a risky business but want more upside than just some interest on a loan. What will fit best for you and the future of your company?
3. How Involved Will they Be?
Third, consider what level of say each person will have in the decision making for the company. How involved will these people be in the decision making or are they simply silent investors with limited rights – these points should be clearly agreed and documented. This is usually done in a shareholders’ agreement.
4. Do I need to comply with the Financial Markets Conduct Act?
Fourth, understand the rules relating to fundraising and what exclusions might apply – some of these are outlined below. The Financial Markets Conduct Act 2013 is incredibly long and detailed but the basic policy approach is that you will be caught by it and need to provide disclosure of information to investors unless there is an exemption for what you want to do.
What are the key exclusions that might apply?
Some of the most relevant exemptions in the context being discussed in this article would be:
Close business associates
Offers to people who already know the business are subject to an exclusion because they would be unlikely to need full disclosure before making an informed decision about whether to invest or not. They need to be able to assess the merits of the offer and obtain information from the person making the offer.
Whether a person actually is a close business associate will need to be assessed on the facts but the term is defined to include situations such as the person being a director or senior manager of the company, holding 5% or more of the votes of the company, is a spouse, partner or de facto partner of a person who is a close business associate (these are just some of the examples to show the nature of the relationships caught).
Along similar lines to the last exclusion, offers can be made to relatives. They are defined to include the following: A spouse, civil union partner, de facto partner, grandparent, parent, child, grandchild, brother, sister, nephew, niece, uncle, aunt, first cousin. The list also includes spouses, partners and de facto partners of those people listed as well as whether or not they result from a step relationship or not. Also included are trustees of a trust where one of the above is a beneficiary.
We had an interesting one recently where a person said that their Godfather wanted to invest – there was a close relationship but they were not a “relative” under this definition, so you need to objectively think about things each time and not just make assumptions that someone is a relative as they need to fit the definition.
A small offer must be for debt or equity securities and for up to a maximum of 20 investors and raising a maximum of $2 million in any 12 month period.
Such offers need to be a “personal offer” which can only be made to certain individuals, such as those who are likely to be interested in the offer (eg some previous connection and interest known), a person with a high annual gross income (at least $200k in each of last two income years) or someone who is controlled by such a person.
Some other key points:
- Small offers also have an advertising prohibition so it is important to check what you will do to get the word out and make sure it is not going to breach that requirement.
- Notification is required of certain information about the offer to the FMA within one month of the end of the relevant accounting period that the small offer was made.
- A warning needs to go on the front of documents which looks like this:
You are being offered [name of financial product type (for example, ordinary shares)] in [name of issuer].
New Zealand law normally requires people who offer financial products to give information to investors before they invest. This requires those offering financial products to have disclosed information that is important for investors to make an informed decision.
The usual rules do not apply to this offer because it is a small offer. As a result, you may not be given all the information usually required. You will also have fewer other legal protections for this investment.
Ask questions, read all documents carefully, and seek independent financial advice before committing yourself.”
This article has been focused on investments by family and friends so has not looked at every possible exclusion. In fact the above are the ones that we see most commonly being used in most situations. However, for more detail on other exclusions have a look at the FMA site here.
We often provide advice to people around the appropriate fundraising strategy for their start-up and from experience every situation is unique. This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. If you would like to discuss the options and work out what might fit best for you then drop us a line (email@example.com or firstname.lastname@example.org) and we would be happy to discuss.
Copyright © Parry Field Lawyers 2017. Reproduction is permitted with prior approval and credit being given back to the source.