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The Financial Markets Authority pushed back on exemptions from continuous disclosure that companies would enjoy on NZX's new growth market, noting its departure from international best practice, while the Treasury questioned whether it was even needed, cabinet papers show.
The stock market operator wants to lure more small-to-medium sized firms to the bourse with less-costly disclosure rules, filling a funding gap for SMEs that was first identified in the 2009 Capital Markets Development Taskforce led by investment banker Rob Cameron. In place of continuous disclosure, companies on the new market would have to release quarterly key operating metrics (KOMs) approved by the FMA and the NZX, and assessed annually by directors.
In July, Commerce Minister Craig Foss granted a ministerial exemption allowing a less-onerous disclosure regime for NZX's new market, while imposing conditions recommended by the FMA including a review of the market after two years and a lower threshold for the release of price-sensitive information, according to the papers, obtained under the Official Information Act.
NZX had proposed a "brightline test" where a variance of at least 20 percent from a company's forecast metrics would trigger an immediate market update, but the FMA had this reduced to 10 percent, noting that "in most contexts in public markets, a movement of 5-10 percent in any significant metric would be considered price sensitive and require disclosure."
Officials also recommended extending rules on insider trading to cover all of a company's employees, as compared to just senior executives in main-board firms, recognising the relatively flat structure of smaller businesses.
NZX's proposed new market aligns with the government's own agenda to deepen New Zealand's capital markets. The Capital Markets Development Taskforce proposed exemptions for markets to coax smaller companies to list and more easily raise capital in the early stages of business, while one goal of the Financial Market Conduct Act, which comes into effect in stages this year, is to promote growth companies and encourage the diversity of financial products.
The proposed new market will provide investors with company research to further promote confidence and liquidity on the new bourse. Listed companies will have to appoint independent directors and a dedicated 'sponsor' to provide an advisory role for the first three years of listing. NZX will also have the right to refuse a listing and companies must show the KOMs chosen do accurately measure the company's performance. New market companies will also be required to graduate to the NZX's main board once they reach a certain size.
In its advice to Foss, the Treasury questioned the taskforce's findings, on concern there was "limited analysis" to show a "gap exists for a stock exchange for SMEs to list on and that compliance costs are a barrier to SMEs listing."
"It is not at all clear that there will be any reduced costs for firms on this proposed market and these may even increase with additional research and market-making features," the Treasury noted. It also echoed FMA's concerns that the proposed market isn't in accordance with international norms, and may weaken domestic and international confidence in New Zealand's financial markets.
The FMA looked at 15 overseas alternative markets aimed at SMEs, including London's AIM, the First North market operating in Nordic countries and Hong Kong's GEM market, and said all operated "with some form of continuous disclosure, making NZX's alternative disclosure regime novel in its approach."
The conditions of the exemption require NZX to design the market to target SMEs, monitor any shift between the main board and the new market, to prevent already listed companies chasing lighter disclosure, and ensure retail investors understand the risk of lower disclosure when they first invest. To underline its different risk profile from the NZX's main markets, the new market will have its own website, look and feel.
The FMA is now assessing the new market's rules to ensure they will support the alternative disclosure requirements, before NZX can launch the new board. The exemption will apply under the Securities Act until December, when the Financial Markets Conduct Act comes into effect. The cabinet has agreed to enact regulations to allow the exemption to continue under the new law.