The author is the Head of Regulation at Catalist Public Market. All opinions expressed within this article are solely the author’s and do not reflect the opinions, beliefs or positions of Catalist.
From an NZSA perspective, this is a topic we are interested in simply as a means of striking a better balance between investor protection and issuer regulation when companies with retail shareholders consider de-listing from the NZX. The recent de-listings of Just Life Group and Geneva Finance, in favour of the unlicensed Unlisted (USX) exchange highlight the relevance for investors of their directors considering a licensed alternative.
New Zealand has two licensed public stock exchanges: NZX and Catalist. They share regulatory similarities for the benefit of public investors and in promoting an informed and confident participation in the financial markets. However, they have their differences too, which recognise that NZX is the home to New Zealand’s largest and mature businesses, while Catalist is a share exchange readily accessible to more growth companies.
We share 10 similarities and differences from corporate governance, legal and regulatory aspects (relating to issuers) to help understand the two public markets. Understanding these differences show that the two exchanges are complementary to developing robust financial markets in New Zealand. More on this later.
- Independent directors and other director requirements: Issuers on both exchanges need locally- resident, independent directors. In the case of NZX issuers, they need a minimum of 3 directors on the board, with at least 2 independent directors and 2 directors ordinarily resident in New Zealand. The issuers must also have an audit committee, with a majority of independent directors. Catalist issuers require at least 1 independent director and at least 1 director ordinarily resident in New Zealand.
- Corporate governance framework: NZX listed issuers must meet several corporate governance requirements. These include putting in place various board committees (mainly an audit committee) and making annual disclosures to shareholders, such as on diversity, equity and inclusion mix of the board and officers. Some of these requirements are framed as recommendations under the NZX Corporate Governance Code (such as recommendation 2.8 that independent directors make up a majority of the board). The issuers can elect not to comply with the recommendation, but must explain its reasons for non-compliance in their annual reports.
Catalist issuers are not subject to similar corporate governance obligations, and are instead encouraged to report on their corporate governance practices in line with the recommendations in the FMA’s Corporate Governance Handbook. - Market cap limits and spread: To get listed, issuers on both exchanges have market capitalisation thresholds. On the NZX, an issuer must have a minimum market capitalisation of $10 million (although for practical purposes, an NZX issuer should aim for a much bigger capitalisation). There is no upper limit on the market cap and, once listed, there is no ongoing requirement to maintain a minimum market capitalisation. An NZX issuer must also meet a minimum spread requirement on listing, by having 100 or more non-affiliated holders who each have a minimum holding of $1,000 or more, and who together hold no less than 20% of the relevant class of securities. Like the market cap requirement, there is no ongoing requirement to meet the spread requirement after the initial listing.
Catalist issuers do not have a minimum market capitalisation requirement, which is designed to encourage more early-stage companies to list. However, there is an upper limit. An issuer that applies to get listed on Catalist must not have more than $60 million in initial market capitalisation. After listing, if an issuer goes beyond the $100 million market capitalisation, it kickstarts a 2-year transition obligation on the issuer and Catalist, to consider alternative listing for that issuer on a more traditional stock exchange, including NZX, or other non-listed options. There is no minimum spread requirement. - Initial raise amount: Issuers planning to get listed on NZX do not have any regulatory restrictions on how much capital they can raise in an initial public offering (IPO), if they have prepared a Product Disclosure Statement (PDS) and completed a register entry with additional information. Catalist issuers, on the other hand, are not required to prepare a PDS or a register entry on their IPOs, and can rely on a simplified “investment memorandum” to raise capital. However, in this situation they must not raise more than $2 million from retail investors. There is no limit on how much capital may be raised from wholesale investors.
- Subsequent raise amounts: Following IPOs on both markets, regulatory relief is available for issuers on either market to raise additional capital. For NZX-issuers, assuming they can meet the cleansing criteria under clause 19 of the Schedule 1 of the Financial Markets Conduct Act 2013 (FMCA), they can raise further capital by issuing the same class of quoted financial products from the retail (and wholesale) investors without needing to prepare a new product disclosure statement (PDS). Catalist issuers are similarly able to raise up to $20 million from the retail investors every 12 months (and as much as they like from wholesale investors), without the need to prepare a PDS.
- Material information disclosure on listing: Both markets use a similar definition of what constitutes “material information” for investors. When issuers are listed on their respective markets, they must ensure that investors are given all material information. NZX-listed issuers must prepare a PDS and complete a register entry (which must contain all material information not otherwise disclosed in the PDS). These must provide all prescribed information about the issuer to the public. For Catalist-issuers, all material information concerning the issuer must be disclosed in an investment memorandum and disclosed via Catalist’s online marketplace webpage. There is no other prescribed information such as a PDS or a register entry.
- Material information after listing: Following the initial listing, investors on both markets have the legal protection of ongoing disclosure of material information. For NZX-listed issuers, they must keep the market continuously updated during trading hours of all material information concerning the issuers or the relevant financial products (‘continuous disclosure’).
For Catalist-issuers, they must disclose all material information immediately prior to, and during, their periodic auctions. There is no requirement to keep the market informed at other times. So, the frequency of disclosure of material information will depend on how often periodic auctions occur for an issuer, which are typically monthly, quarterly or semi-annually. - Directors, officers and substantial shareholder disclosures: Directors and senior managers of issuers on both markets are subject to the same disclosure of interest requirements under Part 5 of the FMCA. Likewise, substantial product holders (namely, people who have interest in 5% or more of financial products in an issuer) have similar disclosure requirements relating to their holdings. These are when they start to have a 5% or more interest, on each 1% movement in their interest, and when they cease to have substantial product holding. The difference is timing of disclosures, with trading occurring on a continuous basis for NZX-listed issuers and periodically for Catalist-issuers.
- Insider trading and market manipulation rules apply: Similar to point 8, insider trading and market manipulation rules under Part 5 of the FMCA apply to both financial markets, for the benefit of the investors. Both markets are required to have systems and controls to minimise the risks and monitor for such activity.
- Financial reporting obligations: Issuers on both exchanges must prepare financial statements, have those statements audited and prepare annual reports. For NZX-issuers, they must also prepare and report to shareholders on their half-year results, lodge their annual financial statements publicly, and must publish financial information as a continuous disclosure to the market if that information is deemed to be material information.
Catalist-issuers do not have a half-year reporting obligation. However, they must disclose periodic financial information immediately prior to and during their periodic auctions, if that financial information would constitute material information. Catalist issuers are also not deemed to be “FMC reporting entities”, and therefore are not required to publicly lodge their financial statements nor engage the more costly “FMA auditor”, which are auditors overseen by the FMA rather than by the accounting industry bodies. This does not negate Catalist issuers’ obligation to prepare and send out to shareholders the audited financial statements.
A Complementary Relationship?
The author hopes that these points of similarities and differences demonstrate the complementary nature of the two exchanges. Catalist can be an ideal nurturing ground for New Zealand’s growth companies, while also introducing them to basic corporate governance and public market disciplines. After sufficient growth, these companies can then migrate to a more mature stock exchange; for the benefit of New Zealand’s public capital pool, ideally the NZX. It would be desirable for home-grown companies to continue to be able to access local as well as international capital and to help grow New Zealand’s financial markets. Any migration to a more mature exchange should be an easier transition given the public market environment that the Catalist issuers would have been operating under, compared to a direct transition from a private company status.
On the other hand, NZX issuers that have lost significant market capitalisation and cannot justify the ongoing compliance requirements associated with their listings, could consider Catalist. Unlike a complete de-listing or a move to other exempt markets that lack investor protections, Catalist requires ongoing public market disciplines for the benefit of remaining retail investors. Retail investors in this situation should feel less “burned” from their experience investing in a delisted NZX company, and hopefully continue to support listed companies in all spectra and not just skew towards the larger issuers.
NZX and Catalist are demonstrably complementary of each other. We hope to see more cross-exchange activities in the future, and for issuers take advantage of the two exchanges’ complementary features.
An earlier article from Moneyhub is also helpful in explaining two key commercial differences between the exchanges, relating to the continuous versus period auction trading markets and the requirement for broker trading.
Joshua Woo
Disclosure: The author is the Head of Regulation at Catalist Public Market. All opinions expressed within this article are solely the author’s and do not reflect the opinions, beliefs or positions of Catalist.
Note that NZSA policies apply equally to issuers on all exchanges, including NZX, Catsalist, Unlisted (USX) and ASX. While we recognise nuance in the context applicable to individual issuers, we are exchange-agnostic in our assessments.