Law and technology

Discussions at Foo Camp are under the Chatham House Rule (not to mention FriendDA), so generally what happens at Foo Camp stays at Foo Camp. However, it’s okay to share your own thoughts on a session you ran. So here are my points from a session I co-presented at this year’s Kiwi Foo Camp, “Clearing the path for Employee Ownership”:

• New Zealand companies want to be able to offer employee share ownership. Employee share schemes are an established part of industries (including the IT sector) in other countries. They are recognised as having a number of benefits, such as encouraging employee retention with minimal (if any) cash-flow cost to the firm.
• However, in New Zealand they are not common. New Zealand law does not encourage employee share ownership. In fact, New Zealand law puts a number of obstacles in the way of a small business trying to set up a scheme.
• The law that makes it difficult (or tries to make it difficult) for dodgy finance companies to rip off “mum & dad” investors, the Securities Act 1978, is unfortunately the same law that makes it difficult for small companies to set up employee share schemes.
• The Securities Act 1978 is outdated, complicated, and has been heavily amended over the years into its current messy state. Also, much of the detail is not found in the Act itself, but in myriad regulations with obscure names. This makes it hard for the average business person to do their own research and understand the various rules.
• There is no “safe harbour” provision, with bright-line tests and plain-English requirements, to enable companies to efficiently implement employee share schemes. In fact the opposite is the case.
• There are a number of tax disincentives and complications, for businesses and employee shareholders. Other countries have introduced tax advantages for employee share schemes.
• It would be a simple change for the Government to fix these problems and create an environment where employee share schemes are encouraged. There is a review underway as part of the Capital Markets Taskforce which may result in a new Securities Act being developed, but the review had not looked at incentivising employee share schemes. Furthermore, while the report discusses introducing clearer, broader exemptions in certain areas, given the great recession and the finance company collapses, it is possible there will be a tightening, rather than a loosening, of the overall regulation currently in the Act. What effect this will have on employee share schemes waits to be seen.
• This again reflects the problem of having employee share schemes governed by the same protective, prescriptive rules as actual offers of securities to the public, which are in reality very different.
• A simple solution would be to clearly separate the rules for offers of securities to the public from the rules for employee share schemes, with the latter being significantly streamlined.This could possibly be done in a separate act from any new Securities Act.