BRIEFING. Review of Unlisted market

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1 This document has been proactively released. Redactions made to the document have been made consistent with the provisions of the Official Information Act BRIEFING Review of Unlisted market Date: 23 February 2018 Priority: Medium Security classification: In Confidence Tracking number: Action sought Hon Kris Faafoi Minister of Commerce and Consumer Affairs Action sought Agree that no changes to Unlisted s exemption conditions are required at present. Send the attached letter to Bevan Wallace and David Wallace outlining the outcome of the review. Deadline 2 March 2018 Contact for telephone discussion (if required) Name Position Telephone 1st contact Sharon Corbett Alasdair Gardiner Manager, Financial Markets Policy Policy Advisor, Financial Markets Policy The following departments/agencies have been consulted (if required) Financial Markets Authority, Treasury Minister s office to complete: Approved Declined Noted Needs change Seen Overtaken by Events See Minister s Notes Withdrawn Comments: In Confidence 0

2 BRIEFING Review of Unlisted market Date: 23 February 2018 Priority: Medium Security classification: In Confidence Tracking number: Purpose To inform you about the Unlisted market, advise you of our recent review of its operation under an exemption from Part 5 of the Financial Markets Conduct Act, and seek agreement from you that no changes to its exemption conditions are required. Executive summary 1. The Unlisted Securities Exchange (Unlisted) is a share trading platform operated by Efficient Market Services Limited (EMS). 2. In 2015, the then Minister of Commerce and Consumer Affairs granted Unlisted an exemption under the Financial Markets Conduct Act to enable it to operate as an unlicensed market. This means that Unlisted is subject to lower regulatory standards than licensed markets such as the New Zealand Stock Exchange (NZX) Main Board. To date, Unlisted is the only market to have obtained such an exemption. 3. Unlisted provides an alternative share trading solution to companies for which licensed markets are unsuitable. Unlisted enables these companies (primarily small and mediumsized businesses) to trade shares and raise capital more cheaply, while still providing some of the benefits of a publicly listed market. It also offers investors an alternative investment opportunity. This enables increased participation in capital markets overall. 4. To mitigate the risks associated with Unlisted s unlicensed status, conditions were attached to the exemption. The conditions require Unlisted to make its regulatory status clear to investors and ensure officials are kept informed of developments in the market. 5. A review of Unlisted s operation two years following the granting of the exemption was also scheduled. This review was to assess whether the benefits and risks associated with Unlisted have changed, and therefore whether the conditions of the exemption should be changed. 6. The Ministry of Business, Innovation and Employment (in consultation with the Financial Markets Authority) has now completed the review of the Unlisted market. The review takes into account market data and the views of relevant stakeholders. 7. In summary, we consider that Unlisted continues to meet the original objectives of its exemption, the benefits associated with Unlisted still apply today, and the risks of the Unlisted market have not increased significantly since the exemption was granted. 8. Therefore, we propose no changes to the exemption conditions at present. However, we will keep a close watch on Unlisted to ensure the risks associated with it do not increase in the future In Confidence 1

3 Recommended action The Ministry of Business, Innovation and Employment recommends that you: a Note that MBIE has reviewed the operation of the Unlisted market under an exemption from the FMC Act, and considers that the conditions of the exemption remain appropriate at present. Noted b Note that MBIE will continue monitoring the Unlisted market and any changes to the risks associated with it. Noted c Agree that no changes to Unlisted s exemption conditions are required at present. Agree / Disagree d Sign and send the attached letter to EMS Chairman Bevan Wallace and Managing Director David Wallace outlining the outcome of the review. Sent e Agree to MBIE publishing this briefing paper on its website. Agree / Disagree Sharon Corbett Manager, Financial Markets Policy 23 February 2018 Hon Kris Faafoi Minister of Commerce and Consumer Affairs... /... / In Confidence 2

4 Background 9. Unlisted is a financial product market (share trading platform or securities exchange) operated by Efficient Market Services Limited (EMS). It has been trading since 2004 and represents a small part of New Zealand s capital markets. The market capitalisation (total value) of companies listed on Unlisted is approximately $2.7 billion, about 2% of the $125 billion market capitalisation of the NZX Main Board. 10. Unlisted provides an alternative marketplace which enables investors to trade shares in primarily small and medium-sized companies which would not publicly list on the fully regulated NZX Main Board. Unlisted enables these companies to trade shares and raise capital more cheaply while still providing the benefits of a publicly listed market, such as price transparency and liquidity. 11. When the Financial Markets Conduct Act 2013 (FMC Act) came into force in December 2015, Cabinet granted Unlisted an exemption under the FMC Act. Unlisted is the only market to have obtained such an exemption. The exemption meant that Unlisted did not have to obtain a licence to operate and is subject to lower regulatory requirements than licensed markets such as the NZX Main Board. Cabinet imposed conditions on the exemption designed to mitigate the risks associated with this. 12. When the exemption was granted, Cabinet directed that a review of the conditions of the Unlisted exemption be undertaken within two years of 1 December MBIE has now completed a review. The purpose of the review is to assess changes to the benefits and risks of Unlisted since the exemption was granted. An increase in risks could be grounds for imposing additional exemption conditions on the operation of Unlisted. 13. This briefing provides context regarding Unlisted and its exemption, and outlines the findings of our review. In summary, we propose no changes to the exemption conditions now, but will keep a close watch on the market to ensure risks associated with it do not increase. The Financial Markets Authority (FMA) and the Treasury have been consulted on this briefing and agree with the recommendations. Context The FMC Act allows for a regulatory spectrum for financial product markets 14. Financial product markets exist to efficiently allocate capital to companies and provide an opportunity for investors to earn a return commensurate with the risk involved in their investment. 15. The FMC Act is a key piece of legislation which governs New Zealand s financial sector. The overall purposes of the FMC Act are to ensure that New Zealand s financial markets are fair, efficient and transparent; and promote confident and informed participation in them by consumers, investors and issuers (companies issuing securities). 16. An additional purpose of the FMC Act (with regards to its regulation of financial product markets) is to promote innovation and flexibility in financial markets. The FMC Act recognises that one size does not fit all, and aims to encourage a diversity of financial product markets to take account of the differing needs and objectives of issuers and investors. 17. The FMC Act gives effect to this purpose by allowing a regulatory spectrum in the financial markets (illustrated in Annex 2). This includes: a. Licensed markets, such as the NZX Main Board (where shares in most larger New Zealand companies are traded) which is subject to the full regulatory requirements of the FMC Act, and the NXT market, which is subject to most of the requirements of the FMC Act but has a less onerous disclosure regime intended to facilitate the In Confidence 3

5 participation of small and medium-sized enterprises (note that the NXT market will soon be disestablished). b. Crowd-funding platforms (services which enable small, growth-orientated companies to raise capital from the public). Issuers using crowd-funding have less onerous disclosure requirements provided they raise less than $2 million in a 12 month period and use a licensed platform. c. Exempt markets (also known as unlicensed markets), which are subject to most of the regulatory requirements of the FMC Act but are exempt from the licensing requirements and investor protections of Part 5 of the FMC Act. d. Over-the-counter trading (which involves issuers managing trading in their own securities without using a marketplace) and private markets (which may be operated by third parties on behalf of issuers). These have specific statutory exemptions in the FMC Act. 18. The FMC Act provides the Minister of Commerce and Consumer Affairs with the power to issue regulations exempting a financial product market from being licenced. Financial product markets may also be automatically exempt if they fall below a size threshold or are limited to wholesale investors (expert, often institutional or high net worth investors). Unlisted operates under an exemption from the licencing requirements of the FMC Act 19. When the FMC Act regime came into force in December 2015, Unlisted was required to either obtain a licence from the FMA or apply for an exemption from the licensing requirements (Part 5 of the FMC Act) to continue operating. 20. Unlisted subsequently applied for and was granted an exemption. Unlisted was the first (and so far only) market to apply to the Minister of Commerce and Consumer Affairs for an exemption. While exemptions are granted on a case-by-case basis, Cabinet was aware of the precedent effect which means that the conditions attached to Unlisted s exemption set a benchmark for conditions under which future unlicensed markets may operate. However, so far no other markets have applied for an exemption. The exemption means that Unlisted has a lower level of investor protection than licenced markets 21. The regulatory requirements and prohibitions for licensed financial product markets under Part 5 do not apply to Unlisted or its issuers, meaning investors on the Unlisted market have fewer protections. 22. Part 5 of the FMC Act: prohibits insider trading on licensed markets prohibits market manipulation on licensed markets requires issuers to comply with continuous disclosure requirements of a licensed market requires substantial product holders in listed issuers to disclose their interests requires directors and senior managers of a listed issuer to disclose their interests and dealings in quoted financial products of, or connected to, the issuer requires licensed operators to have market rules approved by the FMA, provide compliance reports, and submit to reviews of whether they are meeting their obligations In Confidence 4

6 23. The fair dealing requirements of the FMC Act still apply to Unlisted and those participating in the market. These requirements prohibit misleading or deceptive conduct, the making of false or misleading representations, and the making of unsubstantiated representations. 24. Unlisted has market rules applying to brokers and issuers using the market. The market rules require issuers to meet a basic level of disclosure consistent with Unlisted s unlicensed status, and note that issuers must still meet the reporting and disclosure obligations of the Companies Act, Financial Reporting Act and Takeovers Code. Benefits of Unlisted and rationale for granting exemption 25. Cabinet considered, at the time of granting the exemption, that the benefits of allowing Unlisted to operate as an unlicensed market outweighed the risks. The key benefits of Unlisted are outlined below. Unlisted meets the needs of smaller issuers, encouraging increased participation in capital markets 26. Providing markets with varying degrees of regulation allows issuers to choose the best balance between the costs of highly regulated markets (higher compliance costs and fees) and benefits (access to cheaper capital and deeper investor pools). 27. The exemption allows Unlisted to meet the share trading and capital raising needs of some issuers for which the cost of listing on a licensed market is untenable. Unlisted provides these issuers with a public trading facility and the liquidity, price transparency and visibility associated with this, without the compliance costs of a licensed market. This should encourage more companies and investors to participate in capital markets overall. The exemption aligns with the purposes of the FMC Act and a recommendation by the Capital Markets Development Taskforce 28. The exemption supports the FMC Act s purpose to promote innovation and flexibility in the financial markets. It also aligns with a recommendation made by the Capital Markets Development Taskforce to support firms to grow by providing an additional pathway between private and public equity funding. Unlisted provides increased liquidity and information for issuers and investors than the likely counterfactual 29. If Unlisted ceased to operate, it is likely that many Unlisted issuers would resort to over-thecounter trading or private markets. This would mean investors would have less information about issuers on which to make informed investment decisions. 30. Unlisted provides issuer profiles with basic information about each issuer. This information includes historical share price information, summary financial statements from the past five financial years, key financial ratios, significant shareholders and directors. This information is unlikely to be easily available for issuers using private markets or over-the-counter trading. 31. Compared to these alternatives, advantages of listing on Unlisted for issuers include exposure to a wider pool of investors and increased liquidity. Liquidity refers to how easily assets, like shares, can be bought or sold. Increased liquidity benefits investors as well as issuers as it reduces the risk of a single trade causing a large fluctuation in the share price. Risks associated with Unlisted s unlicensed status 32. As an unlicensed market Unlisted poses a number of potential risks, outlined below. Risk of insider trading or market manipulation 33. There is a greater risk of insider trading on unlicensed markets than licensed markets as there is no requirement for companies to disclose material information on a regular basis and such misconduct is not specifically prohibited or monitored In Confidence 5

7 Risk to investor confidence 34. There is a risk that a high-profile case of misconduct on an unlicensed market could diminish investor confidence in the market, which could then affect investor confidence in the wider New Zealand capital markets. Risk to ill-informed investors 35. If investors do not understand the regulatory status of unlicensed markets, they may not factor the additional risk into their investment decisions, exposing themselves to more risk than they intend to bear. Conditions attached to the exemption mitigate the risks of Unlisted s unlicensed status 36. When the exemption was granted, Cabinet attached conditions designed to mitigate the risks identified above. The conditions mitigate the risks associated with Unlisted by: a. Making the regulatory status of the market clear to investors, by requiring a prominent warning message to be displayed on the Unlisted website, and investors to sign an acknowledgement that they understand the regulatory status of the market before investing for the first time on Unlisted. This reduces the risk of investor confusion and the risk of ill-informed investors failing to factor the risks of unlicensed markets into their investment decisions. b. Ensuring that Unlisted remains a relatively small component of New Zealand s capital markets, by requiring this review be undertaken two years from the granting of the exemption, thereby minimising the risk of a decline in investor confidence on Unlisted affecting the broader capital markets. c. Ensuring that the FMA and MBIE are kept up to date about developments in the market. Unlisted is required to submit an annual report to the Minister of Commerce and Consumer Affairs. Unlisted s most recent annual report is attached as Annex 4. Unlisted is also required to inform the FMA of enforcement action being taken against issuers. These reporting requirements allow officials to identify any factors which may increase the risks associated with the market. 37. A full list of Unlisted s exemption conditions is attached as Annex 5. The review of Unlisted s exemption conditions The review assessed changes in risks and benefits of Unlisted since the exemption was granted and whether a response is needed 38. The review was limited in scope to the conditions of the exemption and whether they are still working effectively. The broader question of whether Unlisted should be exempt from the licensing requirements of the FMC Act was not the focus of this review. 39. To determine whether the conditions remain appropriate we assessed Unlisted s operation against the original policy objectives of the exemption, which were to: a. minimise the risks associated with unlicensed markets, and their impact on the confidence and reputation of New Zealand s capital markets b. ensure that investors receive timely, accurate and understandable information about the market and issuers to assist them to make investment decisions c. ensure that New Zealand s capital markets provide a spectrum of capital sources and investment opportunities to respond to the different needs of issuers and investors d. avoid or minimise unnecessary compliance costs for the market, issuers and investors In Confidence 6

8 40. We carried out targeted consultation with a number of stakeholders to inform our analysis of the Unlisted market. These included: a. issuers which have listed on Unlisted since the exemption was granted, to understand their reason for listing on Unlisted and their level of satisfaction with the service provided (issuers who listed on Unlisted prior to the exemption being granted were consulted when Unlisted made its exemption application in 2015) b. a broker, to understand what changes they have observed in the market and the investor population since the exemption was granted c. the New Zealand Shareholders Association, to understand how investors perceive Unlisted and whether it considers there to have been any changes in risks associated with Unlisted which impact investors d. Unlisted, to understand developments in the market since the exemption was granted. 41. Market data from Unlisted s annual reports and information on the Unlisted website also informed the review. One issuer shared with us a board paper to help us understand their business decision for listing on Unlisted. The FMA was consulted throughout the review. Analysis and stakeholder views from the review Overall conclusions 42. We consider that the exemption is meeting its objectives, the benefits of the exemption when granted still apply today, and the risks of the Unlisted market have not increased significantly since the exemption was granted. 43. However, the listing of Zespri (Unlisted s largest issuer) underscores the need to continually monitor Unlisted to ensure that it remains a niche financial market. We (along with the FMA) recommend that MBIE continues to monitor Unlisted s growth through its annual reporting. If Unlisted begins to attract other larger issuers or the nature of investors changes, this may justify imposing additional conditions on the exemption. Stakeholder feedback 44. Feedback from stakeholders on Unlisted was mostly positive. Issuers spoken to were supportive of Unlisted and told us they believe it delivers on their needs while also filling a gap in New Zealand s capital markets. The broker Craigs Investment Partners considers that Unlisted s current exemption conditions are sufficient. Two stakeholders (the New Zealand Shareholders Association and NZX) oppose Unlisted s continued operation as an unlicensed market. These stakeholders consider that the risks associated with Unlisted have increased since the exemption was granted. We disagree with their assessment for the reasons outlined in paragraphs 46 to Below is our analysis of Unlisted against the original policy objectives of the exemption, including arguments raised by stakeholders in consultation and our assessment of their views. Risks associated with Unlisted have not increased significantly and Unlisted should be closely monitored to ensure risks do not increase in future Market size and nature of Unlisted issuers 46. The exemption was granted on the premise that Unlisted remains a small-scale, niche market suiting small or medium-sized issuers. If Unlisted increased significantly in scale, attracted issuers away from licensed markets, or a trend of larger issuers listing on Unlisted was observed, this might imply an increase in the risk associated with Unlisted. 47. Unlisted s market size remains small compared to New Zealand s wider capital markets. The market capitalisation of Unlisted is approximately 2% of that of the NZX Main Board, In Confidence 7

9 compared to 1% when the exemption was granted. While this is still a low percentage, it does indicate that Unlisted has grown substantially over this period. Key metrics relating to Unlisted s market activity are outlined in Annex While there have been a small number of listings and delistings since the exemption was granted, the aggregate number of Unlisted issuers has remained stable, at 15. This, and the fact that S9(2)(ba)(i) implies that Unlisted is not attracting issuers away from licensed markets. 49. Larger issuers listing on unlicensed markets increase the risks to investors should there be a loss of confidence in the issuer or Unlisted. Of particular note is Zespri, Unlisted s largest issuer with a market capitalisation of approximately $990 million, which listed in We do not believe that Zespri imposes the risk to the market that its large size would imply and its listing is not likely to be evidence of a broader trend of larger issuers listing on Unlisted. Zespri is unique because it restricts ownership of its shares to past and current kiwifruit growers. This reduces the potential pool of investors who can invest in Zespri and also means that retail investors interested in the company are likely to have a reasonable degree of knowledge about the company. 51. Normally, two key motivations for publicly listing a company are to raise capital and widen the pool of potential investors. However, Zespri s restrictions on its share ownership mean that these were not relevant factors in its decision to list on Unlisted. 52. Companies seeking any substantial amount of new capital through public markets are likely to need to list on a licensed market to attract sufficient interest to meet their capital needs. Attracting institutional investors or international capital to companies on Unlisted would be challenging, as Unlisted does not offer the same level of access to capital, liquidity and exposure that larger, licensed markets such as the NZX Main Board and Australian Securities Exchange offer. 53. We will closely monitor Unlisted through its annual reports to ensure that Unlisted is not attracting larger issuers or a large number of new issuers. If the risks associated with Unlisted increase, we may consider recommending additional conditions on its exemption. We have noted this in your letter to Unlisted attached as Annex 1. New market platform and updated market rules 54. Unlisted recently launched a new market platform (i.e. its website and the supporting infrastructure). This includes an improved interface for issuers, brokers and investors. As part of this change Unlisted has updated its market rules. The changes to the market rules are minor and are unlikely to increase risks associated with the market. Investors continue to receive adequate information about Unlisted issuers and are adequately informed about Unlisted s unlicensed status 55. We consider that investors continue to have a sufficient level of information (befitting Unlisted s unlicensed status) to make informed investment decisions. Issuer profiles available on the Unlisted website provide investors with a greater degree of information than would be available for private markets or over-the-counter trading. 56. Market analysts are generally discouraged from including Unlisted issuers in their research coverage due to the low volume traded and limited investor interest. The lack of research on which to provide advice means that financial advisers are very unlikely to advise clients to invest in these shares. The flow of retail investors interested in these shares is therefore likely to consist mainly of those who are already connected with the company in some way, or who independently and actively seek out that company s shares. The risk of ill-informed investors is therefore lower than would otherwise be the case In Confidence 8

10 57. The information available to investors on the Unlisted website and the exemption conditions which require Unlisted and brokers to make the regulatory status of the market clear to investors, reduce the risk of ill-informed investors. However, Unlisted s recent rebranding as USX (Unlisted Securities Exchange) may create a misconception among some investors that Unlisted is similar to NZX and therefore more heavily regulated than it is. However, we think this poses a relatively low risk as Unlisted is still not widely known. 58. Investor capability is an issue across all financial markets there will also be investors who do not fully understand offer documents or regulatory conditions associated with fully regulated markets, and so take on more or less risk than they would if they fully understood the regulations and information. Unlisted continues to fulfil its role of providing diversity in the capital markets 59. Issuers had different motivations for wanting to list on Unlisted based on their own circumstances. However, a recurring theme heard from issuers in consultation was that Unlisted offers them some of the benefits of a licensed market (such as liquidity, price transparency, and visibility), while minimising compliance costs. This is particularly important for small companies who are unable to afford the high costs, or do not meet the eligibility requirements, of listing on licenced markets. 60. NZX is currently reviewing the structure of its equity markets and listing rules. This may impact upon the range of alternative markets available to companies seeking to list. We will continue to monitor NZX s review and any impact that it may have on Unlisted. Compliance costs for issuers and Unlisted remain low compared to alternative markets 61. Issuers and brokers did not propose any amendments to the market rules or exemption conditions to reduce compliance costs. As noted above, there is a high level of satisfaction among issuers with the costs of listing on Unlisted. This is largely due to the fact that Unlisted offers a service to small and medium-sized issuers that is cheaper than licensed markets while offering much of the same functionality. 62. In consultation, Unlisted stated that it would like to relax the exemption condition that requires prospective issuers to provide audited financial statements when entering into a listing agreement with Unlisted. Unlisted would like to allow companies to list without providing audited financial statements on the undertaking that they will provide these statements on completion of the financial year in which they list. 63. Unlisted claims that the requirement to provide audited financial statements prior to listing is a deterrent to listing for some companies which have yet to complete an audit cycle. This relates primarily to very small companies which have issued a Product Disclosure Statement or undertaken an initial crowd-funding offer but cannot immediately afford the cost of auditing. 64. We do not believe that this exemption condition should be amended as per Unlisted s suggestion. When the exemption was granted initially, this condition was included to provide an additional layer of information to prospective investors to enable them to make informed investment decisions. We consider that this condition continues to be an appropriate investor protection and have stated this in the letter to Unlisted attached as Annex 1. Communications and risks 65. We consider that this is a low priority matter given your other commitments and suggest you do not make a public announcement. Instead, we propose that this advice be published on the MBIE website In Confidence 9

11 66. We note that there may be a negative reaction from NZX and the New Zealand Shareholders Association, both of whom oppose Unlisted being able to operate as it does currently. Next steps 67. After you have reviewed this advice, we recommend that you send a letter to EMS Chairman Bevan Wallace and Managing Director David Wallace outlining the outcome of the review (attached as Annex 1). Annexes Annex 1: Letter to Unlisted Annex 2: Regulatory spectrum Annex 3: Key metrics on Unlisted s market activity Annex 4: 2017 Unlisted annual report Annex 5: Conditions of exemption In Confidence 10

12 Annex 1: Letter to Unlisted In Confidence 11

13

14

15 Annex 2: The regulatory spectrum In Confidence 12

16 Over the counter (OTC) trading Private markets Exempt markets Crowd funding platforms NXT NZX Description Issuers manage trading in their own securities. Third parties provide a private market service for issuers on the issuer s website. Licensed platforms through which issuers can raise up to $2 million from the public. Fully regulated market with an alternative disclosure regime intended to facilitate the participation of small and medium enterprises (soon to be disestablished) Fully regulated market with the provisions of Part 5 applying in full. Comment Used by companies that have no business reason to list and are prepared to facilitate trading in their own shares. Used by companies that have no business reason to list and are do not wish to manage trading in their own shares. Likely to be low cost. Used by companies that have no business reason to list on a fully regulated exchange but wish to provide additional independence, transparency and price discovery to their investors, and do not wish to manage trading in their own shares. Available to crowdfunded companies. Fully regulated markets provide companies with a range of benefits: Access to deeper capital markets A liquidity discount for their cost of capital Assurance to potential investors around the level of compliance with governance, disclosure and other requirements of listed companies. Research. Ability for substantial numbers of shares to be traded in the secondary market easily. Companies tend to move to fully regulated markets when there is a business reason for these benefits to outweigh the associated compliance costs for example, when they are considering major capital raising. How is the secondary market (trading shares once they have been issued) regulated? OTC trading is exempt from the requirements of Part 5 under section 309(2) of the FMCA. Private markets are likely to exempt from the requirements of Part 5 under section 309(2) of the FMCA. Exempt markets are exempt from the requirements of Part 5. Only the companies that have raised capital through the platform are eligible to trade on these secondary markets. Fully regulated market with an alternative disclosure regime intended to facilitate the participation of SMEs. Fully regulated market with the provisions of Part 5 applying in full. Part 5: prohibits insider trading; prohibits market manipulation; requires issuers to comply with continuous disclosure requirements; requires substantial product holders in listed issuers to disclose their interests requires directors and senior managers to disclose their interests and dealings; requires licensed operators to have market rules approved by the FMA, provide compliance reports and submit to obligations review by the FMA if required. How is capital raising regulated? Part 3 of the FMCA, Disclosure of offers of financial products applies irrespective of the subsequent arrangements for secondary trading in the shares. Companies that undertake private capital raising i.e. seeking angel or venture capital investment, or targeting wholesale investors will often not require a Product Disclosure Statement, but this is related to the nature of the capital raising, not to how the shares will subsequently be traded. Exempt from product disclosure requirements, providing a licensed platform is used and less than $2 million is raised in 12 months. Part 3 of the FMCA, Disclosure of offers of financial products applies. For Initial Public Offers (IPOs), the intention is to provide the initial offer to the public, then to list the shares on a regulated market. The issuer will need to meet the disclosure requirements for the IPO, and the requirements of the fully regulated market on which the shares will subsequently trade In Confidence 13

17 Annex 3: Key metrics on Unlisted s market activity 2015 (when exemption application made) 1 Market capitalisation $1.0 billion $1.8 billion $2.3 billion Value of shares traded $7.6 million $10.6 million $33 million Volume of shares traded $8.8 million $8.5 million $21 million Net change in number of issuers N/A No change (1 listing and 1 delisting) No change (2 listings and 2 delistings) 1 These figures were used when analysis on Unlisted s exemption application was undertaken in early Market capitalisation as at July 2015; value traded, volume traded and net change in issuers in year to 31 Dec Market capitalisation as at 30 June 2016; value traded, volume traded and net change in issuers in year to 30 June Market capitalisation as at 30 June 2017; value traded, volume traded and net change in issuers in year to 30 June In Confidence 14

18 Annex 4: 2017 Unlisted annual report In Confidence 15

19 1 August 2017 Hon Jacqui Dean Minister of Commerce and Consumer Affairs c/- Ministry of Business, Innovation and Employment 15 Stout Street PO Box 1473 Wellington Dear Minister Dean Re: Financial Markets Conduct (Unlisted Market) Regulations 2015 In accordance with the Financial Markets Conduct (Unlisted Market) Regulations 2015, Efficient Market Services Limited, the owner and operator of the Unlisted Financial Product Market, is required to provide a report to the Minister of Commerce and Consumer Affairs in accordance with paragraph 5G in August of each year summarising activity on Unlisted for the 12 months to 30 June of that year. The following is the report for the 12-month period ended 30 June Trading Activity The following table and charts sets out a summary of the aggregate trade volumes and values and the percentage of shares on issue traded during the period for each Issuer. Issuer Security Code Volume traded Value traded (NZ$) % of shares on Issue Blue Sky Meats (NZ) BLUESKY 482, , % Connexionz CNX 30,000 1, % Emerald Gisborne Property Trust EGPT % Fronde Systems Group FSG 5,000 5, % King Country Energy KCE 48, , % MTS Energy MTS % Pharmazen PAZ 6,807, , % PROTEN LIMITED PROTEN 1,523,612 2,385, % Rangatira RANGA-A 49, , % Rangatira RANGA-B 18, , % Rural Equities REL 186, , % Silver Fern Farms Co-operative SFF 6,043,300 5,266, % Speirs Group SGL 102,066 6, % Skyline Enterprises SKYLINE 317,024 7,379, % Syft Technologies SYF 230, , % Terra Vitae Vineyards TERRAVITAE 2,027, , % Zespri Group ZGL 3,532,949 13,668, % TOTAL 21,404,592 33,061,400 Efficient Market Services Ltd (trading as Unlisted) Level 6, 58 Victoria St, PO Box 3156, Wellington 6140, New Zealand Telephone 0508 UNLISTED ( ) Facsimile Home Page info@unlisted.co.nz

20 Value Traded $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- Volume Traded 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 -

21 2 Brokers The following is a list of Approved Brokers as at 30 June Approved Brokers (at 30 June 2017) ANZ Securities Ltd Craigs Investment Partners First NZ Capital Securities Forsyth Barr Hamilton Hindin Greene JB Were (NZ) Pty Ltd Exemptions Provided No new Broker exemptions were issued during the period under review. Broker Audit During February 2017 EMS undertook a Broker audit. Two random trades (1 buy and 1 sell) were selected for each Broker and a copy of the associated Investor Information and Disclaimer Form was requested to check these were on hand and properly completed. All requested forms were received with no issues arising.

22 3 Issuers During the 12-month period ended 30 June Spiers Group and Syft Technologies joined the Unlisted platform on 1 August 2016 and 19 April 2017 respectively. Emerald Gisborne Property Trust delisted on 15 July 2016 and MTS Energy delisted on 1 August The following table sets out a list of Issuers as at the date of this report, the number of shares on issue and the market capitalisation for each. Issuer Security Code No. Shares Market Cap ($) Blue Sky Meats (NZ) BLUESKY 11,526,098 21,323,281 Connexionz CNX 54,205,240 2,710,262 Fronde Systems Group FSG 7,626,493 7,626,493 King Country Energy KCE 25,312, ,639,633 Pharmazen PAZ 160,000,000 13,600,000 PROTEN LIMITED PROTEN 120,035, ,060,554 Rangatira RANGA-A 6,165,000 65,349,000 Rangatira RANGA-B 11,547, ,934,100 Rural Equities REL 33,323, ,622,342 Silver Fern Farms Co-operative SFF 100,378,873 52,197,014 Speirs Group SGL 11,334, ,075 Skyline Enterprises SKYLINE 34,047, ,122,807 Syft Technologies SYF 64,554,002 71,009,402 Terra Vitae Vineyards TERRAVITAE 40,000,000 18,400,000 Zespri Group ZGL 120,717, ,304,010 TOTAL 2,368,578,973 Exemptions Provided No exemptions were provided to Issuers during the period 4 Complaints and Disciplinary Actions S9(2)(b)(ii)

23 S9(2)(b)(ii) 5 Electronic Clearing and Settlement In March EMS issued a guidance note to all brokers advising that all Issuers that had their registry manged by Link Market Services or Computershare had been set up on NZ Clear and that electronic clearing and settlement was able to be used via that system. This means that, where settlement can be electronic, Brokers do not have to use and require signed transfer forms from clients, to complete settlement of Unlisted trades. While EMS does not mandate the use of NZ Clear, it strongly recommended to Brokers that it should be used where possible. 6 Market Rules EMS has not changed its Market Rules in the period under review. However we have drafted several updates to the Market Rules which comprise: 1 The above in respect of Electronic Clearing and Settlement; 2 The ability for Brokers to confirm an investors signature on the Investor Information and Disclaimer Form against AML/CFT documents provided by the investor and have a third party witness the signature in accordance with the market wide waiver provided in December 2015; and 3 The use of the new branding to be rolled out in the September 2018 quarter along side the launch of a new trading platform. These updated Market Rules were provided to MBIE and the FMA for review and comment and confirmation has been received that the changes are acceptable. 7 Other We confirm that there have been no changes in EMS board of directors or management. There has been one shareholding transfer during the period although there was no change in beneficial ownership.

24 We trust the information provided in this report meets the requirements and are happy to provide further clarification should you so require. Yours sincerely S9(2)(a) S9(2)(a) Bevan Wallace Chairman David Wallace Manager S9(2)(a)

25 Annex 5: Conditions of exemption The exemption in regulation 4 of the Financial Markets Conduct (Unlisted Market) Regulations 2015 is subject to the following conditions: Conditions related to Unlisted (a) EMS must not hold out that it has a financial product market licence or that the operation of Unlisted is authorised by a financial product market licence; and (b) EMS must ensure that the Unlisted Internet site contains at all reasonable times a reasonably prominent warning statement that, to the satisfaction of the FMA, states that Unlisted is not a licensed market and specifies the investor protection mechanisms in Part 5 of the Act that do not apply to Unlisted; and (c) EMS must promptly advise the FMA if EMS has any reasonable grounds to believe that any approved broker or issuer participating on Unlisted has breached Part 2 of the Act; and (d) EMS must advise the FMA of any material enforcement action taken against any approved broker or issuer participating on Unlisted immediately upon the action being taken; and (e) EMS must inform the Minister and the FMA immediately if EMS becomes aware or has reasonable grounds to believe that (i) EMS is, or is likely to become, subject to an insolvency event; or (ii) a director or senior manager of EMS, or any of the key personnel of EMS, is adjudicated bankrupt or is likely to be adjudicated bankrupt (whether in New Zealand or overseas); and (f) EMS must inform the Minister before there is a sale of all or a substantial part of the assets of EMS, or a merger, a consolidation, or an acquisition of EMS, or any change of ownership of more than 50% of the voting rights in EMS; and (g) EMS must provide an annual report to the Minister each August that (i) summarises aggregate trade volumes and values on Unlisted, on a per issuer basis; and (ii) contains a list of approved brokers and issuers participating on Unlisted (including any changes during the period to which the report relates); and (iii) states the number of shares of each issuer participating on Unlisted, and the overall value of each issuer, as at the date of the report; and (iv) contains a list of any complaints received, and any disciplinary actions taken, in respect of Unlisted or any approved broker or issuer participating on Unlisted; and (h) EMS must keep, to the satisfaction of the FMA, a record of each transaction that occurs on Unlisted; and (i) EMS must promptly provide, on request by the FMA or the Takeovers Panel, any information within EMS s possession or control about Unlisted, or about any approved broker or issuer participating on Unlisted, or about any activity carried out on Unlisted, that the FMA or the Takeovers Panel considers necessary or desirable to request for the purposes of performing its functions; and (j) EMS must co-operate with the FMA and the Takeovers Panel in the exercise of any of their powers to investigate dealings or conduct in relation to financial products on Unlisted; and Conditions related to Unlisted rules In Confidence 16

26 (k) EMS must ensure that a copy of the rules is available for public inspection, free of charge and during normal office hours, at the head office of EMS and is published on the Unlisted Internet site at all reasonable times; and (l) the rules must provide that all sales and purchases of financial products on Unlisted are required to be executed by, or actioned through the agency of, an approved broker; and (m) the rules must require an approved broker, in respect of each participating investor, to obtain, before acting for the first time after 1 December 2015 on that investor s instructions to trade on Unlisted, an acknowledgement from the investor that the investor knows that Unlisted is an unlicensed market and that the investor protection mechanisms in Part 5 of the Act do not apply to Unlisted; and (n) EMS must inform the FMA before making any change to the rules; and Conditions relating to Unlisted rules about financial statements of issuers (o) the rules must provide that all issuers must, at the time of entering into an agreement with EMS providing for the issuer s financial products to be approved for trading on Unlisted, make publicly available, on an Internet site maintained by or on behalf of the issuer, at all reasonable times, one of the following: (i) audited financial statements for the issuing group s most recent accounting period; or (ii) if there is no relevant period under subparagraph (i) but a member of the issuing group has commenced business and has acquired an asset or has incurred a debt on or before the date of entering into an agreement with EMS providing for the issuer s financial products to be approved for trading on Unlisted, audited financial statements for the issuing group for the period from the date of commencement of business and ending on a stated date that is not more than 4 months before the date of entering into an agreement with EMS providing for the issuer s financial products to be approved for trading on Unlisted; and (p) the rules must provide that all issuers must, while the financial products of the issuer are approved for trading on Unlisted, make publicly available, on an Internet site maintained by or on behalf of the issuer, at all reasonable times, annual audited financial statements for the issuing group s most recently completed accounting period In Confidence 17