Debentures In New Zealand: Legal Essentials For Businesses And Startups

If you’re running a growing business, you’ll eventually hit a familiar crossroads: you need capital to keep moving, but you don’t necessarily want to give up ownership to get it.

That’s where debentures often come up. They can be a flexible way to raise money from investors or supporters while keeping control of your company (or at least avoiding an immediate equity split).

But debentures aren’t “just another finance document”. In New Zealand, issuing debentures can quickly trigger financial markets rules, disclosure obligations, and ongoing governance responsibilities. Getting it wrong can be expensive, time-consuming, and potentially expose directors and founders to real risk.

This guide breaks down what debentures are, how they work in practice, and what NZ startups and small businesses should think about before issuing them. It’s general information only (not financial advice), and you should get legal advice on your specific raise structure before offering or issuing any debt securities.

What Are Debentures (And How Do They Work In NZ)?

A debenture is generally a type of debt instrument a business issues to raise money. In plain terms: an investor lends money to your business, and your business agrees to pay it back (usually with interest), under the terms set out in the debenture.

Debentures can be structured in different ways, but they commonly deal with:

• How much is being invested (principal amount)
• Interest (whether it’s fixed or variable, when it’s paid)
• Repayment date (a maturity date, or repayment on demand in some cases)
• Security (whether the debenture is secured over business assets)
• Ranking (where the debenture holder sits compared to other creditors)
• Events of default (what happens if payments aren’t made or covenants are breached)

From a business owner’s perspective, the core idea is simple: debentures are a way to borrow from investors without immediately issuing shares.

That said, “debenture” is sometimes used loosely in the market. You might hear the term used alongside (or confused with) other funding arrangements like notes, bonds, or secured lending. The legal detail matters, because classification affects which laws apply and what you must do before you raise funds.

Are Debentures Debt Or Equity?

Debentures are typically debt, not equity. That means:

• investors don’t automatically get voting rights like shareholders; and
• the business has a legal obligation to repay according to the agreed terms.

However, debentures can sometimes include additional features (for example, conversion into shares). Once you start mixing debt and equity-like features, it’s even more important to get advice early so your funding doesn’t create unintended control or compliance issues.

Secured vs Unsecured Debentures

One of the biggest commercial and legal differences is whether the debenture is secured or unsecured.

• Secured debenture: the investor has security over certain assets (or a pool of assets). If the business defaults, the investor may have enforcement rights against those assets (subject to the terms and other creditor claims).
• Unsecured debenture: the investor is essentially relying on the company’s promise to repay and ranks alongside other unsecured creditors if things go wrong.

If you’re offering security, you’ll often need a security arrangement that’s properly documented and (in many cases) registered. For many businesses, that ends up looking similar to a General Security Agreement, depending on how the deal is structured and what assets are involved.

Why Would A Startup Or Small Business Use Debentures?

There’s no single “best” funding instrument. But debentures can be attractive when your business is in a growth phase and you want options.

Common reasons NZ businesses consider issuing debentures include:

• You want to raise money without immediate dilution (so you can keep your cap table cleaner for a later equity round).
• Your business has predictable cashflow and can service interest payments.
• You’re funding a specific project (expansion, equipment, inventory, a new location) and want clear repayment terms.
• Your investors prefer debt-like returns rather than equity risk (or want security).
• You want to keep governance simpler than bringing on new shareholders (though “simpler” depends on your wider compliance position).

It can feel like a win-win: you get capital, investors get a defined return, and you avoid handing over shares.

But don’t underestimate the legal and operational impact. If you’re signing up to repay money with interest, you need to be confident your business can actually meet those commitments (including in a downturn).

Debentures vs Shares: The Practical Trade-Off

Raising money via shares means dilution, but it typically doesn’t create an automatic repayment obligation.

Raising money via debentures means you keep ownership, but you take on debt obligations that can put pressure on cashflow.

This is why it’s common for founders to think through their longer-term ownership and control goals early, and set the company up properly (including having the right rules in place for investors and decision-making). For example, if you are going down the equity path (now or later), a Shareholders Agreement can become a key part of protecting the business as more people come onto the cap table.

What Laws And Regulations Apply To Debentures In New Zealand?

This is the part many founders don’t see coming: issuing debentures isn’t just “a contract between you and an investor”. Depending on who you offer them to and how you raise funds, you may be dealing with New Zealand’s financial markets regime.

While your exact obligations depend on the details, key legal frameworks that often come into play include:

• The Financial Markets Conduct Act 2013 (FMCA) (including rules around “offers of financial products” and disclosure)
• The Companies Act 1993 (governance, director duties, and company decision-making)
• The Personal Property Securities Act 1999 (PPSA) if security is being granted over personal property and needs to be perfected/registered
• Fair dealing and disclosure expectations (including not misleading investors)

If your offer is regulated under the FMCA, you may need a product disclosure statement (PDS), a register entry, and you must comply with ongoing obligations. For many regulated offers of debt securities (including debentures), there can also be additional structural requirements such as having a trust deed in place and appointing a licensed supervisor to act for the benefit of investors (for example, to monitor compliance and enforce certain rights). However, there are exclusions and exemptions that may apply in certain private offer contexts (for example, offers to certain categories of investors).

Because the compliance consequences can be significant, it’s worth getting advice before you start pitching a debenture offer, circulating terms, or taking any money.

Directors’ Duties Still Apply

Even where the FMCA is not triggered (or an exclusion applies), directors still need to act carefully.

Under the Companies Act 1993, directors have duties such as acting in good faith and in the best interests of the company, and avoiding reckless trading. Taking on debt the business can’t reasonably service can create risk for the company and potentially for directors.

For growing startups especially, it’s a good idea to make sure your governance settings are clear and up to date, including your Company Constitution if you have one.

Key Terms To Include In A Debenture (And What To Watch Out For)

A well-drafted debenture document is doing two big jobs at once:

• it gives the investor confidence they’ll be repaid (and explains what happens if they aren’t); and
• it protects your business by making obligations clear, workable, and aligned with how you actually operate.

Here are some of the key clauses that typically matter most.

Interest, Fees, And The Real Cost Of Capital

Don’t just focus on the interest rate headline. Check:

• how interest is calculated (daily/monthly, compounding or not)
• when it’s paid (monthly, quarterly, at maturity)
• whether there are establishment fees, default interest, or other charges
• whether early repayment is allowed and if there are break fees

These details can heavily affect cashflow, especially if you’re a seasonal business or still stabilising revenue.

Repayment Mechanics And Early Repayment Rights

Clear repayment rules reduce disputes later. Your debenture should cover things like:

• the maturity date and how repayment happens
• whether repayment is “bullet” (all at the end) or amortised (paid down over time)
• whether the company can repay early, and under what conditions
• whether the investor can demand repayment early (and when)

From your perspective, “repayable on demand” terms can be risky unless you have strong cash reserves or alternative financing available.

Security, Priority, And PPSA Registration

If the debenture is secured, you need to be very clear about:

• what assets are secured
• whether security is fixed or floating (or the modern equivalents)
• how the security ranks against other lenders
• what the investor can do upon default (enforcement rights)

Security interests often need to be registered to be effective against third parties. If you’re granting security in connection with a debenture, it’s worth checking how this interacts with existing finance arrangements and supplier terms.

Events Of Default (And How To Avoid Accidental Triggers)

“Default” isn’t always just missing a repayment. Debentures often define default events broadly, such as:

• failure to pay on time
• breach of a covenant (for example, not providing financial reporting)
• insolvency events or inability to pay debts
• a change of control of the company
• misrepresentation in information given to the investor

These clauses are normal, but they need to be realistic for your business. Otherwise you can accidentally trigger a default through something operational (like failing to deliver reporting in the format/time expected).

Information Rights And Reporting Obligations

Many debenture investors want visibility. That might include:

• monthly or quarterly management accounts
• annual financial statements
• budgets and forecasts
• notice of material events (e.g. a major dispute, key customer loss)

These obligations should match what you can reasonably deliver. Over-promising here is a common mistake, especially for early-stage founders who are already stretched thin.

How Do Debentures Fit Into Your Wider Business Setup?

Debentures don’t sit in a vacuum. They interact with your existing legal foundations and future fundraising plans.

Before you issue debentures, it’s worth sanity-checking the following.

Your Business Structure And Authority To Raise Funds

If you’re operating as a company, you’ll want to confirm:

• what your constitution says (if you have one)
• what approvals are required (board resolutions, shareholder approvals in some cases)
• whether existing shareholders have rights that affect fundraising

If your company has multiple founders, it’s also common to document decision-making and funding rules clearly upfront. A Founders Agreement can be helpful where you’re still early and want clarity on roles, equity, and how major decisions (like taking on debt) are made.

Your Contracts With Suppliers, Landlords, And Other Lenders

Many businesses already have contractual obligations that can restrict further borrowing or security, such as:

• bank or lender covenants
• equipment finance terms
• commercial lease clauses that require consent for certain arrangements
• supplier agreements with retention of title clauses

This is a practical “gotcha” area. If you grant security to debenture holders that conflicts with an existing lender’s rights, you can end up in a priority dispute (or breach an existing agreement).

Investor Communications And Confidentiality

Raising funds often involves sharing forecasts, customer info, or product plans. Even if the offer is private, you should think about how you control information flow, what you put in writing, and how you avoid misunderstandings.

In many cases, it’s sensible to have an NDA (non-disclosure agreement) in place before sharing sensitive information with potential investors, especially if you’re still developing your product or negotiating key contracts. (The exact document depends on the raise structure and who you’re speaking to.)

Privacy And Handling Investor Data

If you’re collecting personal information from investors (names, addresses, IRD numbers in some situations, bank details), privacy compliance matters.

A properly drafted Privacy Policy and internal data handling processes can help you meet expectations under the Privacy Act 2020, especially if you’re storing information digitally or using third-party tools.

Common Mistakes Businesses Make With Debentures

Debentures can be a great tool, but the same pitfalls come up again and again for SMEs and startups.

1. Treating A Debenture Like A Simple IOU

A debenture can be a legally binding financial product in many contexts, and even where it’s “just a private deal”, the stakes are high. A vague document can create disputes around repayment, interest, and enforcement.

Templates are particularly risky here because they often:

• don’t match NZ law or NZ market practice;
• don’t reflect your existing finance arrangements; and
• fail to address what happens in real-world scenarios (late payments, restructures, early repayment, refinancing, etc.).

2. Accidentally Triggering Disclosure/Compliance Obligations

A common founder assumption is: “We’re just raising from a few people, so the rules won’t apply.”

But how you market the offer and who you offer it to can matter. If you’re broadly advertising, offering to the public, or raising from people who aren’t covered by an exclusion/exemption, you can wander into regulated territory quickly.

3. Overcommitting Cashflow

Debt can be less dilutive than equity, but it’s less forgiving.

If your business has lumpy revenue, long receivables cycles, or uncertainty in the next 6–18 months, interest servicing may bite harder than expected. Before issuing debentures, it’s worth building a conservative cashflow model (including worst-case scenarios) and checking whether your business can still operate if growth is slower than planned.

4. Not Aligning Debentures With Your Long-Term Funding Plan

Imagine your startup raises via debentures now, then tries to raise equity in 12 months.

If the debentures have aggressive terms (high interest, short maturity, heavy security, broad default rights), future investors may see them as a red flag. You don’t want today’s funding to block tomorrow’s growth.

Getting the structure right early can keep your options open.

Key Takeaways

• Debentures are generally a way for your business to raise money by borrowing from investors under a defined set of terms (often including interest and a repayment date).
• Debentures can be secured or unsecured, and secured arrangements often need careful documentation and may involve registering security interests.
• Issuing debentures can trigger New Zealand financial markets and disclosure obligations, depending on who you offer them to and how the offer is made (and regulated offers may also require a trust deed and a licensed supervisor).
• The debenture terms should clearly cover interest, repayment, default, reporting obligations, and (if applicable) security and ranking, so both sides know where they stand.
• Debentures should fit your wider legal setup, including your company governance, existing finance arrangements, and longer-term fundraising plans.
• It’s risky to rely on generic templates or handshake deals for debentures, because small drafting issues can create big disputes and compliance problems later.

If you’d like help structuring or reviewing debentures (or working out the best way to raise funds without creating issues down the track), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.