Mr Key outlined more details yesterday during his speech to the National Party conference in Auckland.
There was immediate criticism from Labour, which called it a "Ponzi scheme that punishes taxpayers in more ways than one".
SOE spokesman Clayton Cosgrove said the proposal to give New Zealanders investing in companies like Mighty River Power a loyalty bonus for hanging on to their shares "shifts the burden of National's bad idea on to taxpayers who can't afford to buy in".
"This is a tactic to placate Kiwi concerns about giving up our assets to foreign interests, which under this Government's stewardship is inevitable."
Mighty River Power is the first of four energy companies to be partly privatised - up to 49 per cent - the others being Genesis, Meridian, and Solid Energy.
Unless court action by the Maori Council and iwi delays the sale, Mighty River is scheduled to go through the sale process between September and November.
Once the composition of buyers is decided, a portion of the 49 per cent will be held back for the loyalty bonus.
Mr Key said he expected 85 to 90 per cent of the investors to be New Zealanders.
The Treasury yesterday announced the formation of a syndicate to market the shares to ordinary retail investors and said the emphasis would be on helping to achieve the Government's objective of 85 per cent to 90 per cent New Zealand ownership "at the time of the share offer". The syndicate consists of specialists from Craigs Investment Partners, Forsyth Barr, ANZ National Bank, and ASB Bank.
After his speech, Mr Key told reporters the $1000 minimum had been set by looking at the Contact share float and some others.
About 90 per cent of people applied for about $1000 to $2500 of shares, he said, "so we think that is in the 'sweet spot' of what the average New Zealander might step up and buy if they are interested. It gives them some confidence to know that they will get the full $2000 if they apply."
He said it was not practical to set the minimum at $500 because the trading fee when someone sold shares would significantly reduce the benefit.
People will be able to get a prospectus from over 500 bank branches throughout the country and there will be an 0800 number.
"We will make it as easy as we can for New Zealanders to take part in the share offers."