Equity crowdfunding is sexy. The more financial watchdogs (like the one in the UK) warn “it’s very likely you will lose all your money”, the more punters flock to put their tuppence ha’penny-worth of investment into the latest, coolest start-up idea.
In New Zealand it’s no different. Snowball Effect, (founded by a trio of former and current Fonterra executives, 6% owned by Auckland incubator Icehouse, and arguably the highest-profile of our four licensed equity crowdfunding platforms) has seen all its companies reach their funding targets so far.
Cleantech company CarbonScape, for example, raised $764,000 from 207 investors, almost double its $400,000 target.
The average investment was a relatively hefty $3700, far from the $50 flutter often associated with crowdfunding.
Still, despite Snowball Effect’s success track record, the company's head of growth Josh Daniell says it has encountered a sticking point when trying to sell its services to start-ups.
Some entrepreneurs worried about the potential for sensitive information to be seen by competitors.
Companies were also concerned investors might say “no thanks, mate” to their equity crowdfunding ideas, leaving them with a very public failure.
After all, it’s happening a lot overseas. US-based crowdfunder Kickstarter has a more than 50% failure rate.
And as of the middle of 2014, half of the New Zealand-based projects listed on that site had been unsuccessful or cancelled.
Enter Snowball Private, which combines the advantages of equity crowdfunding (notably that, up to a limit of $2m, no prospectus is required, and limited disclosure, thus avoiding the expensive, time-consuming preparations that go into a stock market listing), with the anonymity of other forms of capital raising.
When a company lists its offer on Snowball Private, the platform sets up a link to a private password-protected page. Then the link is sent to selected potential investors, rather than being touted on the platform’s public offers page.
If investors want to give a small, Kiwi company a leg-up, they can. If they don’t, no one knows.
To the uninitiated, conducting equity crowdfunding behind closed doors might appear to add risk by reducing transparency.
However, Alan Best, a spokesman at the NZ Shareholders’ Association, doesn’t think the new service adds any more to the (albeit high) risk profile.
Equity crowdfunding is already “up at the extreme end of the risk spectrum”, Best says, but he believes the New Zealand legislation has safeguards in place.
As long as the watchdog, the Financial Markets Authority, has the resources to monitor equity crowdfunders, private fundraising shouldn’t be any more risky than its public counterpart, he says.
“We have a general concern that investors aren’t aware of the risk continuum and could be drawn into speculating beyond their means. But New Zealand’s licensing processes are up there with the rest of the world… It comes down to whether the FMA is able to handle monitoring and moves on any complaints… But I’d say canvassing is a logical extension of any business activity in this area.”
FMA enforcement director Elaine Campbell says crowdfunding providers have to tell investors the offer is available only to a select crowd, and equity crowdfunding platforms still have regulatory requirements to comply with.
“Providers are required to report to the FMA annually on a number of things, including the capital raisings they have facilitated. As equity crowd funding was licenced in 2014, this reporting will begin this year.”
Colin McKinnon, who runs the NZ Venture Capital Association, reckons the hush, hush nature of the new service will appeal to New Zealand companies, which are mainly privately owned and don’t like everyone knowing their business.
He thinks Snowball Private will add vibrancy to the smaller end of the market in a cost-effective and efficient way.
“There’s two types of businesses in this space, the startup looking for equity and the more established companies that already have clients and bank funding and are looking for a small amount of equity to grow. A private platform may serve that well,” he says.
Snowball Effect capital raiser CarbonScape is first up on Snowball Private, listing on January 28 and seeking up to $1 million.
The company says it already had a dozen investors who missed out last time around and were still keen to get in on the action.