While raising money has never been something Kiwis are particularly good at, New Zealand’s comparatively liberal equity crowdfunding regulation, the disruption caused by the 2008 global financial collapse, and, let’s face it, a lack of alternatives, has created something of a perfect storm for the development of this country's energetic crowd-based equity investment industry.
Start-ups and investors alike have flocked to the concept and existing platforms have established themselves as viable ways to raise capital quickly.
As exciting industry as it is, other countries haven’t been quite so eager to gamble on the crowd equity concept however. While New Zealand regulators seem to be taking a ‘wait and see’ approach, other countries, notably Australia, have been more cautious in their approach.
The organisation responsible for licensing and monitoring the compliance of crowd-funding service providers here is the Financial Markets Authority (FMA).
“Crowdfunding rules make it quicker and easier for small companies to raise money,” says FMA’s Andrew Park.
“Instead of [the] detailed documents companies usually have to publish when raising money from the public, [those companies] only have to provide basic information on the crowdfunding service website.”
“As part of their licensing requirements, the crowdfunding service must display a warning statement telling potential investors about the risks involved,” he says. “It must also provide information about how the service works, what its fees are and the terms of the client agreement. Crowd funding services must also be a member of a dispute resolution scheme.”
Image: Andrew Park, media relations manager, FMA
Park says licensed crowdfunding service providers must supply three key pieces of information: A warning statement about the risks of crowdfunding, a disclosure statement that tells you the checks the service has and hasn't done on the company you're planning to invest in, and an outline of the terms of your agreement.
If you’re detecting a degree of caveat emptor in that description, it’s for good reason.
Companies going the equity crowdfunding route don’t have to provide detailed investment or financial statements as they would following traditional fundraising channels (such as a regular public share offer). Similarly, they don’t have to provide ongoing financial reporting either. The onus is on backers exclusively to assess the information presented on the platform website and uncovered during their own investigations, and make any decisions based on that.
This arrangement of course suits companies that are looking to raise funds but who are unable or unwilling to fulfil the onerous regulatory requirements of traditional fundraising channels, but dilettante start-ups looking for an easy-money-quick solution are likely to be disappointed.
“For me it’s been a really steep learning curve,” says Lucy Arnold, director and designer of Felt, an online marketplace for locally made goods that launched its first equity crowdfunding campaign via PledgeMe on Wednesday.
Image: Lucy Arnold, director and designer, Felt
“I didn’t know anything about investment, or the details of how you actually do it, so there was lots to learn. As to the legislation, I relied on my lawyer to advise me well on all of that.”
“I don’t have a very strong understanding of the compliance stuff, and some of it almost seemed a little over the top for a small company like ours.”
Josh Daniell, co-founder of Snowball Effect says that the current rules around equity crowdfunding occupy a particular kind of sweet spot however, providing investors with adequate cautions but still allowing enough freedom for the industry here to thrive.
“We've got a good, simple regulatory framework for equity crowdfunding in New Zealand,” he says. “There's only a few parts that should need tweaking over the medium term.”
According to Daniell, among those tweaks is increasing the current cap of $2m per company that can be raised from retail investors.
“$2m is a good place to start,” he says, “but policy makers will be watching this space to see if the efficiencies of equity crowdfunding should be extended to larger offers”.
Not everyone is convinced New Zealand’s buoyant attitude towards crowdfunding is quite deserved, however.
Image: Josh Daniell, co-founder, Snowball Effect
“People are being seduced by the ‘concept’ [of equity crowdfunding] and failing to look at the underlying business case,” says New Zealand Shareholders Association chairman, John Hawkins.
“The companies themselves are not subject to any particular regulation, although the crowd funding platforms do have to be licenced. There is little requirement for companies to report progress to their shareholders and these types of investment require a lot of trust in the management. That may work out okay or it may not.”
Hawkins says the only current regulation affecting crowd funded companies is the Companies Act, which is not protective of outside investors in the way that stock exchange rules are.
“While the platforms do some due diligence, this is not necessarily extensive and they do not guarantee the accuracy of the information the companies provide.”
“We are concerned that there is no limit on how much an individual investor can invest. We note that in Australia this is proposed to be $10,000.”
“There is a view that the total amount that can be raised is too low ($2m in each year), compared to Australia's proposal ($5m), but we would like to see how the companies perform before reviewing this.”
Image: John Hawkins, chairman, NZSA
The Australian proposal that Hawkins is referring to is a consultation paper recently released by Australia’s Treasury department which features some notable differences to the current New Zealand regulatory framework.
The paper proposes that individual companies should be able to raise up to $5 million in any 12 month period (rather than the $2M figure here in New Zealand) but single-investor offers should be capped at $10,000, with an investor’s combined investment across a year capped at $25,000. In New Zealand, no such single investor restriction exists at all.
Daniell says he’s surprised by how restrictive the Australian proposals seem, and says that larger investors (those investing over $25,000 in a single offer) have been critical to the success of several New Zealand equity crowdfunding offers already.
“Across all of the offers on our platform to date, each offer has had at least one investor over $50k, with most offers having multiple investments of that size or larger.”
“If those [Australian] limits were in force in New Zealand, total investments into Kiwi growth businesses through Snowball Effect would have been reduced by over 30%.”
Daniell says that investor caps would limit the ability for issuers to find ‘cornerstone’ investors for the offer.
“Overseas and New Zealand experience shows that momentum is one of the most important factors in successfully raising capital via crowdfunding. Prohibiting cornerstone investors would severely limit the ability to create momentum during a capital raise.”
Daniell also says that investor caps would be difficult to enforce, with investors able to use “other local platforms, international platforms, or simply find other investment channels” that aren't as heavily regulated.
“Investors could also avoid caps by investing through an entity that hides the ultimate owner.”
“Regulators are afraid of investors losing their shirts, but investor caps would potentially choke the market for the benefit of a small minority who may overexpose themselves to this asset class.”
But do investors need legislation to protect them from reckless investment?
Experienced equity crowdfunding investor and accountant Tony Marshall says that caps such as those proposed by the Australian Treasury might have their place in the New Zealand system, if they are not set too low for the market here to thrive.
“Australia is certainly trying to protect the investor more by limiting their ability to invest. I think that might be a good thing for the investor but a bad thing for the platform itself.”
“To be honest I think the $25k per annum across all investments per annum might be too low. I think a cap probably is a good idea, but just a bit too low. Perhaps a better idea would be that if you want to invest at the higher level, you need to tick a few more boxes, but you’re not prohibited.
“That doesn’t then disadvantage the platforms and the people raising capital, but it also provides an extra couple of steps to protect investors…from themselves”.