The Financial Conduct Authority in the UK recently released regulations that prohibit unsophisticated investors from investing more than 10 percent of their savings into equity crowdfunding. While majority of the UK platforms welcomed this as a suitable idea, Barry James, founder of the Crowdfunding Centre, said the rule would lock ordinary investors out.
“Make no mistake, the infamous 10 percent rule, however it’s dressed up, takes the crowd out of equity crowdfunding.”
On the other end of the spectrum are the equity crowdfunding regulations passed in New Zealand. These regulations do not specify investor caps at all, making New Zealand one of the only countries in the world with such a liberal law.
The MBIE’s commentary document, while listing the various options for investors caps being considered, noted that the proposed limits were significantly above what many investors would be able to lose without detriment to their overall savings. So the reasoning behind this decision to have no cap seems to be that since caps were not going to help protect investors anyway, we might as well do away with them completely. This, in my opinion, sends out a very dangerous message.
As part of a company looking to be a major part of the equity crowdfunding market in New Zealand, it might seem contradictory to my own interests to advocate for investors caps.
However, I believe we do need regulations similar to the 10 percent rule to sustain equity crowdfunding as an industry. No first time investor should be investing more than 10 percent of his/her savings in any single high risk-reward investment vehicle, and that includes equity crowdfunding. The first signs of mum-and-dad investors being materially affected by the failure of equity crowdfunded companies will kill this new and potentially disruptive capital raising mechanism.
The 10 percent rule should be seen as a tool for investor education, and not as an indication of investors’ inability to make decisions for themselves. In this very early-stage marketplace, it also puts the onus on platforms to educate their investors about the risks of equity crowdfunding. This will not only help Joe Bloggs learn about equity crowdfunding and reap its rewards, but also help in protecting him from its risks.
Clive Fernandes is director at CrowdFunding NZ, a company with plans to revolutionise the New Zealand economy via equity crowdfunding. Connect with him on LinkedIn here. This post originally appeared on the CrowdFunding NZ blog