Guest Blog - Equity Crowdfunding

Equity Crowdfunding, made possible through a law change just over a year ago, is finding its feet in the New Zealand securities landscape.

Equity Crowdfunding (ECF) gives start-ups better access to capital early on, without needing to comply with stricter disclosure requirements under securities law. In ECF, a company makes a pitch through a licensed online platform, inviting the public (not just professional investors) to invest. If the minimum funding sought is reached, the offer is successful and the investors are issued shares in the company, allowing them to participate in the success of the company.

Some outstanding results

ECF has been making a splash, with over $8 million of capital raised so far. Offers from craft beer, film, avionics and wine companies have all garnered media coverage, with highlights including Yeastie Boys raising $500,000 in the first 30 minutes after its offer opened and Invivo raising the maximum amount of $2 million in March this year. We understand from talking to the market that there are a number of other offers in the pipeline, with some exciting opportunities lined up. There is also considerable interest from a number of both large and small investors.

The first five

There are currently five licensed ECF platform providers. These are:

  • Snowball Effect
  • Pledge Me
  • Equitise
  • Crowdcube
  • My Angel Investment

Snowball Effect and PledgeMe were the first licensed and have run the most offers (eight by Snowball Effect, and 12 by PledgeMe). PledgeMe started with rewards-based crowdfunding (which doesn’t involve shares and so is subject to fewer restrictions), but it has now moved to offer ECF as well. Snowball Effect focuses on ECF, and has also developed Snowball Private, a less-public site for companies that don’t want to share all their information with the market (including their competitors).

Equitise is aiming for both the New Zealand and Australian markets, although it has only two offers so far (which both met their minimum targets). 

 Mexican wave, or mixed feelings?

Reaction to the introduction of ECF has been mixed. Some projects have been stunningly successful, while others have been less so. The point here is that it is the crowd that decides (with their wallets) whether an offer is worth it – or not. A key strength of the ECF process lies in the questions/updates sections of the provider’s websites. These sections are generally viewable by the public and have seen potential investors and informed commentators asking incisive questions. In many cases, potential investors can learn a lot about the company simply by reading its responses. There has been some concern about the high valuations and revenue projections stated in some companies’ forecasts. To counter this, most companies clearly state the inherent uncertainty in valuing start-up companies with the potential for high growth. The providers also make clear that it is up to the crowd to assess the merits of a company’s claims.

Possibilities vs risks

ECF offers many possibilities, but can also carry risks. Both investors and companies should take steps to minimise these risks. Investors should examine the company carefully and ask questions about anything they are unsure of. Investors should also ensure they can afford to lose their entire investment if the company fails. Although ECF relaxes the prescribed disclosure requirements, it is not a shortcut for companies looking to grow. Companies still need to be ready internally before even considering raising capital, and ECF may not be appropriate to a company’s particular circumstances.

If ECF is the right choice for a company, it will still need to pitch its ideas to the crowd, without being misleading (a serious offence). ECF is not a ‘set and forget’ process – there is a lot of hard work involved, and winning (and building) a crowd is a vital part of the process. ECF can also raise some tricky legal and practical issues that may come back to bite the company later on. For example, ignoring the potential Takeovers Code implications can mean a company faces compliance costs in the tens of thousands for even small changes in shareholdings. The Takeovers Panel has indicated that it is likely to grant an exemption for small companies (such as those using ECF), but the detail has not yet been confirmed. Early business and legal advice can reduce these risks, and we have seen companies take a number of different approaches to grapple with the novel issues involved.

The verdict

ECF is an exciting place in New Zealand currently. Investors and companies have shown there is real demand for this innovation, and ECF’s role in the capital-raising landscape looks set to expand. The industry is maturing and participants are achieving a better understanding of the issues involved – allowing ECF to be safer and more efficient. When the next two providers start listing offers, expect the market to become a little more crowded, with the benefits of further competition kicking in.

 


Rodney and Jeremy are partners at top tier law firm Minter Ellison Rudd Watts. Rodney is a corporate partner in Wellington, specialising in M&A, capital markets, and advising early-stage and growth businesses. Jeremy is a financial services and investment partner in Auckland, specialising in managed funds, securities law, peer-to-peer lending and alternative assets including private equity, venture capital, hedge funds and property investment.