New Zealand Equity Crowdfunding Turns 5 Years Old
Equity crowdfunding is 5 years old in New Zealand, having been made legal when the Financial Markets Conduct Act 2013 came into force on 1 April 2014. In this article, MinterEllisonRuddWatts and Nathan Rose (author of Equity Crowdfunding: The Complete Guide For Startups & Growing Companies) review the progress of this innovation in company financing since that inception.
As a brief introduction, “equity crowdfunding” is unlike the “rewards” style of crowdfunding that most people are more familiar with. In contrast to the crowdfunding found on sites like Kickstarter and Indiegogo, where people are typically pre-ordering products for later delivery, equity crowdfunding involves investment in an ownership stake. So, rather than receiving a digital download or something in the mail once the campaign has successfully funded – with equity crowdfunding, the crowd become shareholders in the company doing the fundraising.
As mentioned in a previous article, equity crowdfunding offers in New Zealand can raise up to NZ$2 million in any 12 month period, or more after that if you open offers up to wholesale or other eligible investors. They can be promoted to the general public under a reduced disclosure regime, versus the normal requirements. It reduces the regulatory cost and burden of conducting a public securities offer, thus opening the door to funding from the public for companies who aren’t yet ready to conduct an initial public offering. It also presents an alternative to banks, angel investors, and venture capital.
Since its arrival in 2014, equity crowdfunding has had an immediate impact on New Zealand’s early-stage investment landscape. The often smaller scale of crowdfunding raisings provide an opportunity for “Mum and Dad” investors to invest, and this adds significant diversity to the investment opportunities available. Equity crowdfunding also allows for investors who might feel a connection to a business to invest, without having to be professional investors themselves.
One of the marks of equity crowdfunding is its flexibility. Unlike rewards crowdfunding (which only really works for products which cost a few hundred dollars at the most), equity crowdfunding can work for B2B businesses, service businesses, and high-priced products (think vehicles, or medical devices, for example). None of those latter business models could be easily shoe-horned into a Kickstarter reward.
And, unlike traditional financing channels, equity crowdfunding can also work for main-street businesses which are not scalable enough to attract the interest of venture capital. But some technology startups – the kind that could get venture capital – are still deciding to go down the equity crowdfunding route, because of the advantages it provides, including:
- It allows companies to raise money and gain marketing exposure at the same time. These two tasks are usually #1 and #2 on the to-do list for young, growing companies.
- It can significantly deepen the relationship and loyalty of customers, by giving them a way to become stakeholders in the company’s success.
- Often, money can be raised on more attractive terms than would be possible through banks and venture capital. It shifts the power balance in favour of the entrepreneur.
Less important than the sector of the company, is the stage. With funding needs of below $2 million, equity crowdfunding startups are often quite early in their development. They are almost always past being pre-revenue or pre-product, but may still be at a point where their long term prospects aren’t entirely proven.
But equity crowdfunding doesn’t work for absolutely every business. The following are some of the commercial limitations:
- The business must have some existing traction (past the “idea stage”).
- The business must be systematisable (not reliant on the specific skills of the founders).
- Because it is a very public marketing exercise, it is difficult if the founders are overly concerned about keeping all aspects of company strategy and financial information private.
- It takes some time to execute – anchor expectations on around 2 – 3 months of preparation, at the minimum.
- It is for raising growth capital, not for facilitating founder exits or selling existing shares.
After an initial flurry of new licences issued from 2014 when equity crowdfunding became possible, there has been a consolidation in the marketplace, with many platforms closing their doors and three main players left standing. New Zealand’s most significant equity crowdfunding sites are:
- PledgeMe: Having originally started out as a rewards crowdfunding site, PledgeMe now (uniquely in New Zealand) offers all three methods – rewards, equity and lending. The equity crowdfunding model is supported by a programme called “CrowdfundingU”, where PledgeMe steps campaign creators through their preparation. It is designed to help businesses get ready to more effectively communicate their story to their crowd. PledgeMe’s attitude to company curation tends to be more supportive of letting the crowd decide, as part of their mission is to help make funding more accessible for startups and growing companies.
- Snowball Effect: They now brand themselves as “New Zealand’s leading private equity marketplace”, having moved away from the pure equity crowdfunding model, and towards being a curated marketplace of many different funding options. They offer public offers for retail investors, private offers, and wholesale investor offers. Like most equity crowdfunding sites, they can help young companies which have already commenced revenue-generating activities and demonstrated market traction. But they have also positioned themselves to assist with scale-ups, more mature companies, and even IPO distribution – meaning they are well-placed to facilitate fundraisings across the spectrum of a company’s capital-raising journey.
- Equitise: Originating in Australia, Equitise set themselves up in New Zealand before the equity crowdfunding regulations were changed across the Tasman. To this day, Equitise advertise themselves as “Crowdfunding Australia and New Zealand”, hence being one of the few equity crowdfunding platforms around the world that can credibly claim to be truly cross-border. Equitise allows investors to back the startups and innovative growth companies they care about with investments of as little as $50 – from seed stage, series A, B, C, to IPO. Equitise have themselves been recognised as an innovator, with numerous awards and nominations in FinTech awards.
There are many interesting observations that can be made of the equity crowdfunding market in New Zealand. The data below is gathered from publicly available sources and may not include all crowdfunding campaigns to date. Some interesting observations include:
- The high number of crowdfunding campaigns from the data which have been successful – out of the 80 raisings in the data, only 9 have been unsuccessful in the sense they have failed to raise the minimum amount sought. This is not, however, to say that equity crowdfunding doesn’t come with its risks.
- Many companies have had repeat crowdfunding campaigns. PledgeMe, a crowdfunding platform itself, has had three successful equity crowdfunding campaigns. Veriphi, a medical technology company, has also had three successful campaigns.
- A variety of different business models have been successful with equity crowdfunding. Boutique beverage producers such as craft breweries have been very successful in the equity crowdfunding space and have raised an average of approximately $1.2m. Financial service providers have seen similar results.
- Of the top three campaigns, two were craft beverage producers; Zeffer Cider raised $2,418,443 and Invivo (a winemaker) raised $2,000,000. The highest raise by any campaign was by Squirrel, a mortgage brokering company, with $3,424,400. As this is greater than the $2 million cap on retail crowdfunding, however, this must have been partially funded from wholesale investors.
- Other sectors that have had successful campaigns include organic food producers, healthcare technology providers and IT start-ups. This shows the breadth of industries which equity crowdfunding is open to.
The Financial Markets Authority has recently provided a snapshot of the current equity crowdfunding market in New Zealand, as set out in the table below.
|Number of successful offers||Total capital raised from licensed service investors ($)||Total capital raised from other investors ($)|
Resources: Financial Markets Authority, Peer-to-peer lending and crowdfunding: sector snapshot 2018, https://www.fma.govt.nz/news-and-resources/media-releases/peer-to-peer-lendingcrowdfunding-2018-data-published/
To be successful in the New Zealand equity crowdfunding market, there are variety of legal and practical considerations that companies exploring the possibility of running a campaign need to be aware of. These include:
- Ensuring that the offer documents and campaign materials are accurate and balanced and that all claims are supported by evidence.
- Considering how the constitution of the company may need to be amended to provide an appropriate governance and reporting regime for the company once it has a large number of smaller shareholders. For example, a significant increase in the number of shareholders following a successful campaign will likely require the company to consider how it will manage interactions with shareholders. Careful thought needs to be given ahead of time about how the company will communicate and engage with its new investors and shareholders.
- A company must also be aware it can become subject to the potentially onerous provisions of the Takeovers Code if it ends up with 50 or more voting shareholders after the campaign is complete. One option to avoid application of the Code can be to offer non-voting shares to smaller shareholders and limiting the allocation of full voting shares to larger investors only. Another approach is to use the “nominee” services of the crowdfunding platform whereby investor’s shares are held by a single nominee company on their behalf.
- The financial reporting rules that may apply to the company may change following the introduction of a large number of shareholders; for instance, the default position is that the company must be audited unless the shareholders “opt-out” of that requirement by a greater than 95% majority vote. Once a company has 10 or more shareholders the financial statement preparation and audit requirements kick in.
Though New Zealand is viewed internationally as one of the most successful equity crowdfunding markets, the United Kingdom has been active for even longer, having kicked off in 2011. So, they can give us a potential preview into what the future in New Zealand might hold. UK equity crowdfunding has grown to become a major part of the early-stage financing ecosystem. As of the publication of this article, their largest equity crowdfunding platform – Crowdcube – has been responsible for facilitating over £626 million (NZ$1.2 billion) of funding.
One innovation to look out for is the introduction of a secondary market, such as implemented by Seedrs, another of their leading platforms. It helps facilitate investor liquidity by allowing equity shares to be bought and sold between investors in an open marketplace.
Another move to keep a close eye on is the move towards greater cross-border activity. Seedrs is in the process of partnering with Republic (from the United States) to run dual-listed equity crowdfunding offers, to widen the pool of potential investors that companies can access.
Finally, be on the lookout for the first successful “exits” of equity crowdfunded companies here in New Zealand. If people hear the next IPO on the NZX was originally funded through the crowd, it will lead to even more interest from investors and early-stage ventures.
Nathan Rose is the bestselling author of Equity Crowdfunding: The Complete Guide For Startups & Growing Companies. He has appeared at crowdfunding events all over the world. Today, he runs the website www.startupfundingsecrets.io, to help startups & growing companies to gain marketing exposure and raise investment money at the same time.