Equity Crowdfunding – All You Need to Know

More and more New Zealand’s SME’s are looking to raise capital through equity crowdfunding. This makes sense as each day a new success story comes out detailing a local Kiwi business that “hit the jackpot”. A recent example is Zeffer Cider, a leading craft cider brand and the largest independent, dedicated cider producer in New Zealand. Zeffer Cider in March 2017 raised $1.2m.

To determine whether equity crowdfunding is right for you and your business venture, it is important to understand its benefits and the potential disadvantages involved.

Why Raise Capital Through Equity Crowdfunding?

Investors become brand ambassadors

Often people that invest in equity crowdfunding do so to gain personal satisfaction. It is common for investors to invest in offerings that align with their personal values. As a result, investors have a direct, personal interest in your venture, and genuinely want to see you succeed. Such investors become loyal brand ambassadors that often share your venture with their own networks.

You have total control

As an entrepreneur or business owner seeking to raise capital via equity crowdfunding, you have control. You dictate what type of shares to sell, how many of them, and even at what price. Furthermore, you set the minimum and maximum capital amount you want to raise.

It is a cheaper alternative to an IPO

Sourcing capital through equity crowdfunding is a cheaper alternative to listing on the NZX and becoming a fully reporting public company. There are less stringent regulations, reporting requirements and checks when equity crowdfunding. This especially benefits SME’s that do not have the resources to go public. Furthermore, the listing on the USX can provide a valuable experience as it is a similar interim steppingstone to listing on the NZX or ASX.

Ability to reach a larger number of potential investors

The digital nature of equity crowdfunding means offers can be shared and vetted amongst potential investors with ease. Furthermore, the whole “crowd” (i.e. anyone) can invest. Investors no longer need large amounts of money to invest in established public companies, they now have direct access to investment opportunities from SME’s and can use small amounts of money to invest.

The standards and obligations are not as stringent

The standards and obligations such businesses are required to meet are not as stringent compared to other equity offers.  It is your responsibility to comply with the provisions on fair trading in the FMC Act 2013. These provisions prohibit businesses from engaging in misleading or deceptive conduct. A business’ specific offering on an equity crowdfunding platform however is not checked, approved or reviewed by the FMA. The FMA only check and license the crowdfunding service provider.

What to look out for:

There are some drawbacks to equity crowdfunding that entrepreneurs/business owners should be aware of. For starters, inherent to the concept of equity crowdfunding is the loss of sole ownership. Raising capital by selling shares in the company will dilute the entrepreneur/business owner’s ownership of the company. This is because shareholders will gain a percentage of ownership in the business in return for their investment.

Documents should be accurate

All informative documents and resources that a business provides should be realistic, honest and accurate. Any claims made should be supported by evidence. Furthermore, it is important that a business does not inflate projected financials or performance because of their optimism. Having accurate information and substantiated claims will mitigate potential legal risks.

There are limitations to how much you can raise

In New Zealand, under the FMC 2013 Act, Equity Crowdfunding offers can raise a maximum of $2 million NZD in any 12-month period.

There’s an opportunity cost

By choosing to raise capital using equity crowdfunding rather than an Angel Investor or Venture Capitalist, the business can incur an opportunity cost. Angel Investors and Venture Capitalists are beneficial to an SME in its early stages of growth. This is because they can provide guidance, experience and skills which the business can greatly benefit from. By raising capital solely via equity crowdfunding, a business misses out on such mentorship. Therefore, whilst they may receive the funds, they may not be able to use the funds in the most effective way. A way to mitigate this risk is by having experienced and knowledgeable directors or mentors on board to steer your business and ensure its success.

Beware of platform requirements

It is important when choosing an equity crowdfunding platform to be mindful of their rules. Some platforms stipulate that if a business does not meet their minimum investment amount, all the money invested returns to the investors. Therefore, it is important to carefully consider what platform you chose and set a realistic minimum investment amount. Good marketing of your offer can also help meet the required minimum.

Managing shareholders

Sourcing capital from equity crowdfunding often results in having many shareholders in the business. This is important to keep in mind, as resources will need to be diverted to manage these shareholders. It is important that shareholders receive timely and accurate information, are constantly informed of business activites and are able to communicate with your business to resolve any enquries.

Equity crowdfunding is a growing trend in New Zealand. It can be a great way for a business to raise capital as it comes with many benefits. It is important however to be mindful of the drawbacks of equity crowdfunding and take steps to mitigate potential risks your venture may incur.