Cabinet gives green light to equity crowdfunding

by Mackenzie McCarty28 Feb 2014
Cabinet has approved the regulations for equity crowdfunding and a firm which has been heavily involved in the processes says this is great news for companies and investors alike.

Equity crowdfunding will allow businesses to raise up to $2 million from investors, via a licensed crowdfunding platform, without the need for a formal prospectus or prescribed investment statement.

Commerce Minister Craig Foss announced yesterday afternoon that there will be no individual caps on the amount any investor may invest in a company raising funds via a licensed equity crowdfunding platform. However, a company will only be permitted to raise up to $2 million in any year.

Wynn Williams has made a number of submissions on investor caps, as well as meeting with the Ministry of Business, Innovation and Employment (MBIE) and Minister Foss, and has voiced strong support of no individual investor caps. Partner Hayley Buckley, who has been working for two years alongside client and crowdfunding platform, Snowball Effect, tells NZ Lawyer the decision is likely to have an impact on many law firm clients.

“People think that this might be primarily for start-up companies, but it’s actually much more than that. It’s also established businesses that are looking to raise up to the $2 million which is permitted by the regulations…and there’s a real interest by some companies in expanding their shareholder base so that it’s also their customer base in many instances. So I think it’s applicable to a huge range of companies in various stages,” says Buckley.

Companies that have been successful in raising funds through global equity crowdfunding platforms have demonstrated that initial momentum is critical in a successful capital raise, she adds. Attracting cornerstone investors and channelling them through the crowdfunding platform is an important part of providing this initial momentum and Buckley argues that individual investor caps could hinder this initial momentum and affect the viability of equity crowdfunding in New Zealand.

However, the decision is not without its detractors. Buckley says one commonly-voiced concern surrounds investor security.

“The knee-jerk reaction is, obviously, protecting investors. We have been through a fairly hectic time with the failed finance companies and, without doubt, some investors were burnt in that process, so it is really important to provide meaningful protection to investors. But I think what’s been recognised is that there’s no point providing protection that’s all form and no substance - and you drill down and look at the licencing of these platforms and what will be required in order to obtain a license. It’s [also] really going to be quite self-fulfilling, because the platform will be incentivised to have the best companies - they really don’t want any failures on their platforms. And that’s aligning them absolutely with the interests of investors."

The new regulations will come into force on 1 April, 2014.