Equity Crowdfunding in New Zealand: A Progressive Experiment
When the first part of New Zealand’s Financial Markets Conduct Act 2013 (‘the FMC Act’) came into force on 1 April 2014, a new regime for equity crowdfunding was introduced into New Zealand law, through the licensing of crowdfunding service providers (‘CSPs’). Over NZ $25 million has been raised via this regime to date. Before the FMC Act, a government-led review had recommended substantial changes to New Zealand’s securities law, including reforms to free up private markets, and that securities law build stepping stones from private fundraising to the public capital markets. In line with these objectives, the FMC Act has significantly changed the regulatory landscape governing the raising of capital in New Zealand, including the introduction of licensing regimes for many types of market intermediaries, such as peer-to-peer and crowdfunding service platforms.
The advantage for an issuer of fundraising through a licensed CSP is that the offer is exempt from the mandatory disclosure requirements applying to standard offers of financial products contained in Part 3 of the FMC Act. Although the licensing and monitoring of CSPs is the main regulatory focus of the FMC Act, issuers are required to comply with the Act’s financial reporting and fair dealing requirements. The fair dealing rules are a set of minimum standards of behaviour, such as prohibitions against false and misleading statements, and false representations. Also, an issuer may only raise a maximum of NZ $2 million in any 12 month period via the crowdfunding regime. This is the only financial limit in the Act as, unlike regimes in other jurisdictions, there is no limit on how much an individual investor can invest in equity crowdfunding in any year or in total. There is also no limit on the size of the issuer, although to date only small and medium entities have undertaken equity crowdfunding under the regime.
All CSPs must be licensed by the Financial Markets Authority (‘FMA’). Any platform seeking to become licensed, must provide evidence to the FMA that it has the capability to operate as a market intermediary. This includes having the necessary infrastructure, appropriate anti-fraud and promotion of fair dealing policies and procedures, and that the directors and senior managers have the capability and character to hold their respective positions. Each CSP is responsible for due diligence and the vetting of issuers and must disclose its selection criteria for issuers to potential investors at the time such investors sign up with the CSP. All licensed CSP websites must also contain mandatory notices, warning investors of the potential risks of investing in crowdfunding generally, such as the high failure rate for start-up companies and that as shareholders in non-listed entities, they will not receive the same level of disclosure or protection as shareholders of listed companies. The notice does not need to advise investors of possible difficulties in selling their securities and there is not yet a secondary market or exchange to facilitate dispositions of securities in crowdfunded issuers. Each CSP is also required to have in place adequate disclosure arrangements to enable investors to readily obtain timely and understandable information in relation to any particular share acquisition decision, including initial disclosure or question-and-answer forums.
As at 20 October 2016, eight CSP’s have been licensed, although one has already ceased trading. Since the publication of the paper, a second CSP has had its license suspended, indicating that the crowdfunding market in New Zealand is becoming quite crowded, and that the financial disclosure obligations to the FMA are tough. Two of the earliest licensed CSPs have a dominant share of the market (The Snowball Effect and Pledge Me). Neither company made a profit for the financial year ending on 31 March 2015, although the SnowBall Effect reported a small profit for the 2016 financial year. Of the other four licensed CSPs, probably the most successful is ‘Equitise’. This is an Australian company registered in New Zealand which promotes itself as a trans-Tasman investment platform. It was set up pending crowdfunding legislation in Australia being enacted, and currently Australian companies are raising funds on Equitise’s New Zealand platform under a Trans-Tasman Mutual Recognition Scheme.
Trish Keeper is a Senior Lecturer at the School of Accounting and Commercial Law of the Victoria University of Wellington.
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