Momentum for crowdfunding builds

POSTED BY Andrew Wallace
14 October 2012

posted in Business | Crowdfunding | Capital Raising

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Last month officials took one step closer to make crowdfunding, in a true investment sense, a reality in New Zealand. A small step, but it's one that arguably should be followed up with a lot more work to ensure that we don't fall too far behind international developments in this growing area.

There are already a number of intermediaries operating in New Zealand through which creative and social projects are getting funded by the public. In these instances contributors provide the funding for some form of in-kind benefit, such as getting a signed copy of an album or DVD that's being made with the money. What we're talking about now though, is funding being provided by the public in return for financial reward, such as interest on debt or an ownership interest in a business, in a way that doesn't require the preparation of the usual disclosure documents required when obtaining funding from the public.

In its report on the Financial Markets Conduct Bill (which is set to overhaul New Zealand's securities laws), the Commerce Committee recommended that the government should make it clear that businesses will be able to apply for licenses to operate as crowdfunding intermediaries. Under the new laws, offers of financial products made through licensed intermediaries will be exempt from the standard disclosure requirements. This should mean that businesses will be able to raise money faster and more cost-effectively than they currently can. As officials have stated, the rules that will apply to these types of offers will need to ensure that there are, for example, requirements for background checks to be undertaken on businesses looking to raise funding, requirements for the disclosure of certain limited information to investors, and limits on the amount that an investor can contribute.

Broadly speaking, the way crowdfunding works is that the intermediary runs a website on which businesses that have passed the intermediary's vetting process post video clips pitching their opportunities for potential investors to view. In its pitch the business states how much money it's looking to raise and what it's willing to give up in return (such as the level of interest it will pay on debt or the level of ownership of the business it will hand over). If the target is hit, the deal goes through and the investor pays his or her money and becomes a creditor or a part-owner of the business. The intermediary covers its costs and makes its money by taking a proportion of the funds raised under the offer, typically 5%.

Crowdfunding is certainly not without its critics. However, it's rapidly gaining attention around the world, with the United States likely to be the next major country to permit it (the middle of next year). It's not only happening at a national level. Just last week an organisation calling itself the World Crowdfund Federation was launched to support and promote crowdfunding around the world, with its services to be provided to member organisations from early next year.

A word of caution is required though. Here, businesses hungry for funding and armchair dragons shouldn't get too excited just yet. The Bill and the rules around investment-style crowdfunding in New Zealand are only expected to come into force sometime in 2014. For the time being it's important to be aware of, and comply with, our existing securities laws. The consequences of falling afoul of those laws can be severe.

This article was first published in the Your Law column in the Sunday Star Times on 14 October 2012.

POSTED BY Andrew Wallace
14 October 2012

posted in BusinessCrowdfundingCapital Raising

VIEWED 3424 TIMES

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