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New Zealand ahead in equity crowd funding

Thursday 20 August 2015

Since a year ago, New Zealand has specialised rules to cover equity crowd funding. This is ahead of most of the Western world, which have tried to fit crowd funding around their existing laws for raising capital.

In New Zealand, there is the ability for developing companies to raise funds through an on-line process from potential investors without having to comply with the standard requirements of having a prospectus or an investment statement.  The on-line investors would get shares in the company in return for their investments. The investments can range from $100 to tens of thousands of dollars. However, there are still the following protections for investors:

  1. The investment must be made through a licensed intermediary;
  2. No more than $2,000,000 in any 12 months may be raised through this process.

An example of a licensed intermediary is the platform “Snowball Effect”, which had raised around $9,000,000 for the businesses using it to raise funds in the last year. The government places responsibilities on these intermediaries to ensure that the companies seeking capital through them will provide sufficient information to the investors to enable them to make the decision to invest or not.

These intermediaries provide a cost effective and transparent way for smaller companies to raise capital from the public. There are often up-front costs and a success fee for reaching the capital raising target is payable to the licensed intermediary. However, as compared to traditional ways of raising capital, it is much more cost effective. In addition, the licensed intermediary is able to provide advice and experience to the companies raising the capital.

The indication at this stage is that Equity Crowd Funding is more appropriate for businesses after the initial seed capital stage i.e. the growth stage. There are other issues to consider for any business wishing to do equity crowdfunding. For example the implications of having a substantial number of shareholders need to be considered. In addition, care needs to be taken to reduce the risk of being subject to overseas capital raising regulations or New Zealand regulations regarding takeovers.

As Equity Crowd Funding allows much wider access to investors at much lower cost, growing businesses should consider this option. There will no doubt be significant growth in Equity Crowd Funding in New Zealand and overseas in the years to come.

If you require legal advice, contact Teresa Chan at Teresa Chan Law Limited, Level 3, Westpac Building, 106 George Street, Dunedin 9016, ph. 477 1069, or email teresa@tchanlaw.co.nz  If you are a Mandarin speaker, please ring Xiaoyan Mu at (022) 694 9917.

Note: The information in this article is general only. You should seek advice for specific situations.

KEYWORDS: equity crowd funding, capital, investors, investments, intermediary
Dunedin Shanghai Association property law section ADLS