Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


Equity crowd funding carries risks, high failure rate

Equity crowd funding, latest step in much-hyped social capital, carries risks, high failure rate

By Suze Metherell

April 23 (BusinessDesk) – Equity crowd funding, which became legal in New Zealand this month, comes with a high risk of failure based on figures showing existing forays into social capital have a success rate of less than 50 percent, one new entrant says.

The Financial Markets Conduct Act, which came into effect on April 1, allows businesses to crowd fund by offering equity of up to $2 million without the burden and costs associated with a prospectus, effectively giving investors skin in the game rather than getting a ‘reward’ or making a donation. The Financial Markets Authority has received 12 expressions of interest from companies wanting to set up as equity crowd funding platforms, of which two have applied for a licence.

“The balance of probabilities sits on the side that they won’t be successful and that’s going to be a challenge for the companies wanting to raise money, and it’s also going to be a challenge for the crowd funding platforms,” said David Wallace, director with Armillary Private Capital, which has teamed with UK-based Crowdcube to apply for an equity crowd funding licence.

“There are some very real risks for a number of the crowd funding businesses themselves, whether they can build a sustainable business model – that’s probably a question globally for all the crowd funding platforms, not just for New Zealand ones,” Wallace told BusinessDesk.

Armillary is the operator of the Unlisted share trading platform. Partner Crowdcube of the UK began in 2011 and has raised more than 22 million pounds.

Kickstarter, the US-based crowd funder which has garnered more than US$1 billion in pledges, has a success rate of about 44 percent. Last year 3 million people pledged US$480 million, or US$1.3 million a day, on its website, according to its own data. Of 198 New Zealand-based projects listed on the site, 103 had been unsuccessful or cancelled, 24 were in the process of fundraising and 71 had secured funding, a success rate of 35 percent for kiwi projects.

“We know from experience in the UK that 25 percent of pitches that actually get to Crowdcube actually get activated on the platform, and of that about 25 percent actually get funded, so you’re probably talking about 8-and-a-quarter-bit percent that actually get funded of those looking for funding,” Wallace said.

Wellington-based crowd funder PledgeMe is another group planning to add equity-based crowd funding. The platform has been operating for the past two years and claims a 49 percent success rate, having raised more than $2.5 million for some 560 projects. Auckland-based Snowball Effect says it has 11 companies looking to raise funds through its platform.

The FMA says the purpose of licensing is to ensure members of the public are given all the information they’re entitled to in the absence of a requirement for a prospectus.

“The real focus of licensing the intermediaries is to make sure the customer gets real clarity over what the risks are, so it’s not necessarily that they’re reducing the risks, but making sure that there is a transparent disclosure of the risks,” said Colin Magee a senior FMA adviser. “It might be that there isn’t much information, but as long as it is clear what information there is and isn’t that’s sort of the job of that licensed intermediary.”

Equity crowd funders would typically earn their fee from a percentage of the capital raised, meaning they get nothing if the offer doesn’t meet its target.

Armillary’s Wallace says its platform plans to restrict who it will accept and expects to successfully raise funds for six or seven companies a year.

Auckland-based MeMini, a wearable camera developer, raised US$94,300 on Kickstarter in February, exceeding its US$50,000 goal. Co-founder Sam Lee said he will follow equity crowd funding closely, but wasn’t sure if his business would use it to raise more capital.

“Reward-based crowd funding is a great way to get seed money and to validate your concept and idea without having to actually go to market with a product,” Lee said.

Queenstown camera company Syrp used Kickstarter in June 2012 to raise US$636,766, surpassing its US$150,000 target, for its Genie time lapse camera. Wellington-based Loomio, the makers of an app which facilitates online decision making and is part of the Enspiral Foundation, last week raised US$124,509, surpassing their US$100,00 goal using CrowdtiltOpen, a San Francisco-based crowd fund website.

(BusinessDesk)

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Housing Policy: Auckland Densification As Popular As Ebola, English Says

Finance Minister Bill English said calls by the Reserve Bank Governor for more densification in Auckland’s housing were “about as popular in parts of Auckland as Ebola” would be. More>>

ALSO:

Crown Accounts: NZ Government Deficit Smaller Than Expected In First Half

The New Zealand government's operating deficit was smaller than expected in the first six months of the financial year, as the consumption and corporate tax take rose ahead of forecast in December, having lagged estimates in previous months. More>>

ALSO:

Fruit & Veg Crackdown: Auckland Fruit Fly Find Under Investigation

The Ministry for Primary Industries (MPI) is investigating a find of a single male Queensland fruit fly in a surveillance trap in the Auckland suburb of Grey Lynn... MPI has placed legal controls on the movement of fruit and some vegetables outside of a defined circular area which extends 1.5km from where the fly was trapped in Grey Lynn. More>>

ALSO:

Scoop Business: Westpac NZ Reaches $2.97M Swaps Settlement

Westpac Banking Corp’s New Zealand unit has agreed to pay $2.97 million in a settlement with the Commerce Commission over the way the bank sold interest rate swaps to farmers between 2005 and 2012. More>>

ALSO:

Going Dutch: Fonterra Kicks Off $144M Partnership With Dutch Cheese Maker

Fonterra Co-operative Group, the world’s largest dairy exporter, has commissioned a new dairy ingredients plant in Heerenveen, in the north of the Netherlands, its first wholly-owned and operated ingredients plant in Europe. More>>

ALSO:

Scoop Business: NZ Retail Sales Beat Estimates

New Zealand retail sales rose more than expected in the fourth quarter, led by vehicle-related transactions, food and beverages, adding to evidence that cheap credit and a growing jobs market are encouraging consumers to spend. More>>

ALSO:

Delivery Cuts Go Ahead: 'Government Money Grab' From NZ Post

"It's a money grab by the Government as the shareholder of New Zealand Post" says Postal Workers Union advocate Graeme Clarke about the changes announced by NZ Post. More>>

ALSO:

Get More From Scoop

 
 
Standards New Zealand

Standards New Zealand
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news