Could it End in Tears? First Peer to Peer Lending License
8 July 2014
Crowd Funding and Peer to Peer Lending: SMEs on the Up, but Could It End in Tears?
Amid excitement following the Financial Markets Authority announcement today that it has licensed the first Peer to Peer lending platform comes a word of warning. DLA Phillips Fox partner Sue Brown says there's plenty of up-side for small businesses looking to grow, but the opportunities come with a caution, as some similar schemes have ended in failure in the UK and US.
“There are great opportunities , but failures could ultimately damage the market confidence the FMA is working hard to grow. When failures happen, people don’t react logically – they react understandably emotionally and forget the warnings they received,” she says.
‘No investment is risk free,” says Ms Brown, “But businesses looking for funding in this way are likely to be small, untested and speculative – and therefore carry higher than usual investment risk. Unlike more traditional investments – which must be made through offer documents containing clear information about the offer – investors investing through the new platforms will receive only very limited information and warnings before they hand over their money. There will therefore inevitably be failures. Then investors will forget the warnings they received and remember only that they took comfort from the fact the platform was licensed by the Financial Markets Authority.”
Now a partner at DLA Phillips Fox, Ms Brown is a high profile financial markets specialist. She is best known for her recent role as Head of Strategy, Innovation & Engagement at FMA and has more than 25 years’ local and international experience in financial markets and law, including in New Zealand, Australia and the United Kingdom.
Equity crowd funding and peer to peer lending became legal under the Financial Markets Conduct Act (FMCA) in April. It has taken three months for the first platforms to satisfy FMA that they meet the minimum standards to be licensed.
“The Platforms are like dating agencies – introducing businesses that need growth capital to investors looking for investment opportunities, usually through the internet,” says Ms Brown. “This is a great opportunity for small, innovative businesses to grow and develop and who knows – perhaps some of them will become NZ’s next corporate success story and list on NZX one day.”
While each business can raise up to $2m a year through the platforms, there are no limits on the amount an investor can invest.
Ms Brown suggests that businesses thinking of raising funds through the new platforms should make sure they are dealing with a licensed platform. They should also understand the legal structure of the investment they are seeking.
“Offering shares through crowd funding may seem to be ‘cheaper’ in the short term, but it has significant implications for ownership and control of the business,” she says.
Businesses thinking of raising funds this way also need to be very clear and honest “about the deal they’re offering investors and how it’s described in their marketing materials” she says, or they risk breaching the FMCA fair dealing rules.
“The regulatory risk FMA carries in this area means it will need to be vigilant and take prompt action if it hears of misleading behaviour,” she says. “FMA has been quick to offer advice to those thinking of investing through the new platforms and this week published guidance for investors warning they might not get their money back.”
“Long and loud may they repeat that message. Then we can all get on with the job of building growing and thriving businesses for New Zealanders.”