EQUITY CROWDF NEW ZEALAND SHOWS AUSTRALIA THE WAY One of the uses of the internet and social media has been the ability to connect those who require funding for business and other activities with those who have funds available that they are willing to invest.
I
N THE UNITED STATES, WHERE crowdfunding has been available for over 10 years, the initial reward- and donation-based approach has evolved to cover many situations, including raising funds to assist charities (worthy or otherwise) or even Star Citizen, a video game that raised over US$80 million. In Greece a campaign was undertaken to bail out the country using crowdfunding with almost €600,000 being raised in three days from 35,000 people – it wouldn’t have been possible without social media. The most recent evolution of this funding approach is equity crowdfunding, which is simply where investors provide funds to companies in exchange for shares or other equity instruments. The concept is spreading widely, and has quickly become everyday parlance in New Zealand, where raising capital for growing businesses has traditionally been a challenge. Parliament has responded to the opportunity and incorporated lighthanded regulation for equity crowdfunding, now overseen by the Financial Markets Authority. New Zealand rules enable up to $2 million of capital to be raised (in a 12 month period), which is very attractive for businesses that require an injection of capital. High-growth businesses use a lot of shareholders’ capital to maintain cash-flows and can often be undercapitalised; crowdfunding can be attractive to investors willing to bear the risk and fund these businesses’ growth. Funding can be obtained without the usual cost and difficulties that come with traditional capital raising. Crowdfunding must be done via a licensed crowdfunding service provider website if seekers of capital want to take advantage of the lighter disclosure obligations that apply to crowdfunded share offers. A number of early implementers are already operating in this space, and providing a platform for business seeking funds; Equitise (www.equitise.co.nz) is one such example. Staples Rodway Director Phil Pavis has been assisting the platform, primarily assisting with Inland Revenue compliance and record-keeping, which are necessary for any new business. Equitise maintains its accounting records on Xero and, being cloud based, the information can be accessed when required from New Zealand, Australia or anywhere else in the world, as managers stimulate interest in the opportunities. GST matters need to be considered as well. Raising
funds is often considered as more of a financial service with no GST, as compared to dealing in traditional goods and services on which GST is payable. The GST implications can be different for crowdfunding where GST can be payable on funds from “rewards-based” crowdfunding, but may not be on the proceeds of an equity raising. Staples Rodway has provided other practical support to Equitise, including undertaking to conclude any capital-raising process in the unlikely event the crowdfunding platform cannot. A typical capital-raising runs for 30-90 days and Equitise charges a percentage of the funds raised. Costs are kept to a minimum with social media providing affordable word-of-mouth communication. Start-up businesses wrestle with cash-flow and trading losses and Staples Rodway has been helping clients manage these issues for years. The issues are the same in the equity crowdfunding space but it means smaller businesses may succeed where they can prove viability before falling victim to the age-old problem of limited cash-flow. New Zealand is showing Australia the way; crowdfunding, like many innovations, is having its path forged in New Zealand before it is adopted across the Ditch. Equitise has a strong Australian connection, being backed by both an ASX-listed company and an Australian venture capitalist. And, as a forward thinker, it has been consulting with the Australian Government in anticipation of Australia passing legislation that allows equity crowdfunding. The experience in New Zealand has helped shape Australia’s legislation and will place Equitise in pole position in Australia when the market launches. In the short time crowdfunding has been in New Zealand it has provided investors with the opportunity to back diverse business opportunities such as breweries, a digital travel guide, and a Lee Tamahori movie. Investors have a unique opportunity to provide funding and participate in ownership of businesses they may otherwise never hear of or which, up to now, only wealthy angel investors and venture capitalists have had access to. Clearly, investors must carry out due diligence before making an investment decision as not all investments will be successful, and advice should be taken if opportunities in this space are being considered.