It’s official: New Zealand crowd funding platforms PledgeMe and Snowball Effect have become the first to receive equity crowd funding licences under the Financial Markets Conduct Act 2013 (FMCA). The Financial Markets Authority (FMA) made the announcement on 31 July 2014, putting New Zealand at the forefront of a worldwide equity crowd funding movement.
Entrepreneurs and regulators worldwide will be paying close attention to our initial experiences.
The current crowd funding landscape in New Zealand
Among other new initiatives, the FMCA removes historical impediments to small-scale public capital raisings by creating a new category of “licensed intermediary”, through which offers are exempt from the normal disclosure and governance requirements associated with a traditional “full blown” initial public offering (IPO).
In the area of equity crowd funding these licensed intermediaries are commonly referred to as crowd funding platforms, crowd funding providers or simply crowd funders. The debt equivalent of crowd funding under the FMCA is peer-to-peer lending. Harmoney became the first licenced peer-to-peer lending provider last month.
Under the FMCA, crowd funders act as intermediaries between companies offering shares and investors looking to buy them. Companies are limited to raising no more than $2 million from the public (in total via crowd funding, peer-to-peer lending and the FMCA “small” offers exclusion) in any 12 month period. However, there is no limit to how much an investor may invest using such platforms.
Many of the companies looking to raise funds via crowd funders will be start-up or early-stage businesses. Marlborough-based craft beer brewer Renaissance Brewing Company has already announced that it intends to issue between 300,000 and 350,000 shares at $2 each via the Snowball Effect platform, representing 12.28% of all shares on issue if fully subscribed.
Snowball Effect and PledgeMe intend to launch their crowd funding services on 13 and 15 August 2014 respectively. Harmoney expects to launch its peer-to-peer service “very soon”.
Comparison to overseas jurisdictions
New Zealand continues to outpace jurisdictions that have traditionally had similar securities law landscapes. There are currently crowd funding-specific initiatives at various stages of development in Australia, Canada, the UK and the US. However, these initiatives appear to be more restrictive than under the FMCA, and it is by no means certain that they will all see the full light of day.
Currently there is no tailored crowd funding regime in Australia. The Corporations and Markets Advisory Committee (CAMAC), which advises the Australian Government on financial markets law issues, released its report on equity crowd funding in May 2014. The report proposes the introduction of crowd funding through online licensed intermediaries. Issuers would be limited to raising a total of $2 million in any 12 month period, with a maximum per investor investment of $2,500 per issue and $10,000 in total in any 12 months.
In Canada crowd funding is being addressed at a regional level. In December 2013 Saskatchewan became the first to implement a crowd funding-specific exemption, with six other provinces currently considering similar measures. Key elements of the Saskatchewan exemption include a requirement to make offers through a crowd funding website, a maximum raise of $150,000 per offering, a maximum of two offers in a 12 month period and an investor investment cap of $1,500 per offering. Currently there are no websites offering equity crowd funding in Saskatchewan.
In the UK crowd funding is regulated by the Financial Conduct Authority (FCA), which issued a Policy Statement in March 2014 outlining the FCA’s approach to the regulation of equity crowd funding in the UK. The relevant rules to implement this policy statement commenced in April 2014. Under these rules, licensed intermediaries may market offers of non-readily realisable securities to various classes of investors. Prescribed investor classes cover wealthy or sophisticated investors, investors who received qualifying investment advice, and investors who certify that they will not invest more than 10% of their net investible portfolio in non-readily realisable securities.
Enacted in April 2012, the intent of the Jumpstart our Business Startups (JOBS) Act is to promote economic growth in the US, including by allowing companies to undertake small capital raisings through online intermediaries. Under the JOBS Act, companies can raise a total of $1 million over a 12 month period through a broker-dealer or "funding portal" website, with a maximum individual investment limit of $100,000 over a 12 month period. Securities and Exchange Commission (SEC) timelines to complete federal crowd funding rules have been pushed out, and it is not clear when the rules will be finalised.
Chapman Tripp comment
As a global phenomenon, the success or failure of equity crowd funding in one jurisdiction could influence the implementation of crowd funding in others. Under the FMCA it is the FMA’s role to license and monitor the compliance of crowd funding providers, and accordingly, FMA will play an important role in overseeing the success or failure of this new industry in New Zealand. The FMA has a range of regulatory tools at its disposal, and we hope to see these tools used in a constructive and collaborative way as the industry finds its feet.