New Zealand was one of the first countries in the world to create a legal framework for equity crowdfunding. Two years on, things have evolved significantly. Snowball Effect co-founder Josh Daniell explains how the market has played out, and what’s in store for the next 12 months.
Over $30 million has been raised by Kiwi growth companies in the two years since the first equity crowdfunding offer was launched in August 2014.
At first we were seeing public offers which were available to the general public through the new equity crowdfunding regulations. Well known examples are Renaissance Brewing (the first equity crowdfunding offer in New Zealand), Invivo (the first to raise the $2 million limit from retail investors), and Punakaiki Fund (the first fund to raise through this channel).
Next we saw private offers. This is where the company selects a specific audience, and makes the offer available exclusively to that group.
In late 2015, Snowball Effect launched the first “wholesale investor” offer. A wholesale investor is someone who meets a set of regulatory criteria related to wealth, expertise, or experience.
Less than two percent of Kiwis meet these criteria, but companies sometimes prefer wholesale investors for a number of reasons.
Some companies prefer to structure their offers in a way which is not permitted by the equity crowdfunding regulations – such as offering a convertible note. Some prefer to focus on larger investors, particularly if they’re very early stage and want investors close to the business that will understand the inevitable ups, downs, and pivots as the products hit the market.
Some prefer investors that will be actively involved and bring networks and skills to the table alongside their cash.
Squirrel Group demonstrated another use case for the wholesale investor audience. The equity crowdfunding regulations permit a company to raise up to $2 million in a 12-month period from retail investors. But Squirrel was able to raise over $3.4 million by making $2 million available to retail investors, and the remainder available to wholesale investors.
The current state of affairs
New territory is being broken again right now. G3 Group was the first company to list on NZX’s new junior exchange, the NXT Market, when it launched 15 months ago. G3 is now raising up to $3 million through Snowball Effect. This is the first time that a listed company has used an 'equity crowdfunding' marketplace to raise funds in New Zealand.
We’re also starting to see private broking of deals. The demand is coming from companies who are seeking capital but would prefer to keep the business tightly held – seeking a small number of large shareholders rather than a crowd of minnows. Snowball Effect has recently recruited former capital markets lawyer and entrepreneur Cowan Finch to lead this part of the business. Finch explains his role as “working with growth companies to understand their objectives and capital requirements; working with key wholesale investors to understand their investment appetites, and then matching those groups when there’s a potential fit”.
Services in this area have included assessing capital options, help with preparing offer information, and introductions to relevant investors.
Snowball Effect recently released key statistics relating to the first two years of the market. The data shows 35 percent growth from the first year in terms of capital raised. There has also been an increase in the average size of investment (to just under $13,000) and an increase in the number of investors making multiple investments.
What does the future hold?
We’ve yet to see a New Zealand company raise funds through an equity crowdfunding marketplace as part of an IPO. Most of the funds raised through an IPO process come from large 'institutional investors'. This is useful because institutional investors take larger allocations, often expect to have a long term commitment to the investment, and often have the ability to fund further capital requirements.
However, there are benefits to having a broader investor base as well. For a start, listed companies need to meet certain rules around the number of shareholders. And having greater “spread” leads to less volatility in the share price once the company is listed.
If the large brokers aren’t engaging their retail client bases, it can be difficult for a company to tap into the wider capital market. Equity crowdfunding marketplaces can provide this distribution infrastructure, and we expect to see this channel tested in the near future.
We’ve also yet to see a secondary market platform emerge to enable trading between shareholders in early stage growth companies. Investors want to understand a company’s longer term exit or liquidity intentions, and while they don’t expect immediate liquidity with private companies, they would value the ability to sell shares from time to time.
If investors have some form of liquidity, they’re more likely to invest, and we expect a secondary market to develop which is tailored for these types of companies.
View this infographic on the past two years of equity crowdfunding