The maturing of equity crowdfunding

With the equity crowdfunding industry about to celebrate its second birthday in New Zealand, Josh Chang looks at how it is breaking new frontiers in its application. 

By Josh Chang

Since its inception, the global equity crowdfunding (ECF) industry has been poked and prodded and often, at times, lambasted by its critics. However, with the maturity of the industry in early-adopter regions such as the UK and New Zealand, the market is beginning to take notice of the benefits of ECF and its potential applications.

Equity crowdfunding is the process by which companies create an offer of shares to investors via an equity crowdfunding platform. There are currently only a handful of jurisdictions in the world where companies can legally engage in general solicitation of financial products such as shares – this means that private companies are legally able to advertise its share offering to not only wholesale investors, but also mum-and-dad investors (retail).

The idea is to use ECF platforms to tap into the ‘power of the crowd’, where many people contribute small amounts to add up to a large, lump-sum investment.
While the equity crowdfunding industry has existed in New Zealand for almost two years, industry participants are still keenly aware of the lack of education in this space. The general notion is that equity crowdfunding is geared toward capital raises for small, high-risk, high-growth, domestic companies. However, those who have been following the industry have witnessed its maturity and seen it branch out into new territories.

New Zealand equity crowdfunding not limited to New Zealand
Companies seeking to raise capital are not restricted to seeking funds domestically. Dependent on size, there is the option of initiating a joint raise between a New Zealand-based ECF platform and an ECF platform based in liberal regulatory environments, such as the UK. An example of such was the offer available on the Equitise platform for international sportswear company SKINS.

SKINS is an Australian company, based in Switzerland, raising capital in New Zealand and Australia through the trans-Tasman ECF platform Equitise and in the UK through Seedrs. Quite clearly, the company has not been restricted by location and has branched out to New Zealand and the UK to raise capital.

So long as the business has exposure in the country they are raising in, there is no reason why New Zealand businesses, who have wide-spanning presence, can’t raise capital internationally through equity crowdfunding platforms.

Over the ditch and beyond
With the UK and New Zealand ECF regulations well implemented, further markets will soon follow. Australia is currently drafting a Bill to legalise and define the regulations for equity crowdfunding – and while there is some controversy over some of the proposed sections, a final piece of legislation is expected to be passed in some shape or form within the year.

The ASEAN region has also opened up to the power of the crowd with Malaysia first out of the blocks, implementing regulatory reforms in 2015. Singapore, Thailand and Indonesia are also expected to release finalised regulations very soon.

As governments begin to open up their respective jurisdictions to equity crowdfunding, we’ll see an influx of capital raising opportunities that would not have been possible before.

New Zealand businesses will suddenly be able to engage multiple equity crowdfunding platforms across different countries. Behind these platforms will be venture capital firms and angel investors, plus thousands of retail investors, all looking for investment opportunities.

There will also be platforms such as Equitise who operate in more than one jurisdiction, allowing companies to engage one platform, but have access to investors from multiple countries. With expansion into Singapore planned for this year, Equitise’s multi-country business model will be closely watched by many in the industry and will hopefully become an industry standard.

Size doesn’t matter
Much like the movie The Wolf of Wall Street, it has been a common misconception that the use of equity crowdfunding platforms is restricted to small-cap companies who are unable to receive funding elsewhere. However, what industry participants have been seeing is a growing number of larger companies utilising the equity crowdfunding platforms’ investor databases, putting them in touch with angel investors and the wider crowd without the typical market frictions such as seeking and engaging costs associated with private capital raises.

In October 2015, Dongfang Modern Agriculture Group Ltd (DFM) listed on the ASX with the help of Equitise. The trans-Tasman ECF platform was engaged to help ‘top off’ their IPO round, with DFM utilising the platform’s connections and investor database to help offer investors Australasia’s first liquidity event in an equity crowdfunded company. To date, DFM has produced up to 90 percent liquid returns over its IPO price.

Season Equity Offerings (SEOs) is also an option explored by Chapel Down, a UK-based wine company. The company was already listed on the ISDX when it chose to equity crowdfund through Seedrs in 2014. It is now having a second go at ECF through Seedrs, raising £1.5 million for its new line of beers and ciders called Curious Brew. Chapel Down is reportedly the first listed company to do a SEO through equity crowdfunding, and there is no disputing the results, having successfully reached its funding target twice.

Beyond companies
The ECF industry has seen an increase in popularity over the merging of real estate and equity crowdfunding – real estate crowdfunding has been a huge hit in Asia and the US. Big players such as Prodigy Network, RealCrowd and FundRise, offer investors the opportunity to own their first slice of the multi-billion dollar real estate pie.

The actual mechanism and benefits over more traditional forms of real estate crowdfunding are the topic of another article. However, the main idea is that investors indirectly invest in real estate property by owning shares in a company, whose sole purpose is to own the real estate in question.

This method of real estate investment has allowed for extremely low entry points (some as low as $100), allowing people of almost all means to benefit from real estate investments.

The equity crowdfunding industry is finding ways to break out of its perception of ‘funding for small-cap, risky businesses’ and become a diverse funding platform, offering investors a new asset class, and making the entire investing process smoother and more efficient.

Equity crowdfunding continues to branch out in new and exciting areas, demonstrating the changing face of finance as companies are seemingly spoiled for choice when deciding on a suitable financing channel.