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The ins and outs of equity crowdfunding

The new equity crowdfunding regime provides an exciting new way for start-ups and small businesses to raise finance. Business.govt.nz hears from BDO Partner Aaron Titter about what the new regime means for small and medium businesses.

By Aaron Titter, BDO's Advisory Partner

Equity crowdfunding is a branch of crowdfunding that aims to improve access to finance for growing businesses, and to provide everyday investors with the chance to back some of New Zealand’s most exciting businesses.

The process can be relatively quick, with businesses signing up to a crowdfunding platform and raising finance by taking small investments, loans or donations from a lot of people. Equity crowdfunding circumvents the potentially hefty compliance obligations of traditional financing channels.

So far New Zealand has two licensed equity crowdfunding providers, PledgeMe and Snowball Effect, with a few more on the way. Blenheim based Renaissance Brewery has been the first company to benefit, raising a remarkable $700,000 in one week from a crowd of 287 ‘brand advocate’ shareholders. While it won’t suit every company, it adds another string to the bow for raising funds.

Why choose equity crowdfunding

As well as being a quick and relatively low cost and easy process, equity crowdfunding has the advantage of amassing an army of avid brand advocates who are keen for the company they have invested in to succeed. It also tends to generate positive media exposure.

As a springboard for start-ups, early stage or growth companies, equity crowdfunding has multiple attractions, not the least of which is building a wide shareholder base from which to facilitate a potential future stock exchange listing.

Early-stage companies can also use crowdfunding to explore the viability of a product, not only attracting early adopters at lower costs and with low barriers to entry but also receive feedback.

Further, the online chat facility offered by the platforms commonly becomes a forum for sharing of ideas and knowledge between the company and their investor crowd - many with a wealth of expertise and experience.

What companies need to know

It’s important to understand the implications of a crowdfunding campaign for your company and existing shareholders particularly in the area of public disclosure. It’s a very public process, disclosing financials, and key risks and rewards to your business. It requires good in-house communications skills, a strong social media presence, and enough time to manage the campaign.

The secret to successful equity crowdfunding lies in knowing how to pull the crowd, developing a clever campaign around the products/services that will tap into advocates early on in the venture and keep them engaged throughout.

This starts with working with professional advisers to ensure company information is up to scratch, developing a clear business plan, financial statements and forecasts and, importantly, getting a realistic valuation. This all information that the platform provider is required to collect, in addition to a signed issuer agreement.

Companies also need to set a minimum goal of what they want to raise for the round and define an equity stake on offer, the share price, and a maximum amount you could overfund. It is key at this stage that the shareholders determine what percentage of their company they will sell to the crowd.

With the marketing component of the campaign, while the crowdfunding platforms will provide support and advice in this area, it is up to the company to develop their own collateral such as online videos and to understand how to build and maintain a community of supporters before, during, and after the business/venture launches. In terms of exit strategies for investors they are limited at this stage and it is very much buyer beware.

Companies that build a shareholder base of over 50 also need to be aware that they may become subject to the Takeovers Code and the obligations under the Financial Reporting Act. So it’s important to seek professional advice on how best to structure the company depending on the desired outcome.

The future of crowdfunding

We are likely to see platforms providing a facility for secondary markets allowing investors to buy/sell shares. But for now, companies can look to facilitate that process themselves.

While this is a very exciting industry it is also very much in its infancy in New Zealand and globally. So any company considering a crowdfunding campaign should do so based on strong advice and a clear understanding of the future implications for the operations of the business.

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