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The end of banks?

By Mike Worsnop - 19 Jul 2013

Well not quite. But the last few years have seen the rise of a number of alternative sources of funding to challenge the traditional banking model. One such source of funding is known as crowd funding.

Mike Worsnop blogCrowd funding is the term coined to describe the process where a network of investors (the Crowd) pool their money, usually via the Internet, to fund initiatives by other people or organisations. It is also sometimes used to describe the process of a company issuing small amounts of equity to a network of investors.

Under the archetype crowd funding model, contributors did not receive interest or any other form of direct financial benefit as reward for their investment but sometimes received a reward in kind. More recently, crowd funding has seen contributors issued securities in return for their contributions which they might subsequently realise for a profit.

Initially crowd funding was used to support community, artistic and philanthropic endeavours but is now increasingly being used by commercial enterprises to fund profit-making ventures.

The US crowd funding website, Kickstarter, was established in 2009 but its success has lead to copy-cat sites in other countries. The leading NZ crowd funding site is PledgeMe.

Kickstarter claims to have raised close to $1 billion dollars across more than 100,000 projects and trumpets notable successes including Pebble (a customisable watch with over US$10m raised), Ouya (a game console with nearly US$9m raised) and Form 1 (a 3D printer with US$2.5m in the bank) - so we're not talking small beer here.

In the US the crowd funding industry recently received a fillip with the passage of the JOBS Act which reduced the impact of US securities laws with the intention of encouraging funding of start-ups.

Unfortunately, the position in NZ is more problematic. As things stand there is a risk that crowd funding initiatives may constitute an offer of securities to the public triggering the requirement to comply with the Securities Act 1978. This has probably constrained the development of crowd funding in NZ. However, this is likely to change if and when the Financial Markets Conduct Bill comes into force.

The Bill provides for the licensing of crowd funding sites. It is probable that entities seeking to raise equity capital using a crowd funding platform and the crowd funding platforms themselves will each need to prepare a disclosure statement, but the level of disclosure will be less onerous than the current requirements for offers of securities to the public. The Bill also contains exemptions from the disclosure regime for "small offers". This should balance the need to protect investors by regulating crowd funding platforms while minimising the regulatory compliance burden on start-up entities wishing to raise capital. 

What it will do is create a more certain environment, providing start-ups the ability to raise capital from investors with limited regulatory compliance barriers and potentially propel NZ to the forefront of crowd funding.

We would be happy to talk if you wish to learn more about crowd funding and alternative sources of finance.


Mike Worsnop


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