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.
Crowd 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.
Contact
Mike
Worsnop