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Crowd funding lessons from NZ

By: Jeff Mazzini| Tags:

 

by Robin Christie | 23 Jul 2015
New Zealand’s regulation of the burgeoning crowdfunding industry offers interesting lessons on striking the balance between safety and innovation.

Writing in the latest issue of Jassa, The Finsia Journal of Applied Finance, Senior Lecturer at Christchurch Polytechnic Institute of Technology Department of Business, James Murray, explained that New Zealand’s securities laws “are based on the idea that issuers need to disclose sufficient information for public investors to make informed investment decisions”.

His article, ‘Equity crowdfunding and peer-to-peer lending in New Zealand: The first year’, goes on to explore how this regulatory concept can in fact “be a barrier to small businesses raising funds as the costs of producing a prospectus and committing to ongoing disclosure are high relative to the amount raised”. But this is where crowdfunding has stepped in.

Changing the playing field

Until the Financial Markets Conduct Act (FMCA) was introduced in 2013, Murray explains that crowdfunding was both costly and risky. But the FCMA exempted issuers from producing prospectuses and investment statements “when making a regulatory offer through an equity crowdfunding platform or P2P lender.”

“These changes are not simply a relaxation of financial regulations but reflect a trade-off between different forms of regulation,” he explains. “Reduced disclosure recognises that standard financial disclosures by new and high-growth companies have little value, so they have been replaced by mandatory use of licensed crowdfunding platforms and a $2 million limit on the amount that can be raised.”

Commenting further on this $2 million limit, Murray writes that it allows New Zealand’s equity crowdfunding market to provide small and medium sized enterprises with an alternative method of fundraising to the options of venture capitalists and angel investors.

However, the article adds that, under the present limits, crowdfunding won’t compete with the stock exchange when it comes to large capital raisings. This is especially the case, given that the New Zealand Stock Exchange (NZX) recently launched a new market for small and mid-sized businesses – NXT.

“While the relationship between the equity crowdfunding market and the exchange’s new NXT market remains to be seen, crowdfunding can complement the NXT rather than compete with it,” states the article.

Describing itself as a platform from which businesses can achieve their growth potential, NXT claims to offer New Zealand businesses with an alternative option to access capital with reduced complexity – thanks to simplified listing rules and a new approach to disclosure.

Noting that the current market mechanisms aren’t effectively connecting emerging businesses and investors, NXT’s marketing material states that structural changes in New Zealand’s capital markets have allowed it to address these challenges – and build on a model that’s appropriate to the scale of the businesses involved.

What can Australia learn?

Commenting on the regulatory environment overseas, the article notes that internationally equity crowdfunding has come into existence either where securities laws allow exemptions, or where the laws have been changed to allow crowdfunding to take place.

It goes on to make some interesting observations about how the Australian regulatory landscape is affecting its crowdfunding scene.

“For example, in Australia, specific crowdfunding rules are yet to be introduced,” it states. “Under existing securities laws equity crowdfunding is restricted to qualified investors and a limited number of the general public, resulting in a somewhat smaller crowd.”


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