Crowd funders enduring 'red-tape fest' have three-week wait on equity-raising licenses
Applicants for equity crowd funding and peer-to-peer lending platform licences will know in the next few weeks whether they've been successful after a process some say is overly complex and bureaucratic given new rules were supposed to be transparent and simple.
The Financial Markets Conduct Act, which came into effect on April 1, allows businesses to raise up to $2 million of equity by crowd funding without the burden and costs associated with a prospectus. Issuing equity takes crowd funding a step forward from what historically has been little more than a donation scheme for worthy causes. At the same time, rules on peer-to-peer platforms allow borrowers to pitch loans to a multitude of investors. The regulator is mulling five licence applications from 12 initial expressions of interest, Elaine Campbell, head of compliance with the FMA says.
"We expect to be in a position to be issuing our first licences imminently, and when a regulator says imminently that's kind of three weeks, two to three weeks," Ms Campbell says. "We are significantly advanced with some of the population."
Of the five applications received, three sought an equity crowd funding licences, one a peer-to-peer licence and one a platform which does both. Lendit, which counts entrepreneur Selwyn Pellett as a shareholder, has applied for a peer-to-peer and equity crowd funding licence. The FMA's careful deliberations have frustrated some applicants and led to claims the paperwork is almost akin to a prospectus.
“It’s a red tape fest – it’s massively overly complicated and we are working through it line by line as we can, it is excruciatingly complicated, “ said John Walley, sole director of Lendit and also head of the New Zealand Manufacturers and Exporters Association. “Peer-to-peer is the most technically complex part of the platforms, because it is multi-transactional and there are more people interested in the crowd funding because that is relatively simple from a transactional standpoint."
The FMA's licence fee for Crowd Funding is $6238.75 and the same amount applies for Peer to Peer lending. There is a discount available if you buy more than one type of license. (See a full breakdown of fees here).
Walley says Lendit paid the FMA $10,000 as part of its licence application and may face additional costs of $150 an hour for any additional time spent by the regulator.
The regulator is confident that the process has worked well.
“There hasn't been any 'oh my gosh' moments during the licensing process from FMA's perspective,” said Campbell. “The issue for FMA is that we need to be satisfied that the licence applicant can satisfactorily perform the service that they're seeking to be licensed for.”
The licence requires the business to build a platform that fits within the FMA's regulation, but is not prescriptive on just how the platform might operate.
"There are differences between them but a lot of that is about how they disclose what it is they do and they don't do, and making sure it is very transparent to investors to the extent which the platform has undertaken any form of due diligence, what that due diligence is, where they can find the information and so forth," Campbell said. "There are some essential elements that are consistent across the way the businesses are being operated."
Wellington-based crowd funding platform PledgeMe is also waiting for word on its equity licence application. The platform has been operating for the past two years as a reward-based crowd funder and has raised more than $2.5 million for some 560 projects.
"For an industry that is supposed to be all about transparency, it has been a bit blurry," said Anna Guenther, head of PledgeMe. "It’s going to be interesting to see who the first off the block is."
Guenther said the process had been slow, which was understandable given it was a new industry. She was expecting to hear from the FMA in the coming weeks and thought competition in the crowd funding space would be good for the new capital raising process.
Auckland-based Harmoney applied for a peer-to-peer lending licence in mid-May. It will be a solely online platform which matches lenders with borrowers, and will determine interest on the loans based on the level of credit the borrowers have, with more risky borrowers to incur a higher level of interest.
“The FMA’s approach has been very much 'these are the regulations, it's up to the people who want to apply for a licence to how they think they can fit in those regulations and how they can design their business to fit those regulations,'” Simon Ward, chief financial officer of Harmoney, says. “We have been very mindful of both the regulations here and how the platforms are operating overseas in designing our platform.”
Other equity crowd funding applicants include Armillary Private Capital, which teamed up with the UK-based Crowdcube for an equity crowd funding licence, and Auckland-based Snowball Effect.