Is the $2m equity crowdfunding limit too low?
Josh Daniell, co-founder of Snowball Effect, says the $2 million limit placed on those raising money through equity crowdfunding is a "good place to start" but will probably be revised over time.
The $2 million cap in one year was raised today during a discussion on new platforms for raising capital at the Conferenz financial markets law conference in Auckland. The panel included Mr Daniell, Neil Roberts from peer-to-peer lender Harmoney, and NZX head of funds management Aaron Jenkins, who has been heavily involved in setting up the new NXT market, which launches tomorrow with the compliance listing of G3 Group.
Equity crowdfunding and peer-to-peer lending were brought in less than a year ago through licenced platform providers and are regulated under the Financial Markets Conduct Act.
Mr Daniell said the equity crowdfunding market was still getting on its feet and needed to consolidate before market regulators were likely to review the $2 million limit on the amount raised. "It's a couple of years off," he said.
So far, about $10 million has been raised by mainly high-growth companies through equity crowdfunding, he said. The only one to date that has hit the $2 million cap is Invivo Wines in March on Snowball Effect while, on the same platform in February, drone company Aeronavics raised the previous highest amount – $1.5 million.
Mr Daniell said the normal skew for investors was male except for Invivo Wines where women put more money in.
One of the other licensed equity crowdfunding providers, PledgeMe, said the average amount raised from its eight successful crowdfunding campaigns so far was $200,000.
PledgeMe spokesman Jackson Wood said equity crowdfunding was still in its infancy and the $2 million cap was well above what companies had been aiming for to date on its platform for their two-year growth strategies.
"We're not actively pushing for it to be raised but we don't mind if it is," he said.
Mr Daniell told the conference there were four broad categories of Kiwi investors on its platform: professional people with some disposable income who find it an easy channel to make this sort of investment; retired people wanting to invest professionally; professional investors who can act as lead investors for others; and people associated with the company raising the money, such as customers and suppliers in that sector.
Mr Roberts said Harmoney has profiled the average retail investor and borrower on New Zealand's first peer-to-peer lender. The average borrower is a 43-year-old man on an above-average income whose loan is typically $15,000 and mainly used to either pay off credit card debt or for home improvements. The average retail investor, who accounts for 20% percent of its marketplace, is a bit younger than the average borrower and is predominantly someone trying to save for a deposit on their first home. The average loan is $2000.
Mr Jenkins said the NXT is expected to attract more sophisticated investors (than those on the main board), who understand the higher risk attached to the fast-growing small to medium-sized companies likely to be raising money on the new market.
Analysis of trading on the AX, the alternative investment market the NZX is phasing out in favour of the NXT, shows many were self-directed and therefore more likely to be slightly more sophisticated investors than those advised by brokers, Mr Jenkins said. He expects a similar trend in the new market where investors have a health warning that indicates they understand the riskier nature of an initial public offering.
The key difference between IPOs on the main board and the new market is the NXT requires key operating metrics and regular forecasts on those rather than financial forecasts. Mr Jenkins said many early stage companies are put off listing on the main board because it can be difficult for them to accurately assess their finances two years out and there are high penalties if they get it wrong.
"These are KPIs the business' directors would be monitoring internally already and sharing with their board. They have to share those with investors now as well," he said.